Investment-related advice that pension consultants offer to retirement plan officials could be subject to higher fiduciary standards under a new regulation the Department of Labor is proposing to consider in 2010.
A key DOL target in the proposal, according to ERISA experts, is the third-party payments that some investment consultants receive when retirement funds hire money managers recommended by the consultants.
The thrust of the DOL's proposed rulemaking, which the agency's Employee Benefits Security Administration hopes to unveil in June, would be to subject consultant advice to the full panoply of ERISA fiduciary obligations. Those obligations prohibit self-dealing and other conflicts.
“There's a bull's-eye on the third-party payments paid to consultants,” said Mercer Bullard, an associate professor at the University of Mississippi Law School and founder and president of the advocacy group Fund Democracy Inc., both of Oxford, Miss.
“DOL is concerned about conflicts, the fact that there may be consulting services provided in a conflicted manner where the self-dealing restrictions presently do not apply,” added Andrew Oringer, an ERISA attorney with the law firm Ropes & Gray LLP, New York.
During a Dec. 9 “webchat” on the DOL website, Phyllis Borzi, assistant secretary of labor for the EBSA, said officials were concerned that the agency's existing fiduciary regulations allow plan advisers “from whom plans expect impartial advice to evade fiduciary responsibility.”
In a fact sheet about the proposed rulemaking on EBSA's website, the agency added:
“An increasing number of plan fiduciaries rely on advice and recommendations from service providers such as pension consultants and financial asset appraisers in making significant investment-related decisions for their plans. However, the current regulatory definition of 'fiduciary' limits ERISA's ability to protect employee benefit plans from advisers and financial asset appraisers that act imprudently, or that subordinate their clients' interests to the interests of others. Subjecting these persons to ERISA's fiduciary responsibility rules will help protect the interests of plans by fostering the provision of quality, impartial advice and recommendations.”
Ms. Borzi had not returned phone calls seeking additional information by press time. Gloria Della, a DOL spokeswoman, said agency officials would not provide further comment.
But Bradford P. Campbell, a former assistant secretary of labor for EBSA and now an attorney with Schiff Hardin LLP in Washington, said DOL staffers have long been concerned that the agency's existing fiduciary regulations don't require consultants to disclose all of their compensation arrangements to plan sponsors.
“Lots of consultants structure their contracts so that they're not providing fiduciary advice but rather are providing information and non-fiduciary advice to plan fiduciaries who are ultimately responsible,” Mr. Campbell said. “They (the consultants) don't want to be fiduciaries.”
“There are questions in practice whether some of those relationships cross the line,” Mr. Campbell added.
Mr. Bullard said the EBSA's proposed rulemaking responds to a May 2005 report by the Securities and Exchange Commission alleging that many pension consultants had conflicts of interest — and do not consider themselves ERISA fiduciaries.
That report said plan sponsors were responsible for selecting and monitoring pension consultants, including watching for potential conflicts of interest of service providers. It also said there was widespread failure of consultants to keep records of correspondence with clients and affiliates (Pensions & Investments, May 16, 2005).
“The DOL needs to decide where it stands on the embarrassing findings of the SEC study regarding kickbacks paid to pension consultants,” Mr. Bullard said.
One consulting firm executive agreed with the need for consultants to take on fiduciary standards. Richard Charlton, chairman and CEO of Cambridge, Mass.-based consultant NEPC LLC, said his firm already offers its advice as an ERISA fiduciary.
“We think it's entirely appropriate for all providers to act entirely in the best interests of their clients and to accept designation as a fiduciary as defined by ERISA,” Mr. Charlton said.
But executives at other consulting companies said the way they offer advice depends on circumstances.
“Mercer has a number of lines of business, which provide a broad array of services to U.S. retirement plans that are subject to ERISA,” said Stephanie Poe, spokeswoman for Mercer LLC, New York, in an e-mail. “Our relationships vary considerably from client to client. Mercer Investment Consulting — which is one of the lines of business — may act in a fiduciary capacity depending on the nature of the services provided.”
A spokesman for Watson Wyatt Worldwide, Arlington, Va., said in a statement e-mailed to P&I: “Watson Wyatt Investment Consulting Inc. is a registered investment adviser and offers investment consulting services to plans that are subject to ERISA. The types of services offered by our investment consulting practice vary from client to client. Watson Wyatt Investment Consulting agrees with the position that certain specialized services we provide to our clients may be deemed "fiduciary' services as defined in ERISA, and in those instances, we agree that we assume fiduciary responsibility. We also provide certain services that are not fiduciary services. With respect to all of our services, we exercise the appropriate standard of care.”
In another e-mailed statement, a spokeswoman for Russell Investments, Tacoma, Wash., said: “Russell Investments advises registered mutual funds and non-registered funds, as well as a number of large institutional investors and state plans. Russell has a fiduciary responsibility to these funds and investors which arises under federal securities laws, ERISA, state law or by contract with the investor.
“Although Russell does not offer investment advice directly to plan participants, Russell is frequently retained by plan sponsors for the specific purpose of providing advice. Depending on the arrangement sought by the plan sponsor, Russell can be appointed as an ERISA fiduciary to the plan, either as the plan's investment manager, trustee, or consultant.”