J. Fielding Miller, CEO of independent advisory firm CapTrust Financial Advisors, says the Raleigh, North Carolina, firm does operate a commission-recapture program through an affiliated broker-dealer. But CapTrust limits the arrangement, Miller notes, to so-called 12b-1 fees — that is, commissions that mutual funds pay brokers and other investment advisers to market their funds. When a mutual fund in a corporate client's 401(k) plan pays such commissions, he adds, any revenue CapTrust receives above that fee is rebated back to the client.

That's not always the case. Indeed, plan sponsors often have no idea that a pension consultant has a business relationship with a money manager. On paper, there often is no relationship. A consultant will merely recommend a money manager to a client. That money manager, in turn, routes trades through the consultant's broker-dealer — even if the trades are not for that pension plan's account. "It's kind of a wink deal," Miller says. "The money managers are saying, 'I'll get you trades another day another way, but it can't be traced back to that particular client.'"

Ask Hard Questions
Surprisingly, midsize businesses are more likely to receive tainted advice than small or large companies. Judy Schub, managing director of the Association for Financial Professionals's Committee on Investment of Employee Benefit Assets, in Bethesda, Maryland, says that smaller businesses may not use pension consultants, because they can't afford them. Those businesses are far more likely to choose their plan's investment options internally, aided only by third-party administrators (mutual-fund operators, insurance companies, and the like).

Meanwhile, Fortune 500 companies employ in-house pension professionals to make sure they're getting unbiased advice. That can take some doing, however. Managers at health-care-products distributor Henry Schein Inc., for example, hired a pension consultant to help them choose the investment options for the company's $230 million (in assets) 401(k) plan about a year ago. But Schein executive vice president and CFO Steve Paladino says executives at the $4.1 billion (in revenues) company did not sign on with the consultant until they verified the independence of the firm.

How? Managers at Melville, New York–based Schein asked representatives of the consultancy to confirm that it had no relationship with any broker-dealers or mutual funds. And they wanted to know if the firm received any compensation as advisers, or in any other capacity. "We also wanted to make sure they understood that they have a fiduciary relationship with our plan," notes Paladino. "We confirmed all of those items."

Plan sponsors that have yet to get similar assurances from their pension consultants may be courting trouble. "You should always be asking these kinds of questions," says an attorney who focuses on cases involving the Employee Retirement Income Security Act, which governs the operation of 401(k) plans. Now that the SEC and the DoL have highlighted the issue, the attorney says corporate executives should be proactive in grilling pension consultants about potential conflicts of interest. "You need to get comfortable that they have procedures in place to deal with [possible conflicts]," the lawyer says. "And you need to be assuring yourself that none of this affects the integrity of the selection process."

Randy Myers is a contributing editor of CFO.

Who Benefits?

Now that the Securities and Exchange Commission is on the case, CFOs with oversight responsibility for their companies' 401(k) plans can sit back and wait, comforted by the idea that any wrongdoing will be righted — right? Wrong, says former SEC chairman Harvey Pitt, now CEO of global consulting firm Kalorama Partners LLC, in Washington, D.C. "If your interest is in protecting the employees who are going to use whatever monies are accumulated in these accounts for their retirement, then it seems to me that CFOs should basically say, 'We don't need to wait for the government inquiry. We ought to make sure the people who are servicing our employees understand that neither the employees nor we as a company have any tolerance for conflicts of interest, and we should make certain any practices that are followed are practices consistent with the interests of the plan beneficiaries.'"

Pitt calls the allegations that pension consultants could be offering advice to retirement plans based on anything other than what's best for the plan and its participants "extraordinarily serious." As noted in the accompanying article, the findings of the SEC staff have been forwarded to the SEC's enforcement division. While there is no guarantee the enforcement division will do anything with those findings — and the SEC isn't commenting — Pitt says he thinks it is "very likely" that the referrals will lead to some form of enforcement action by the SEC. — R.M.

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