GAO Investigating Whether Investment-Related Conflicts Are Root Cause of Pension Plan Crisis
Might the issues outlined in the SEC staffís May 2005 pension consultant report have anything to do with, say, the underfunding of the multi-billion dollar United Airlines pension plan?
Seems like a stretch, but there you have it.
In recent months, the U.S. Government Accountability Office (GAO) has been investigating whether the well-publicized pension plan losses in the airline industry and elsewhere are somehow tied to undisclosed conflicts of interest in the investment management industry.
"That strikes me as completely insane," said one lawyer, who said he was aware of the investigation. "But I donít think GAO has a lot of choice."
According to a GAO spokesperson, the investigation is focusing on the following issues:
What potential conflicts of interest and undisclosed financial arrangements might exist when managing pension fund assets?
What is known about the extent to which such conflicts of interest have contributed to recent problems in plan underfunding?
Which agencies have the responsibility to investigate potential conflicts in terminated plans?
What is the Pension Benefit Guaranty Corporationís (PBGCís) role in such investigations? To what extent have they coordinated with other agencies in these investigations?
GAO officials are expected to meet with Congressional staff later this month to provide an initial assessment of their findings and to discuss the content and timing of the final GAO report. "I understand from GAO that they will have this report by year-end," said Edward Siedle of Benchmark Financial Services. Siedle, whose firm investigates pension consultants and advisers, explained that GAO is looking not only at the PBGC, but also at the Department of Labor. "What should DOL be doing in terms of ferreting out pension wrongdoing and red flagging situations before it gets to PBGC?" he said. GAO is "very much interested in what DOL should be doing before the [plan] gets terminated."
Siedle explained that DOL is in the "hot seat" following the termination of the United Airlines plan. "UAL was the largest termination of a defined benefit plan in the history of this country," he said. "Lots of questions arose." Nationally, people began to ask, "What happened here?" One of those questions, added Siedle, "was whether the private sector, the vendors to private pension plans, have in any way contributed to their demise."
In some ways, the GAO study is the product of a series of events that occurred last summer. In May 2005, the SECís Office of Compliance Inspections and Examinations issued its pension consultant report, which found that more than half of the consultants reviewed provided products and services to both pension plan advisory clients and money managers and mutual funds on an ongoing basis. For some consultants, the compensation from advisers "comprised a significant part of their annual revenue," said the report.
Two weeks later, on June 9, the Senate Health, Education, Labor, and Pensions (HELP) committee held a hearing, provocatively titled "Protecting Americaís Pensions Plans from Fraud: Will Your Savings Retire Before You Do?"
The hearing, which had been previously scheduled, just happened to coincide with the issuance of the SEC staff report. And as it turned out, the issues raised by the report were front and center during the hearing. The Senators grilled the sole DOL witness about whether the agency was adequately overseeing plan investments.
"Does [DOL] currently have open investigations going against investment advisers?" asked Senator Jeff Bingaman (D-NM). The SEC report, he noted, found that about half of the pension consultants reviewed "basically have a financial deal with some financial company that they are then recommending to their clients." What, asked the Senator, is DOL doing about that?
"We donít regulate investment advisers, per se. We regulate plan fiduciaries," replied Alan Lebowitz, deputy assistant secretary in the agencyís Employee Benefits Security Administration. "[W]hile we operate in the same general area as the SEC, we have a different law and the people who are subject to our law are not necessarily the same ones or subject in the same way that they are to the securities laws, and it is difficult sometimes to parse through all of that to make sure that everything that should be covered is covered."
Meanwhile, around the same time as the SECís pension consulting report and the hearing, concerns about the underfunded United Airlines pension plan were coming to a head. Observers began wondering if there might be a connection between the conflicts identified in the SECís pension consultant report and the financial mismanagement of pension plans.
On June 20, the Aircraft Mechanics Fraternal Association wrote to DOL and the PBGC, urging the two agencies to conduct a "forensic audit" of the United Airlines pension plan and other distressed employee pension plans, in order to reveal potential fraud and recover assets. According to the union, the SEC report "raised serious questions about whether some pension consultants are fully disclosing potential conflicts of interest that may affect the objectivity of the advice given to their pension plan clients," said the group. "The implication is that tainted advice may cause avoidable losses or pension under-performance."
Tellingly, the union expressed hope that the United Airlines pension plan losses might be recovered out of the pockets of investment advisers: "While the plan sponsor may be bankrupt, the parties that have been dealing with the plan are not and it may be possible to recover assets from these parties on behalf of the planís participants," they said.
Things started to get moving. According to correspondence posted on Siedleís website, he was invited to meet with the head of PBGC in early September. During the meeting, Siedle offered to conduct, on a contingency basis, "forensic reviews" of each of the failed pension plans at PBGC. Such reviews, he said, would focus on conflicts of interest and hidden financial arrangements and malfeasance by firms that have provided investment services to the terminated plans.
The PBGC, however, turned Siedleís offer down.
In November, Representatives Ed Markey (D-MA) and George Miller (D-CA) asked GAO to investigate whether conflicts of interest in pension plan asset management have contributed to the underfunded defined benefit plan crisis. "We are concerned about reports that pension consultant conflicts of interest may have caused or contributed to the problems at Unitedís plan, which produced the staggering liabilities that have now forced the PBGC to assume control of the plan," said the Congressmen. Noting the findings in the SECís pension consultant report, they expressed concern that "some of the 3,500 terminated pension plans that are now the responsibility of the PBGC may have been adversely affected ó prior to PBGC assumption of the plansí liabilities ó by the types of conflicts and hidden financial arrangements uncovered by the SEC."
The Congressmen asked GAO to address a variety of questions, such as whether PBGC "routinely and systematically" conducts forensic audits of terminated pension plansí financial information to determine "whether malfeasance by the plan sponsor, administrator, consultant or other vendor to the plan occurred, such as conflicts of interest, hidden financial arrangements, or unlawful activities." GAO also was asked to investigate whether DOL and the SEC have "been effective in preventing and eliminating conflicts of interest from the pension fund industry."
According to Siedle, DOL historically has not examined pension plan investments because it has not understood the investment management business. The problem, he explained, is that DOL has been involved in enforcing ERISA and is "utterly lacking" when it comes to understanding money management. "Now, they are beginning to get a glimmer" of what the business entails, he said. "They are getting an innoculation Ö of reality and knowledge of the asset management business." The problem, noted Siedle, is that ERISA "is so complicated" and the securities laws are equally complex. In any event, he added, "people who are handling pension assets should be aware that there is a new emphasis now on what is going on in retirement plans."