GAO: Conflicts of Interest May Reduce Returns

Posted on by

In “GAO: Consultant Conflicts May Slash Pension Returns,” reports on a GAO study that looked into the performance of defined benefit pension funds that used consultants that had undisclosed conflicts of interest. The analysis found that the funds that relied on these advisors had lower investment returns. Their annual results were 1.3% lower on average, which over the life of a typical pensioner’s holdings, is enough to make a marked result in fund value.

The GAO was careful to avoid declaring, as opposed to merely suggesting, that the conflict were the cause of the performance gap. In fairness, correlation isn’t causation, and the sample size was small (13 funds with conflicted consultants versus 11 without). But it is precisely the result you would expect to see.


Conflicts of interest between consultants and the pension plans they assist can be costly to employees saving for retirement, according to a new report from the Government Accountability Office.

The report comes two years after the Securities and Exchange Commission performed a review of 24 pension consultants and found that 11 had disclosed conflicts of interest and 13 had undisclosed conflicts of interest. The GAO report finds that the defined-benefits plans using those 13 consultants had annual returns 1.3 percent lower than the others. Although the new finding is “suggestive,” however, it shouldn’t be considered proof that consultant conflicts cause lower rates of return, according to the report.

The 13 consultants with undisclosed conflicts advised plans worth more than $4.5 trillion in assets. A worker with 30 years of service could see his retirement funds reduced by nearly 30 percent, according to a statement by Democratic Representatives Edward J. Markey and George Miller, of Massachusetts and California, respectively.

“When it comes to the management of pension funds and workers’ hard-earned savings, investment decisions should be driven by thorough analysis and research,” said Markey. “Not by the pursuit of fees that pad profit margins of consultants to the detriment of fund beneficiaries.”

A conflict of interest could occur if a consultant who advises pension fund plan sponsors on their plan’s long-term goals has a competing financial interest. Such conflicts have been blamed for the failure of certainly defined-benefit plans — like for example, those of United Airlines.

Money managers, broker-dealers, or pension consultants can have conflicts when business relationships—especially among each other, may lead them to breaching their fiduciary duties, according to the report. Money managers for instance, might make more in fees by steering investments in initial public offerings to the advisers’ more well-heeled clients.

In the case of pension consultants, the SEC found in its study that the 10 of the advisers who didn’t disclose their conflicts sold money managers analytical software packages that they use to help boost the performance of clients’ holdings. That creates a conflict for consultants because they might be prone to advising pension plans to use the money managers that buy the software “because those business relationships are profitable for the consultant,” according to the GAO.

“We can’t allow the challenge of saving for retirement to be made even more difficult by pension consultants who choose to enrich themselves,” said Miller.

Although the GAO report was “suggestive” of a link between conflicts of interest and negative pension returns, it said that the findings did not prove direct causality. It recommends that such regulators as the SEC, the Pension Benefit Guaranty Corporation, and the Employee Benefits Security Administration work more closely together to uncover undisclosed conflicts of interest. Miller, chairman of the House Committee on Education and Labor, is preparing legislation to combat conflicts of interest that affect defined-benefit and 401(k) plans.

In a letter that accompanied the GAO report, Bradford Campbell, acting assistant secretary of EBSA, said that his agency would soon publish a new regulation requiring service vendors, including pension consultants, to disclose fees along with direct and indirect compensation information.

The fate of the traditional defined-benefit plan has looked bleak for some time. The number of DB plans shrunk from 58,000 to 29,000 between 1995 and 2005, according to the American Benefits Council.

That shrinkage has an upside, however. Because of the sharp decline, the surviving DB plans have recently appeared healthier. A recent survey by Milliman, an actuarial consultancy, found that in 2006, pension funds saw returns of 12.8 percent, beating expectations by more than 4 percent.

Print Friendly, PDF & Email