There's a whole lot of lawyering going on. It may make some trial lawyers rich, but ultimately it might improve pension fund governance.
In September, participants filed separate lawsuits over 401(k) fees against nine major companies, including Boeing Co., whose 401(k) assets total $23.7 billion; Lockheed Martin Corp., $14 billion; and United Technologies Corp., $14 billion.
In August, participants filed lawsuits against Callan Associates Inc. for purported conflicts of interest in its role as consultant to the $36.8 billion defined benefit fund of the Illinois Teachers' Retirement System. The system dropped Callan earlier this year.
All of the suits seek class-action status. (In a separate lawsuit still pending, the City of San Diego sued Callan in connection with its consulting work for the $4.45 billion San Diego City Employees' Retirement System.)
What appears to be happening is that participants, or class-action law firms working on their behalf, are peeling away the shroud that has in many cases hidden complex arrangements involved in the oversight and management of 401(k) and defined benefit plans.
Although the courts will have to decide the merits of the allegations in these specific cases, the escalating litigation should serve as a renewed warning to retirement plan executives. Those who fail to scrutinize, disclose and monitor fees they pay to managers and consultants could face litigation. The Department of Labor and the Securities and Exchange Commission last year jointly issued guidance addressing investment consultants' potential conflicts of interests. The instruction was long overdue and should apply to money management, brokerage and any vendor involved with the investment management of any employer-sponsored retirement program.
The guidance was an outgrowth of an SEC investigation that uncovered a lack of disclosure of conflicts of interests in financial arrangements that consultants have with money managers and brokers. Fund executives need to ask other vendors about potential conflicts also.
Are sponsors paying attention? A complex fee arrangement in itself isn't grounds for legal action. The SEC recently reaffirmed, for example, soft-dollar payments are proper, if they are made for investment-related purposes under certain, wide-ranging categories. But all of these arrangements, such as revenue sharing, raise concerns of potential conflicts, abuses and overpayments at the expense of participants.
These arrangements create a breeding ground in which conflicts of interests could grow. The question is: Do fund executives, even when they know about fee arrangements, understand the implications and potential ultimate costs to participants?
Fund executives should ensure all fee arrangements are disclosed to participants. The SEC in its reaffirmation of soft-dollar payments didn't require disclosure, although it plans to consider that issue.
Plan trustees should audit their consultants and money managers to see if any of the service providers' activities have harmed the financial interests of the pension funds or participants, and to examine whether any activities compromised the integrity of any investment or trading decisions.
Trustees might not even know of some arrangements, or appreciate their cost implications. Without complete disclosure, trustees can't evaluate fees. Regular audits will provide the insight key to overseeing plans, controlling costs and ensuring loyalties of money managers and consultants.
Recent searches in Florida at the $110 million Delray Beach Police and Firefighters Pension Board and the $957 billion Jacksonville Police & Fire Pension Fund, albeit for defined benefit plans, show an awakening to conflicts of interest issues, including soft dollars. Delray Beach's recently ended search sought only a consultant not affiliated with brokerage firms. Jacksonville's just opened RFP seeks a consultant "free of all conflicts of interest that would represent a threat" in its ability "to act solely in the best interest of the plan participants." The RFP also notes Jacksonville will pay the new consultant only in hard dollars.
Plans that insist on complete disclosure, audit vendors and operations, and take other steps to regularly review activities, help ensure that participants have priority and eliminate grounds for litigation.