The following article was printed in Pensions & Investments as a Letter to the Editor during August 2005. The article discusses the merits of forensic investigations of pension wrongdoing and the drawbacks of the popular (and costly) “no blame” “forward looking operational audits.” Today, given the explosion in the number of lawsuits against pension sponsors and investment providers, an issue arises as to the role friendly reviews and “independent fiduciaries” hired by plan sponsors to bless questionable arrangements and transactions, may have played in enabling certain pension abuses. Lots of money has been made by professionals who over the years have provided sponsors with the answers they wanted, without regard for the harm inflicted upon pension participants. Sounds a lot like Enron all over again, doesn’t it?
Your June 27 editorial calling for forensic investigations of pension consultant conflicts of interest was right on the money. Pension consultant conflicts of interest, often involving collusion between money managers and consultants, result in substantial, quantifiable harm. As the only firm that has successfully investigated these conflicts and recovered assets from consultants on behalf of pension funds, we know that tainted consultant advice can cost a fund 10% to 15% over time. While funds may choose to spend $250,000 or more for so- called forward-looking operational reviews, we believe that these reviews provide minimal value and fail to address the fundamental issue. That is, if conflicts cause harm (and we know they do), then an approach that neglects to fully investigate, quantify and recover damages fails to safeguard participant funds.
Fiduciary reviews that do not assign blame for past or ongoing malfeasance are an easy sell to pensions unprepared to seriously examine the actions of their vendors, however, they are not in the best interests of participants because the fund is never made whole. We have observed that these superficial reviews seldom result in subsequent civil or criminal proceedings. They are sold as being a painless alternative for sponsors, as opposed to a precursor to a forensic investigation. Participants are the losers when boards choose a cover-up, as opposed to a cleanup.
Furthermore, only through in-depth investigations of past and ongoing wrongdoing can one competently advise pensions regarding their operations going forward. Absent a thorough forensic investigation, procedures to prevent reoccurrence of problems cannot be established. Put simply, a fund cannot adopt procedures to prevent problems of which it is not fully aware. Our investigations of past and ongoing wrongdoing inevitably provide funds with the guidance they need to correct operations going forward; on the other hand, operational reviews at best provide superficial advice going forward with no resolution of past matters.
We believe it is appropriate to judge firms that seek to advise pensions by the results they deliver. All too often, superficial operational reviews leave serious wrongdoing untouched. When we examine funds that have undergone such reviews, we often see continuing malfeasance. The operational review has merely provided the board with a possible defense against lawsuits brought by participants or others. The board can claim to have looked into the matter and, on advice of expert counsel, taken (limited) action to address the matter. We are not in the business of providing such relief to those who turn away from wrongdoing under their noses. If you engage this firm to conduct a forensic audit, I promise you will get our best analysis of all potential vendor wrongdoing and nothing less.
Finally, we believe an approach that focuses upon industry best practices is fundamentally flawed. It only ensures compliance with industry standards of today and, as the mutual fund and similar scandals have shown, commonly accepted industry behavior often is corrupt. We focus upon conduct that is harmful to plans, regardless of whether it is commonplace in the industry or not. When we identify such harm, we seek to fashion a legal theory that will address it. We were the only firm talking about illegal mutual fund activity in the 1980s and 1990s and the first to draw attention to pension consultant conflicts of interest in the 1990s. Our efforts, including testifying before the U.S. Senate and the Louisiana House of Representatives, as well as advising the SEC and law enforcement, contributed substantially to bringing these abuses to the forefront. Currently we are advising unions representing participants in defined benefit pensions in requesting forensic audits of any plans taken over by the Pension Benefit Guaranty Corp. We are committed to continuing to ferret out wrongdoing and bring it to the attention of our clients, regulators, legislators, law enforcement and ultimately investors.
Edward A.H. Siedle President Benchmark Financial Services Inc. Ocean Ridge, Fla.
Spitzer's Painful Lesson forbes.com Neil Weinberg
New York State Attorney General Eliot Spitzer has been claiming plenty of credit lately for championing his state's teachers and forcing insurer ING to pay $30 million for foisting costly annuities on them under false pretenses. But the settlement is likely to do a lot more for Spitzer's gubernatorial ambitions as he gears up for next month's general election than it does for the 66,000 state teachers ripped off by ING and their own union.
That's because while Spitzer reaps a public relations windfall, the compensation is unlikely to come anywhere close to repaying teachers for the overcharging they have suffered or the years of opportunity they have lost by not investing in cheaper, better-performing products. What's more, only after Forbes began inquiring last week about surrender fees of as much as 5% did ING agree to waive them entirely, according to a spokesman for the attorney general's office. The issue was originally set off by a Forbes magazine story, titled "Costly Lesson," in April 2005. It outlined how ING was paying the New York State United Teachers (NYSUT) $3 million a year to hype its annuities to member teachers. The program involved a retirement plan known as a 403(b), which is a public-sector cousin of the 401(k). Inside it, ING was selling variable and fixed annuities, which are mutual funds and bond- like investments wrapped in life insurance that, in policies like ING's, cost several times more than low-cost alternatives and provide minimal coverage. Forbes' story prompted Spitzer's office to subpoena NYSUT and ING on their relationship. Investigators concluded that the $3 million annual payment from ING to the NYSUT Member Benefit's unit was to gain exclusive access to union members. The union, in turn, concealed the under-the-table payments and the fact that events it portrayed as "investment seminars" were actually ING-sponsored sales pitches, according to the findings of the attorney general's office. ING used the arrangement to amass $2.5 billion in retirement savings contributions from NYSUT teachers.
The union agreed in June to pay $100,000 to settle the dispute and to offer other retirement products, including a low-cost option, to its members starting in 2007. In its settlement with the New York attorney general, announced Oct. 10, ING agreed to pay $30 million to compensate teachers, which means they will receive an average of $450 and as little as $100 each. ING also agreed to more clearly disclose the costs of its products offered nationwide. "ING takes its regulatory responsibilities very seriously and seeks to work cooperatively with regulators," the company said in a statement. "ING is pleased to have this matter resolved and fully supports improved transparency and disclosure."
For long-suffering New York teachers, however, the settlement is likely to prove a pyrrhic victory. About 53,000 of them remain invested in the overpriced ING annuities. Moreover, 41% of the assets, or more than $1 billion, are in a fixed-income product that for recent deposits is earning 3.2% annually. That compares to the 4.5% paid to state teachers by the nonprofit Wisconsin Education Trust. The 1.3 percentage point difference between the payout of the NYSUT fixed investment and Wisconsin's nonprofit means that ING is pocketing the equivalent of 40% of the teachers' total return, or $13 million, annually. "Seventy percent of the profits related to these annuity programs come from the fixed account," says Edward Siedle, who runs Benchmark Financial Services and investigates money-management abuses. "That's where the real money is."
With $2.5 billion in assets in the ING/NYSUT program and 66,000 participants, each teacher had an average of $37,878 invested. The average $450 settlement payment equals 1.2% of that--a paltry amount, given that many of these teachers were arguably overcharged far more than that each year and have been investing for many years. Officials in the attorney general's office were uncertain what surrender penalties would apply to teachers who sought to exit the program before new products are offered next year (when no-penalty rollovers will be permitted at least on variable annuity investments). A spokesman insisted, however, that the settlement was well thought out. "This was an extraordinarily detailed settlement and any suggestion it was patchworked together is incorrect," says Paul Larrabee, a spokesman for the New York attorney general's office. "It's all about disclosure, accountability, transparency and collecting a benefit for those who had no recourse."
NYSUT, meanwhile, has endorsed Spitzer for governor. Although its president, Richard Iannuzzi, says he does not dispute Spitzer's findings of wrongdoing at the union, no NYSUT officials have been fired over the investment scandal. "People here thought they were doing the right thing," Iannuzzi says. "They failed to change practices as the standards of the industry changed."