(July 1, 2007) GAO Report Estimates Cost of Pension Consultant Conflicts: 1.3% of $4.5 trillion. |
"What do we care if there are hidden financial dealings between investment consultants and money managers to pensions, i.e., "kick-backs," if fund performance does not suffer?"Bradley Belt, Executive Director- PBGC, meeting on September 7, 2005.
"there are no harmless kick-backs. Performance always suffers whenever "pay-to-play" determines which managers are hired. We have found that consultant conflicts can cost a fund 10-15% over time. The harm to pensions is substantial and quantifiable. Response of Edward Siedle to Belt's question at September 7, 2005 meeting.
"Defined Benefit plans using these 13 consultants (with undisclosed conflicts of interest) had annual returns generally 1.3% lower..." "...in 2006, these 13 consultants had over $4.5 trillion in U.S. assets under advisement." GAO Report - 070703, dated June 28, 2007
While it's unlikely the report the GAO issued last week dealing with pension consultant conflicts of interest will receive much attention in the pension or national press it is, in a sense, earth- shattering.
Not only did the agency confirm that conflicts of interest involving pension consultants are pervasive, involving trillions in assets under advisement, and that these conflicts result in billions in damages, but the report went on to point out that neither the SEC, DOL nor PBGC is focused upon pursuing these conflicts that detrimentally impact pension performance. All of these governmental agencies/regulators initially failed to notice even the most obvious conflicts involving pension consultants. Later the agencies failed to investigate such matters brought to their attention, choosing instead to accept industry assurances that no harm resulted from conflicts. They then allowed the conflicts to persist and even occasionally specifically opined that suspect industry practices were acceptable within the pension context.
Now GAO concludes that conflicts may cause massive harm. 1.3% of $4.5 trillion is massive. Why has it taken so long for such a common sense notion to gain acceptance in the pension community? "Kick- backs cause harm" is hardly counterintuitive. Where do we go from here?
Is it possible that we, as a nation, now realize that all is not well with the management of our defined benefit and defined contribution plans? Are we now prepared to believe that poor performance and inadequate retirement balances may, in part, be attributable to forces other than poor behavior on the part of employees? Is it possible that firms serving as fiduciaries to the nation's retirement plans have been ignoring their statutory duties and pursuing corporate profits at the expense of their clients? Let's hope that these notions are finally being seriously considered. It's fine to encourage people to be self-reliant and take responsibility for their retirement finances. But it's in no one's interest to see them fail because they weren't clued in to systematic skimming from their accounts. We don't want growing ranks of elderly poor.
So where do we go from here? The answer is simple. It's time that firms that have been profiting from decades of undisclosed or poorly disclosed conflicts of interest began paying back their ill-gotten gains.
Let's make the pension consulting/money management/brokerage business a little less profitable for these companies and improve the retirement security of their clients. Let's transfer some of the wealth these firms have accumulated at the expense of their clients.
For starters, every pension that has a conflicted adviser should undertake an audit to determine whether there is any connection between the adviser conflicts and pension underperformance. Here in Florida there are hundreds of public pensions that have utilized conflicted consultants employed by the major wirehouses and have terrible performance to show for it. We estimate that these conflicted consultants have cost Florida taxpayers in excess of $600 million in the past decade. To date, not one single Florida public pension has sought a recovery from these firms. Some of these pensions have received inquiries from the SEC and it is a matter of public record that their consultants have received SEC subpoenas. One consulting firm has even been issuing refunds to their pension clients. You'd think fund boards would be asking some serious questions but they aren't.
For starters, all of the 4,000 pensions that have been terminated and are now managed by PBGC should be reviewed to determine whether industry conflicts contributed to their demise. Believe it or not, PBGC has never undertaken such an audit. For starters, let's make a rule that any adviser that has contributed to the demise of a pension should be prohibited from providing services to PBGC. Currently PBGC employs conflicted advisers.
For starters, all pension consultants who were found to be conflicted by the SEC during its investigation into the industry in 2005 should be required to disclose to their clients the SEC's findings, thereby arming clients with the information they need to seek recompense. Why is the SEC aiding these consulting firms in concealing their wrongdoing?
In conclusion, there are no harmless kick-backs. For those who believed there were, hopefully the GAO report will serve as a wake up call. When advisers are conflicted and hidden financial dealings determine which managers are hired, ultimately pension performance suffers. According to the GAO, the performance of $4.5 trillion in pension assets in U.S. assets alone has suffered from these conflicts. Surely that's a number worthy of attention.
------------------------------------------------- GAO Report on Pension Consultant Conflcits of Interest
Conflicts of Interest Involving High Risk or Terminated Plans Pose Enforsement Challenges. Click here to view report.