More pension executives are scrutinizing their defined benefit plan money managers to ensure compliance with investment guidelines. But plan sponsors haven't given their 401(k) or other defined contribution plans the same concern.
Such a contrast in emphasis could create trouble for sponsors, as a few in the pension fund industry have pointed out, including William J. McHugh, treasurer of Novartis Corp., Tarrytown, N.Y.
A report in Pension & Investments noted several funds are stepping up monitoring their defined benefit plan managers. The Orange County Transportation Authority, Santa Ana, Calif., which has a $740 million defined benefit plan, suspended BlackRock Financial Management Inc., New York, for one year for violating investment guidelines.
The $20 million Los Angeles County Employees' Retirement Association terminated Capital Guardian Inc., Los Angeles, as a manager of large-capitalization domestic equities over concern that the returns weren't worth the portfolio's risk level or active management cost.
The story noted increasing demand from pension sponsors for software tools to monitor compliance and programs to assess risk-return relationships.
Northern Trust Co., Chicago, one of the pioneers in providing some of the programs, is developing a second version of its compliance monitoring software. Now Bankers Trust Co., New York, is developing a client warning system. The Ohio State University endowment is monitoring managers using software by Advent Corp., San Francisco.
The programs will aid sponsors in tracking promptly their money manager portfolios to ensure compliance with investment guidelines. Los Angeles County used Vestek Systems, San Francisco, and Wilshire Associates Inc.'s Compass monitoring software.
In another report in P&I, Novartis' Mr. McHugh asserted that some sponsors might be compromising their fiduciary responsibility in regard to their defined contribution plans. In particular, he mentioned the selection of 401(k) investment managers and the setting and monitoring of investment guidelines.
Remarking on the differences between the two types of plans, Mr. McHugh was quoted as saying: "It is remarkable how different this approach can be from the approach companies use in managing their defined benefit pension plans."
He was critical of what appears to be a growing trend of plan sponsors hiring bundled service providers for their 401(k) plans, offering investment and record-keeping services. Often such decisions, he said, are based on name recognition of the provider by participants, administrative ease to the sponsor, and the availability of mutual fund quotes published daily in newspapers.
Jack Dyer, a principal with Alexander Consulting Investment Services Inc., Lyndhurst, N.J., contended in a commentary a couple of years ago that "many plan sponsors may not apply the same level of fiduciary process to the management of their defined contribution plan as they have to defined benefit plan assets."
Importantly, he noted the Employee Retirement Income Security Act "makes no distinction between responsibilities of a defined benefit and defined contribution fiduciary."
The potential liability consequences are unknown. But these are warnings that sponsors need to give the same attention to 401(k)plans as they give to their defined benefit plans.
