"Might" Makes Right?

Last week the Government Accountability Office (GAO) published a 67-page report titled “Conflicts of Interest Involving High Risk or Terminated Plans Pose Enforcement Challenges.” In announcing the results of that report, Congressmen George Miller (D-California) and Ed Markey (D-Massachusetts), who had commissioned the report, issued a press release claiming that “Undisclosed Conflicts Reduce Pension Plan Returns,” and that “Workers Likely Bear Brunt of Lower Returns in the Form of Reduced Pension Benefits.”

The gist of that report: “[P]ension plan consultants assisting significant numbers of pension plan sponsors may have conflicts of interest, as a result of their affiliations or business arrangements with other firms that could affect the advice they provide to these sponsors.”

However, let me draw your attention to two words in that long sentence: “may” and “could.”

That’s right, after drilling down into the specific firms identified in a Securities and Exchange Commission (SEC) report two years ago (see “IMHO: Disclose Sure?”), the GAO determined only that pension consultants might have a conflict of interest that could affect the advice they provide to plan sponsors. Or, one is tempted to add, they might not.

The SEC report (see “Staff Report Concerning Examinations of Select Pension Consultants”) continues to be dredged up and referenced in media reports as suggesting that “more than half” the pension consultants examined by the SEC had potential conflicts of interest. What is frequently overlooked in that comment is that we’re talking about 13 of 24 firms (the SEC said that 1,742 firms under its oversight provided pension consulting services) – and even then, the SEC’s report said only that the “duality” in the customer base “may create a conflict of interest.”

Still, the most recent report notes that those 13 consulting firms had over $4.5 trillion in assets under advisement and, further, that a sampling of defined benefit plans “associated with” those firms had total assets of $183.5 billion. By any measure, that’s a lot of potential influence.

Performance Standards?

Now, if the report had left it there, it would have been just another expenditure of taxpayer dollars directed toward a fairly obvious result (though the GAO reports are generally very well-researched and informative in describing the historical and legislative background of the issues they cover). However, the GAO report went further – claiming to have found a difference in annual returns between the DB plans who used consultants with those potential conflicts, and those who did not – a 1.3% difference in annual returns, to be specific.

While I commend the GAO for taking the time and effort to see if a difference in result could be quantified, I have to say that I found their conclusion to be something of an extrapolation based on an assumption, founded on a premise – and thus undeserving of its appearance in the report. The GAO itself acknowledged the limitations of their analysis, noting that, “because many factors can affect returns, and data and modeling limitations limit the ability to generalize and interpret the results, this finding, while suggestive, should not be considered as proof of causality between consultants and lower rates of return.” (1) Indeed, consultants offer many types of guidance to pension plans, guidance that is not always solely oriented toward providing the very highest rates of return.

The GAO, again to its credit, acknowledged that the Department of Labor’s Employee Benefits Security Administration (EBSA) “noted a number of concerns about our statistical analysis and in particular our econometric analysis that suggests a negative association between consultants with undisclosed conflicts of interest and rates of return on assets. EBSA expressed important cautions that should be considered when interpreting our results, including some data limitations and our use of an estimate for our investment returns variable.”

Additionally, while the GAO claimed to have found a return differential between plans that were associated with the potentially conflicted consultants and those that relied on other firms, they “did not find significant differences in returns for those plans that had associations with both types of consultants.”

So - there are questions about the assumptions employed, the data itself, proof of the existence of a real conflict of interest that might have resulted in tainted guidance, doubt that the result measured – absolute performance results – would be appropriate under the circumstances - oh, and no apparent difference in the performance results of DB plans that worked with potentially conflicted AND ostensibly unconflicted firms.

As for the impact of all this on retiree benefits and pension funding, the GAO said that EBSA “emphasized the view that it is primarily the failure of plan sponsors to adequately fund pension plans causing plan underfunding problems rather than poor investment advice from self-interested service providers.”

Ultimately, IMHO, we’re left with more questions than answers – loose allegations predicated on tenuous assumptions – and the certainty only that consulting conflicts of interest may exist and could, if present, result in a difference in performance results. That, and a few hyperbolic headlines that, IMHO, cast a broad net of overly generalized assumptions.

If, indeed, there are real conflicts of interest, it’s time we identified them and ended the practice(s), once and for all. No ifs, ands, or “mights” about it.


- Nevin E. Adams, JD


(1) Among the caveats in the report about the assumptions employed were: the use of a “potentially unrepresentative sample of pension consultants to identify the pension plans included in our investigation that therefore limits the ability to generalize the results. A few pension consultants that had significant conflicts of interest that impacted their activity could very well drive the observed negative relationship. Further, the imbalance between the large number of plans associated exclusively with conflicted consultants and the small number of those that were not raise additional statistical issues and limits the ability to generalize the results. Lastly, given the short time period analyzed, it could be possible that some plans’ returns were abnormally low due to their investment strategies, and would have higher returns had the time period analyzed been lengthened.”