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Games They Play

The other shoe has yet to drop on pension consultants' possible conflicts of interest. But companies can't afford to wait.

Randy Myers, CFO Magazine
December 22, 2005

Conflicts of interest may be more subtle than you think

Everyone has a conflict of interest in their work with ERISA retirement plans. Independence is not just a matter of how one gets paid. Remember, there is no PCAOB equivalent in the benefits or pension consulting world. Thus, one brand name consulting firm who proposed to provide independent advice already had a $500k health and welfare consulting assignment on the books. Is that advice independent? Who would risk a $500k assignment by telling the Plan Sponsor something they don't want to hear? In this case, the firm is about as independent as Arthur Andersen was on Enron.

Another of the major consulting firms who provided record keeping and actuarial services to a Fortune 500 company also proposed that they be retained to provide a "fiduciary audit" of the Plan Sponsor's conduct. How independent could that audit be?

Investment consultants may or may not be independent of the investment funds they recommend, regardless of how they are paid. For example, academic studies show that you have about somewhere in the vicinity of a 10% chance to identify today the active investment manager who will outperform a passive benchmark over the next five years.

Given that statistic, what is the prudent basis for choosing to spend plan assets pursuing the "rewards" of active investment management on a Defined Contribution plan?

How many investment advisors recommend a passive strategy or enhanced passive strategy to their customers? It turns out that most are conflicted because they want to sell their "smarts" to the customer even though the statistics are against heavily weighted against them, their client and their plan participants.

Conflicts abound in the ERISA world. To act as if all conflicts are tied to direct payments is to miss where the conflict influences behavior and generates a blind spot in the thought process of the individual or organization providing services.

All conflicts of interest on the table and under a bright light that should be the mantra.

Posted by Wayne Miller | December 15, 2005 02:59 pm

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