ERISA requires that fiduciaries of retirement plans manage their for the benefit of participants
ERISA requires that fiduciaries of retirement plans manage their for the benefit of participants
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 planís 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 planís 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.
1. 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)?
+++ Tips For Selecting And Monitoring Service Providers For Your Employee Benefit Plan
You can check yourself - and view the firmís Form ADV - by searching the SECís Investment Adviser Public Disclosure Web site. At present, the IAPD database contains Forms ADV only for investment adviser firms that register electronically using the Investment Adviser Registration Depository. In the future, the database will expand to encompass all registered investment advisers-individuals as well as firms-in every state. If you canít locate an investment adviser in IAPD, be sure to contact your state securities regulator or the SECís Public Reference Branch.
2. 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.
When pension consultants have alliances or financial or other relationships with money managers or other service providers, the potential for material conflicts of interest increases depending on the extent of the relationships. Knowing what relationships, if any, your pension consultant has with money managers may help you assess the objectivity of the advice the consultant provides.
3. 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)?
Payments from money managers to pension consultants could create material conflicts of interests. You may wish to assess the extent of potential conflicts.
4. 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?
Probing how the consultant addresses these potential conflicts may help you determine whether the consultant is right for your plan.
5. If you allow plans to pay your consulting fees using the planís 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?
You may wish to avoid any payment arrangements that could cause the plan to pay more than it should in pension consultant fees.
6. If you allow plans to pay your consulting fees using the planís brokerage commissions, what steps do you take to ensure that the plan receives best execution for its securities trades?
Where and how brokerage orders are executed can impact the overall costs of the transaction, including the price the plan pays for the securities it purchases.
7. 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?
As noted above, you may wish to explore the consultantís relationships with other service providers to weigh the extent of any potential conflicts of interest.
8. 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?
All investment advisers (whether registered with the SEC or not) owe their advisory clients a fiduciary duty. Among other things, this means that advisers must disclose to their clients information about material conflicts of interest.
9. Do you consider yourself a fiduciary under ERISA with respect to the recommendations you provide the plan?
If the consultant is a fiduciary under ERISA and receives fees from third parties as a result of their recommendations, a prohibited transaction under ERISA occurs unless the fees are used for the benefit of the plan (e.g., offset against the consulting fees charged the plan) or there is a relevant exemption.
10. What percentage of your plan clients utilize money managers, investment funds, brokerage services or other service providers from whom you receive fees?
The answer may help in evaluating the objectivity of the recommendations or the fiduciary status of the consultant under ERISA
As sponsors of 401(k) and other types of pension plans, business owners generally are responsible for ensuring that their plans comply with Federal law Ė including the Employee Retirement Income Security Act (ERISA). Many businesses rely on other professionals to advise them and assist them with their employee benefit plan duties. For this reason, selecting competent service providers is one of the most important responsibilities of a plan sponsor. The process of selecting service providers will vary depending on the plan and services to be provided. To assist business owners in carrying out their responsibilities under ERISA to prudently select and monitor plan service providers, the Employee Benefits Security Administration has prepared the following tips which may be a helpful starting point:
+++Consider what services you need for your plan Ė legal, accounting, trustee/custodial, recordkeeping, investment management, investment education or advice.
+++Ask service providers about their services, experience with employee benefit plans, fees and expenses, customer references or other information relating to the quality of their services and customer satisfaction with such services.
1. Present each prospective service provider identical and complete information regarding the needs of your plan. You may want to get formal bids from those providers that seem best suited to your needs.
2. You may also wish to consider service providers or alliances of providers who provide multiple services (e.g., custodial trustee, investment management, education, or advice, and recordkeeping) for a single fee. These arrangements are often called "bundled services.
3. Ask each prospective provider to be specific about which services are covered for the estimated fees and which are not. Compare the information you receive, including fees and expenses to be charged by the various providers for similar services. Note that plan fiduciaries are not always required to pick the least costly provider. Cost is only one factor to be considered in selecting a service provider. More information on pension plan fees and expenses can be found in Understanding Retirement Plan Fees and Expenses and the 401(k) Fee Disclosure Form, located at www.dol.gov/ebsa.
4. If the service provider will handle plan assets, check to make sure that the provider has a fidelity bond (a type of insurance that protects the plan against loss resulting from fraudulent or dishonest acts).
5. If a service provider must be licensed (attorneys, accountants, investment managers or advisors), check with state or federal licensing authorities to confirm the provider has an up-to-date license and whether there are any complaints pending against the provider.
6. Make sure you understand the terms of any agreements or contracts you sign with service providers and the fees and expenses associated with the contracts. In particular, understand what obligations both you and the service provider have under the agreement and whether the fees and expenses to be charged to you and plan participants are reasonable in light of the services to be provided.
7. Prepare a written record of the process you followed in reviewing potential service providers and the reasons for your selection of a particular provider. This record may be helpful in answering any future questions that may arise concerning your selection.
8. Receive a commitment from your service provider to regularly provide you with information regarding the services it provides.
9. Periodically review the performance of your service providers to ensure that they are providing the services in a manner and at a cost consistent with the agreements.
10. Review plan participant comments or any complaints about the services and periodically ask whether there have been any changes in the information you received from the service provider prior to hiring (e.g. does the provider continue to maintain any required state or Federal licenses).