Pension Advisers Fall Under Scrutiny


The problem of conflicts of interest for pension advisers attracted Congressional attention, according to a Wall Street Journal article by Dan Fitzpatrick  (June 9, 2014).  U.S. Representative George Miller (D., Calif.) has written a letter to the Labor Department that asks the Department to examine the conflicts of interest in the pension advising industry.

The amount of money in pension funds totals $6.5 trillion.  Cities, states, and companies hire consulting firms to give them disinterested advice about the money in their pension funds, but many firms assist in managing the funds themselves.  The Securities and Exchange Commission (SEC) puts the number of firms in the pension industry who both provide consulting and manage investments at above 75%.  The percentage has grown so large because consulting firms are offering to manage investments and investment managers are offering consulting services.

Some large public pension funds already forbid pension advisers from performing both services, but, given the numbers, many firms are doing both and billing their clients a healthy fee for it.  Conflicts of interest abound, however, as government investigations have shown.  A Government Accountability Office study found in 2007 that consultants who did not disclose their conflicts realized annual returns that were lower by 1.3%.  Also, a 2005 SEC investigation discovered that some consultants accepted money from investment managers, even though the consultants were providing advice about selecting a manager.

These investigations show the large potential for abuse when pension advisers fulfill dual roles.  An examination by the Labor Department, along with enacting regulations in response, would help reduce the conflicts of interest present in the pension industry and the potential harm caused by these conflicts.

Page Perry is an Atlanta-based law firm dedicated to protecting investor rights.