A few days ago, I was asked to provide an answer to a FundFire reader’s question regarding possible conflicts of interest. I’ve included the question and published answer below. (See "Your Q&A: How to Vet Consultant’s In-House Products?" by Dr. Susan Mangiero and Mr. Wayne Miller, Fundfire.com, August 25, 2008.)
"Question: What can an institutional investor do to protect against conflicts of interest if a consultant recommends an in-house investment product? Third-Party Marketer, Institutional, East Coast
Answer: When reviewing an investment in a consultant’s in-house product, the plan sponsor decision-makers should first and foremost review their own fiduciary duties to participants (ideally with plan counsel) and the implications that such a selection would have on those obligations. Without a full understanding of such obligations, it is impossible to know when, how and why a fiduciary breach might occur. In the event that the consulting firm contracts as a fiduciary to the pension plan, the plan sponsor should likewise seek counsel regarding any implications for asset allocation and money manager recommendations made by the consultant.
Notwithstanding the important fiduciary considerations, it is vital to understand the process by which the consultant arrives at recommending one of its own offerings. Countless questions arise. Will the consultant earn higher fees by recommending an in-house fund? Are those higher fees justified? Is the in-house offering ‘suitable’ on a risk-adjusted basis? Are there ‘better’ available investment choices offered by third parties?
It’s important to clarify whether the consultant will be able to objectively fire an in-house or outsourced manager if performance is ever deemed sub-par. An institution must also determine whether the consultant is displaying full transparency about the selection, monitoring and termination process within the offering. Always remember that a plan sponsor must be able to discern the line of demarcation between authentic fiduciary representation by the consultant and the consultant’s own self-interest. Delegation does not eliminate the need for continued oversight on the part of the plan sponsor fiduciaries."
Editor’s Note: For further reading, check out the following resources.
- "Tips For Selecting and Monitoring Service Providers For Your Employee Benefit Plan," U.S. Department of Labor, Employee Benefits Security Administration, May 2004
- "Staff Report Concerning Examinations of Select Pension Consultants," U.S. Securities and Exchange Commission, May 16, 2005
- "Selecting and Monitoring Pension Consultants: Tips for Plan Fiduciaries," U.S. Department of Labor and U.S. Securities and Exchange Commission, June 1, 2005
- "Defined Benefit Pensions: Conflicts of Interest Involving High Risk or Terminated Plans Pose Enforcement Challenges," U.S. Government Accountability Office, June 2007