RFPs needed to prevent corruption
By Pensions & Investments | December 10, 2012
The Nov. 26 Pensions & Investments page 15 article, “A shift toward streamlining: Firms providing more manager information as public plans move away from traditional RFPs.” forgets that public pensions need to be run for the benefit of taxpayers and beneficiaries, not for the convenience and/or profit of consultants, money managers and pension staff. The Government Finance Officers Association officially recommends an RFP process for public pension managers to hire investment managers (www.gfoa.org).
The article makes the assumption that an RFP's only goal is to make a qualitative assessment for the “best” money manager. I believe the RFP's main goal in public plans is to prevent corruption in the hiring process, and to ensure the lowest possible fee for the service.
The article makes an invalid comparison to corporate plans. Corporations do not need RFPs because the people making the hiring decisions under the CFO are not conflicted. You rarely if ever see any placement agents in corporate plans.
The article seems very industry driven. Money managers know that public RFPs produce a bidding process that lowers fees dramatically in both traditional and alternative assets. Only by bypassing RFPs can managers get large chunks of investment dollars at their higher normal fee schedules for smaller corporate plans.
Without RFPs the process can break down for public plans like I saw in Kentucky. All of the managers that secretly promised to pay nearly $15 million to placement agents for KRS were not selected by an RFP process and many were not even selected by the consultant but by staff.
According to the “Report of Independent Counsel to SEC: Placement Agent Abuses at Kentucky Retirement System,” “contrary to prudent investment practices for public pensions, KRS does not utilize RFPs seeking competitive bids from prospective money managers. Failure to solicit bids undermines the integrity of public pension contracting. RFPs ensure that contracts for investment management services are competitively bid and that requirements related to such contracts are clearly and publicly stated.” KRS pays 66 money managers over $56 million a year in fees and not one has ever filled out an RFP (see pages 98 to 100 of the KRS comprehensive annual financial report for 2011). While there were a few questionable hires such as seeding a hedge fund and a currency fund, the main damage I believe of bypassing the RFP process was higher fees, which provided a larger potential for problematic behavior like placement agents.
Christopher B. Tobe
Stable Value Consultants
EDITOR'S NOTE: Mr. Tobe was a trustee of the Kentucky Retirement Systems, 2008-2012.
This article originally appeared in the December 10, 2012 print issue as, "RFPs needed to prevent corruption".