The collapse of Enron Corp. underscores the need to strengthen a number of areas in the oversight of defined benefit and defined contribution plans beyond the issues of large concentrations of company stock and restrictions on trading such stock.
Areas needing improvement include clarification of fiduciary responsibility and better disclosure. These are two of the most powerful weapons to ensure the integrity and security of retirement programs. But they often are neglected by both regulators and sponsors.
Who, for example, is a fiduciary? Your investment consultant? Your actuary? The providers of other services? Despite ERISA's provisions, it's not always clear which providers are fiduciaries.
Ann L. Combs, assistant secretary of labor, Pension and Welfare Benefits Administration, said in a teleconference in late January that "the cornerstone of ERISA is the fiduciary responsibility rule." A fiduciary, she said, is anyone responsible for the "management of a plan or management of assets or anyone who gives investment advice for a fee or administers the plan."
But fiduciary status is not so easily defined or accepted; otherwise many court cases over ERISA would have been superfluous. Take investment consultants. For many plans, consultants don't accept fiduciary responsibility. They customarily hold themselves out as experts and the chief adviser to trustees, presenting recommendations on investment policy, asset allocation and money managers to hire or fire, while evaluating performance - all the most important components in investing pension assets. Whether they like it or not, consultants are giving investment advice for a fee. Until legislation or regulation recognizes that, all pension funds should require consultants to sign off as fiduciaries. Many, but not all, larger, sophisticated pension sponsors require their consultants to accept fiduciary status.
What about other providers, such as those who do actuarial work? Actuarial return assumptions can affect investment policy (though they should not). Should actuaries be fiduciaries?
Actuaries aren't taking any chances. Two top actuarial firms, Watson Wyatt Worldwide and Towers Perrin, are asking pension sponsors to limit their liability to no more than $250,000 and indemnify them for higher damages if lawsuits are filed by parties involved with the pension plan.
Plan sponsors should refuse such limits, which jeopardize participants' legal redress if a grievance should arise, unless they are willing to accept liability of their contractors. One small pension fund, to its credit, refused to accept Towers Perrin's provision. As a result Towers Perrin reported it stopped doing business for that fund.
Employers don't have to wait for congressional action to reinforce or clarify responsibilities of the firms that provide services to their plans. They need to strengthen terms in contracts. Sponsors, too, should insist on full disclosure of potential conflicts of firms. Many consultants sell services to investment managers, posing a potential conflict on whether recommendations on hiring managers are unbiased. Still, many sponsors don't ask for details on fees from this other side of the business.
And then there is disclosure, often called "the best disinfectant." The Internal Revenue Service and the Department of Labor should demand more disclosure from both defined benefit and defined contribution funds about their investments and supplier relationships.
The DOL should fix Form 5500 so sponsors can't hide details of their funds' investments in the opaque master trusts line. And they should make available all forms online in a timely fashion.
The reporting of Form 11-k, which contains details on defined contribution plans and the SEC defines as an annual filing for employee savings and similar plans, appears spotty on its website. A spokesman couldn't say why that is. This form should be available for such plans of all companies at least once a year.
The SEC only last year began to put ADV forms for registered money managers online, making them easily accessible for the first time.
The Enron debacle could lead to tighter regulatory controls on pension programs, but there is much sponsors and regulators can do now.