Consultants acting as fiduciaries to pension plans who recommend their own firm as an asset manager "could be in violation" of the Employee Retirement Income Security Act, according to letter penned by Assistant Secretary of Labor Phyllis Borzi.
Borzi was writing in response to questions raised by retiring Rep. George Miller, D-California, in a letter to the Secretary of Labor sent last May.
Consultants acting in a dual capacity as managers of plan assets are a "growing trend," according to Miller's letter.
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"As revenues and margins in the pension consulting business have come under pressure, it appears that more and more firms have sought to transition these relationships from a pure consulting model to one where the consultants step into the role of becoming the manager of the plan assets," wrote Miller, who is the ranking Democratic member of the House Education and Workforce Committee.
More than 75 percent of consulting firms to pensions act as both investment managers and outside consultants for their clients, according to the SEC.
Such relationships are not news to Borzi, who heads the Employee Benefits Security Administration.
In fact, the potential conflicts of interest that arise when consultants recommend their own firm as a manager of plans assets have been on regulators' radar for some time.
In 2005, the SEC examined 24 pension consultants and found 13 failed to disclose significant conflicts of interest. Subsequent analysis by the Government Accountability Office found that the defined benefit plans associated with the 13 consultants had lackluster returns.
In her response to Rep. Miller's letter, Borzi explained that "during the department's investigation of a 401(k) plan, we routinely examine the relationship of the plan to its pension consultant to determine if the consultant's activities could be considered fiduciary in nature."
Borzi also cited fee disclosure regulations implemented in 2012, which require service providers to defined contribution plans to disclose "indirect" compensation they receive from relationships with affiliates and third parties.
Though she did not articulate how consultants acting in a dual capacity may be affected by the proposed adoption of a universal fiduciary standard, she did say that the DOL remains committed to addressing conflicts of interest.
The DOL is expected to rule on a new fiduciary standard next spring.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
