A news report of major brokerage companies seeking payments for recommending certain mutual funds should trouble pension sponsors, particularly of 401(k) and other defined contribution funds.
The report cited Dean Witter Discover & Co. as agreeing to sell some mutual funds of other fund companies as aggressively as its own internally managed mutual funds in return for a special payment. Merrill Lynch & Co., according to the report, wants the same treatment from mutual fund companies.
The report doesn't mention pension clients. But some brokers might have institutional clients. The question is: what price objectivity? Sponsors hire consultants for their expertise and expect objective advice. But that objectivity risks compromise when any consultant seeks special favors for recommending certain mutual funds or other money managers.
Consultants deserve appropriate compensation for their advice to sponsors. But the form of that compensation should never compromise their objectivity.
Fund sponsors need to lead the way on the issue. They cannot expect to receive the expertise of these brokers without appropriately compensating them.
For a long time, some have sought compensation through soft-dollar brokerage commissions. A cut in the cost of consulting could mean a false saving and an implicit rise in portfolio management costs, unless sponsors scrutinize brokerage for best execution.
Also, bundled services - portfolio management, record keeping and related services - have become popular with 401(k) sponsors. But the lower fees can come at the cost of locking participants into a few portfolios of a single mutual fund company, which could cause problems when investment options underperform.
Saving money on consulting, or bundled services, in the long run does a disservice to pension participants. Sponsors get the expertise they pay for.
