Miller to probe 401(k) consultant conflicts

Hearings to focus on links between firms and managers

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George Miller worries that payments by managers may harm participants.

WASHINGTON — Rep. George Miller, D-Calif., is considering holding hearings as soon as next month to examine whether pension consultant conflicts of interests are hurting 401(k) plan participants, pension industry lobbyists said.

The lawmaker is concerned because some plans use money managers recommended by their consultants — and some of the consultants have financial ties to the money managers they recommend, according to the lobbyists. So a key issue is whether the money managers hired are ultimately a better deal for the consultants than they are for plan participants.

While federal regulators previously have criticized investment consultant conflicts, the fact that Mr. Miller has the subject on his radar screen ups the ante significantly. Mr. Miller has made clear his interest in drafting legislation aimed at ensuring that 401(k) plan participants get the best returns possible from their investments, and reforms aimed at pension consultants could easily become a part of any legislation.

Mr. Miller, chairman of the House Education and Labor Committee, and his aides would not comment on hearing plans at deadline, said Aaron K. Albright, the committee’s press secretary.

But pension industry lobbyists said a General Accountability Office study Mr. Miller requested about potential conflicts of pension consultants is expected to provide ammunition for the hearings. The GAO is Congress’ investigative agency. It is not known when the GAO will issue its findings.

In a 2005 report, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations warned that concerns about conflict had arisen because some pension consultants advise plan clients — and have business relationships with the money managers they recommend to plan clients — at the same time. (Pensions & Investments, May 16, 2005.)

In addition, according to the SEC report, some pension consultants receive compensation through the commissions of the affiliated broker-dealers that process transactions for a consultant’s clients.

Currying favor?

“These relationships with broker-dealers also provide a mechanism for money managers to compensate pension consultants, perhaps as a way to curry favor with the pension consultant,” the SEC report said.

“It appears that many money managers do not disclose their relationships with consultants to their pension plan clients, to whom they are recommended by those consultants,” the SEC report added.

Officials at the mutual fund industry’s Investment Company Institute, Washington, had no comment, according to Mike McNamee, an ICI spokesman.

But Brian H. Graff, executive director and chief executive officer of the American Society of Pension Professionals & Actuaries, an Arlington, Va.-based group that represents pension consultants, said: “We certainly feel that to the extent that there is wrongdoing going on it should be examined. But this should not be an indictment of the entire pension industry, which by large measure is providing quality and fair products and services helping American workers save for retirement.”

In addition, one lobbyist said consultants have already moved to resolve concerns raised in the SEC’s report. The report urged investment consultants to insulate their consulting staff from a firm’s other business interests and to adopt policies to prevent or disclose conflicts.

“We haven’t seen what the GAO report is going to say, but we do think the issues raised by the SEC’s report have been addressed by the industry,” said Elizabeth Varley, vice president and director of retirement policy for the Securities Industry and Financial Markets Association, an organization that represents brokers in Washington.

Still, there is support for a crackdown on any wrongdoing by pension consultants.

“To the degree there are fiduciary breaches or other violations of the law, we don’t have any sympathy for the consultants,” said Ed Ferrigno, vice president of Washington affairs for the Profit Sharing/401(k) Council of America, Chicago, which represents 401(k) plan sponsors and participants.

Mr. Miller is particularly concerned about pension industry practices that could be diminishing the investment returns to participants in 401(k) plans, because more than 47 million Americans are now counting on proceeds from their defined contribution plans for their retirement income.

Likely proposal

During a March 6 congressional hearing, Mr. Miller said he is likely to propose legislation aimed at ensuring that plan sponsors and participants understand what they are paying in 401(k) fees. The Department of Labor and the SEC also are jumping on the bandwagon.

“To far too great a degree, and in substantial part because of a regulatory cumbersomeness that obscures the real numbers, our financial services industries are able to skim off much more of the assets they handle than would be the case in a well-functioning market,” SEC Chairman Christopher Cox said in April 13 speech to the Mutual Fund Directors Forum, an organization for the independent directors of mutual funds.

Despite the legislative threats Mr. Miller has been raising in the House, some pension industry lobbyists remain skeptical about the prospects of legislation, in part because Sen. Edward Kennedy, D-Mass., who chairs the Senate Health, Education, Labor and Pensions Committee, has been holding his cards on pension industry practices close to his vest. Mr. Kennedy’s committee would have a say on any legislation on the subject.

“I don’t see Ted Kennedy running around with his hair on fire about this,” said Bill Sweetnam, a partner at Groom Law Group, Washington.