Fact Sheet Selecting And Monitoring Pension Consultants - Tips For Plan Fiduciaries Background The Employee Retirement Income Security Act (ERISA) requires that fiduciaries of employee benefit plans administer and manage their plans prudently and in the interest of the plan’s participants and beneficiaries. In carrying out these responsibilities, plan fiduciaries often rely heavily on pension consultants and other professionals for help. Findings included in a report by the staff of the U.S. Securities and Exchange Commission released in May 2005, however, raise serious questions concerning whether some pension consultants are fully disclosing potential conflicts of interest that may affect the objectivity of the advice they are providing to their pension plan clients. Under the Investment Advisers Act of 1940 (Advisers Act), an investment adviser providing consulting services has a fiduciary duty to provide disinterested advice and disclose any material conflicts of interest to their clients. In this context, SEC staff examined the practices of advisers that provide pension consulting services to plan sponsors and trustees. These consulting services included assisting in determining the plans investment objectives and restrictions, allocating plan assets, selecting money managers, choosing mutual fund options, tracking investment performance, and selecting other service providers. Many of the consultants also offered, directly or through an affiliate or subsidiary, products and services to money managers. Additionally, many of the consultants also offered, directly or through an affiliate or subsidiary, brokerage and money management services, often marketed to plans as a package of bundled services. The SEC examination staff concluded in its report that the business alliances among pension consultants and money managers can give rise to serious potential conflicts of interest under the Advisers Act that need to be monitored and disclosed to plan fiduciaries. To encourage the disclosure and review of more and better information about potential conflicts of interest, the Department of Labor and the SEC have developed the following set of questions to assist plan fiduciaries in evaluating the objectivity of the recommendations provided, or to be provided, by a pension consultant. Are you registered with the SEC or a state securities regulator as an
investment adviser? If so, have you provided me with all the disclosures
required under those laws (including Part II of Form ADV)? Do you or a related company have relationships with money managers
that you recommend, consider for recommendation, or otherwise mention to
the plan? If so, describe those relationships. Do you or a related company receive any payments from money managers
you recommend, consider for recommendation, or otherwise mention to the
plan for our consideration? If so, what is the extent of these payments in
relation to your other income (revenue)? Do you have any policies or procedures to address conflicts of
interest or to prevent these payments or relationships from being a factor
when you provide advice to your clients? If you allow plans to pay your consulting fees using the plan’s
brokerage commissions, do you monitor the amount of commissions paid and
alert plans when consulting fees have been paid in full? If not, how can a
plan make sure it does not over-pay its consulting fees? If you allow plans to pay your consulting fees using the plan’s
brokerage commissions, what steps do you take to ensure that the plan
receives best execution for its securities trades? Do you have any arrangements with broker-dealers under which you or
a related company will benefit if money managers place trades for their
clients with such broker-dealers? If you are hired, will you acknowledge in writing that you have a
fiduciary obligation as an investment adviser to the plan while providing
the consulting services we are seeking? Do you consider yourself a fiduciary under ERISA with respect to the
recommendations you provide the plan? What percentage of your plan clients utilize money managers,
investment funds, brokerage services or other service providers from whom
you receive fees? For more information on the SEC staff’s findings, please read “Staff Report Concerning Examinations Of Select Pension Consultants”. Plan trustees, pension consultants, and other service providers can learn about their fiduciary responsibilities under the Employee Retirement Income Security Act (ERISA) by visiting the Web site of the U.S. Department of Labor. Pension consultants who have questions concerning their obligations under the Investment Advisers Act of 1940 should either consult with an attorney who specializes in the federal securities laws or contact the staff of the SEC’s Division of Investment Management. This fact sheet has been developed by the U.S. Department of Labor, Employee Benefits Security Administration, Washington, DC 20210. It will be made available in alternate formats upon request: Voice phone: 202.693.8664; TTY: 202.501.3911. In addition, the information in this fact sheet constitutes a small entity compliance guide for purposes of the Small Business Regulatory Enforcement Fairness Act of 1996. |