Two years ago, senior executives at LandAmerica Financial Group Inc. hired a pension consultant to review the investment options in the company’s 401(k) plan. The reason? Managers at the title insurance company wanted an independent analysis of the investment-selection process.
It was a prudent move. While LandAmerica CFO G. William Evans says the review turned up nothing irregular at the Richmond, Virginia-based company, it appears some pension consultants have been recommending money managers based on self-interest, and not on the needs of their clients. Indeed, a study of 24 pension consultants conducted by the Securities and Exchange Commission found that more than half of the advisory firms earned money from both retirement-plan clients and money-management funds. According to the SEC study, issued in May, most of these pension advisers had relationships with unaffiliated broker-dealers or operated their own broker-dealers — thus providing themselves with an easy way to receive indirect payments from money managers.
At press time, the SEC had yet to take official action against any pension consultants. (The commission’s enforcement division is thought to be looking into the matter.) But the cozy relationship between pension consultants and the money managers who love them could be bad news for employers. According to Jay Harrelson, an attorney with the Nashville-based law firm Waller Lansden Dortch & Davis PLLC, an employer that relies on a single — and tainted — pension consultant could find itself on the hook. The same is true for a plan sponsor that fails to properly vet the selection of the funds in a plan. “If a fund performs poorly,” says Harrelson, “the plan sponsor could be liable for restoring those losses.”
Lawsuits in the Making?
So far, plan sponsors have been slow to see the danger in this situation. That’s surprising, considering that the potential conflicts of interest in the pension-advisory business are similar to those exposed in the insurance-brokerage business last year. Those conflicts, brought to light by New York Attorney General Eliot Spitzer, received a great deal of press coverage — and led to sizable settlements by three of the nation’s largest insurance brokers.
While no one knows if the SEC’s review of pension consultants will lead to any penalties or sanctions, publicity about potential conflicts could trigger worker suits — particularly in a down stock market. Still, few employers are doing what LandAmerica did. Harrelson says he has a few corporate clients that are beginning to ask hard questions of their pension-plan consultants, but labels them “the exceptions rather than the rule.” Adds David Wray, president of the Profit Sharing/401(k) Council of America: “I don’t think plan sponsors are reacting at this point to a list of possible concerns.”
One fiduciary who isn’t waiting to act is Robert Belk, executive vice president and CFO of Shaw Group Inc. Belk says the engineering and construction firm has been using a pension consultant for its 401(k) plan for several years. For his part, Belk believes the consultancy — R.V. Kuhns & Associates Inc., of Portland, Oregon — is a truly independent adviser.