It seems illogical the professionals who serve pension plans are judged by two sharply different sets of standards.
Lawyers, actuaries, consultants and benefit plan administrators are held strictly accountable by trustees for their actions, and their compensation is tied to their performance. This is both proper and necessary.
And when we say most professionals are held accountable in a rigorous manner, we're not exaggerating. Often, the actuary's work for a pension fund is evaluated extensively by a plan's auditors or another actuary. The actuary's assumptions and methods are constantly challenged by trustees, and this is as it should be. If the actual experience deviates significantly from assumptions, the actuary may be chastised for his or her inability to "predict" future events. (In actuality the actuary doesn't "predict" what events will occur; rather, he or she is responsible for making a best estimate of the value or likely cost of projected events such as retirement or disablement.)
And after the actuary has completed his or her work, fees are closely reviewed.
Pension fund administrators, the third-party professionals who process claims and pay benefits, undergo essentially the same scrutiny. For a fund of any size, they must deal daily with hundreds of problems - some extremely complex - documenting their actions and making certain they are in compliance with the law and their fiduciary obligation.
The attorneys for a pension fund are in just as tight a box as the actuaries and administrators.
They, too, must account for every minute of time they spend and must be very certain their clients' plans are updated to reflect the latest changes in the laws and regulations governing them.
But when it comes to the management of pension assets, there often is no such oversight or accountability. Pension money managers do not even have their quarterly management fees approved independently. Usually, those amounts are deducted automatically from the trust assets - regardless of whether the value of those assets has increased, declined or stayed the same.
Investment managers may argue that in fact they are held to account: if they do poorly, they are fired. However, the reality is that many investment managers amass great fortunes from their fees in spite of actual performance. As a whole, the investment management "industry" is enormously profitable - far beyond the status that could be justified by their financial or personal risks in their business.
It seems to us this double standard for money managers is not just irrational; it's unfair to the workers whose money is involved. In our view, it's high time that Washington take steps to change the way pension fund money managers are compensated. These professionals should be paid not just for how much they're managing, but for the time they put in and the results they produce. The problem cannot be resolved by individual investors or retirement plan trustees.
Investment managers operate in a market that allows them to continue their special status. If any specific client threatened not to pay the going rate, the investment manager can merely posture that the client can just go ahead and hire someone else. The problem is that all managers seem to belong to the same "club" as far as fees are concerned.
It will be difficult to change the system because investment managers are in such demand. Congress should make it a project for the Department of Labor to tackle and should establish a deadline for the submission of suggestions that would banish the double standard that exists. The "regulators" will have to wake up and challenge a system of compensation that, in operation, smacks of a fiduciary breach when unjustifiably high fees are charged against qualified retirement plan assets - the funds needed to secure pension benefits for plan members. Money managers of the pension world should be treated like other professionals and no longer be rewarded when they fall short of the mark.
Daniel F. McGinn is principal of McGinn Actuaries Ltd., Anaheim, Calif. This commentary is adapted from a report.