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Cypen & Cypen
JUNE 2, 2005

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


As our readers know, a recent report by the Securities and Exchange Commission Office of Compliance Inspections and Examinations indicated that potential conflicts of interest may affect objectivity of the advice pension consultants are providing to their pension plan clients (see C&C Newsletter for May 19, 2005, Item 1). Well, it didn’t take long for the U.S. Department of Labor and the SEC to publish tips assisting fiduciaries of employee benefit plans in reviewing conflicts of interest of pension consultants. Issued June 1, 2005, the guidance is entitled “Selecting and Monitoring Pension Consultants - Tips for Plan Fiduciaries.” To encourage disclosure and review of more and better information about such potential conflicts of interest, DOL and SEC have developed a set of questions to assist plan fiduciaries in evaluating objectivity of recommendations provided, or to be provided, by a pension consultant. Because this matter is of such great importance, we are providing the full set of questions, together with the substance of the agencies’ commentaries:

1. Are you registered with SEC or a state securities regulator as an investment adviser? If so, have you provided all disclosures required by those laws (including Part II of Form ADV)?

Comment: A firm’s Form ADV can be self-checked by searching SEC’s Investment Adviser Public Disclosure website. If an investment adviser cannot be located in IAPD, contact the subject state securities regulator or SEC’s Public Reference Branch.

2. Do you or a related company have relationships with money managers that you recommend, consider for recommendation or otherwise mention to the plan? If so, describe those relationships.

Comment: When pension consultants have alliances or financial or other relationships with money managers or other service providers, the potential for material conflicts of interest increases, depending on extent of the relationships. Knowing what relationships, if any, a pension consultant has with money managers may help assess the objectivity of advice the consultant provides.

3. Do you or a related company receive any payments from money managers you recommend, consider for recommendation or otherwise mention to the plan for consideration? If so, what is the extent of these payments in relation to your other income (revenue)?

Comment: Payments form money managers to pension consultants could create material conflicts of interest. The extent of these potential conflicts of interest should be assessed.

4. Do you have any policies or procedures to address conflicts of interest or to prevent these payments or relationships from being a factor when you provide advice to your clients?

Comment: Probing how the consultant addresses these potential conflicts may help determine whether the consultant is right for a particular plan.

5. If you allow plans to pay your consulting fees using the plan’s brokerage commissions, do you monitor the amount of commissions paid and alert plans when consulting fees have been paid in full? If not, how can a plan make sure it does not over-pay its consulting fees?

Comment: A plan may wish to avoid any payment arrangement that could cause the plan to pay more than it should in pension consultant fees.

6. If you allow plans to pay your consulting fees using the plan’s brokerage commissions, what steps do you take to ensure that the plan receives best execution for its securities trades?

Comment: Where and how brokerage orders are executed can impact overall costs of the transaction, including the price a plan pays for securities it purchases.

7. Do you have any arrangements with broker-dealers under which you or a related company will benefit if money managers place trades for their clients with such broker-dealers?

Comment: As noted above, a plan may wish to explore the consultant’s relationships with other service providers to weigh the extent of any potential conflicts of interest.

8. Will you acknowledge in writing that you have a fiduciary obligation as an investment adviser to the plan while providing the consulting services the plan seeks?

Comment: All investment advisers (registered with SEC or not) owe their clients a fiduciary duty. Among other things, advisers are required to disclose to their clients information about material conflicts of interest.

9. Do you consider yourself a fiduciary under ERISA [which governs private plans] with respect to the recommendations you provide the plan?
Comment: If the consultant is a fiduciary under ERISA and receives fees from third parties as a result of their recommendations, a prohibited transaction under ERISA occurs unless the fees are used for the benefit of the plan (such as an offset against consulting fees charged the plan) or there is a relevant exemption.

10. As a percentage, how many of your plan clients utilize money managers, investment funds, brokerage services or other service providers from whom you receive fees?

Comment: The answer may help in evaluating objectivity of the recommendations or fiduciary status of the consultant under ERISA.

As we (and others) have been saying for years, trustees have a duty to manage their plans prudently. And because in carrying out these duties, trustees must rely heavily on pension consultants and other professionals to help, trustees must fully explore potential conflicts of interest that may affect objectivity of the advice they are receiving from these third parties.


On May 31, 2005, Department of the Treasury, Internal Revenue Service, published notice in the Federal Register of regulations under Section 415 of the Internal Revenue Code regarding limitations on benefits and contributions under qualified plans. The proposed amendments would provide comprehensive guidance regarding the limitations of Section 415, including updates to the regulations for numerous statutory changes since regulations were last published under Section 415. The proposed amendments would also make conforming changes to regulations under Sections 401(a)(9), 401(k), 403(b) and 457, and would make other minor corrective changes to regulations under Section 457. The regulations will affect administrators, participants and beneficiaries of qualified employer plans and certain other retirement plans. A public hearing has been scheduled for August 17, 2005. Written or electronic comments must be received by July 25, 2005.


In a May 2005 report to Congressional Committees, the United States Government Accountability Office examined recent experiences of large defined benefit plans that illustrate weaknesses in funding rules. Pension funding rules are intended to ensure that plans have sufficient assets to pay promised benefits to plan participants. However, recent terminations of large underfunded plans, along with continued widespread underfunding, suggest weaknesses in these rules that may threaten retirement incomes of these plans’ participants, as well as future viability of the Pension Benefit Guaranty Corporation single-employer insurance program. The report was prepared under the Comptroller General’s authority, and is intended to assist Congress in improving the financial stability of the defined benefit system and PBGC. The report examines (1) the recent funding and contribution experience of the nation’s largest private DB plans; (2) the funding and contribution experience of large underfunded plans, and the role of the additional funding charge; and (3) implications of large plans’ recent funding experiences for PBGC, in terms of risk to the agency’s ability to insure benefits. GAO recommends that Congress should consider broad pension reform that is comprehensive in scope and balance and effect. Specifically, GAO found that each year from 1995 to 2002, while most of the largest DB pension plans had assets that exceeded their current liabilities, 39% of plans on average were less than 100% funded. By 2002, almost one-fourth of the 100 largest plans were less than 90% funded. Further, because of leeway in the actuarial methodology and assumptions sponsors may use to measure plan assets and liabilities, underfunding may actually have been more severe and more widespread than reported. Additionally, 62.5% of sponsors of the largest plans each year on average made no cash contribution because the rules allow sponsors to satisfy minimum funding requirements through plan accounting credits that substitute for cash contributions.


Fast on the heels of the GAO report discussed in Item 3 above, U.S. Assistant Secretary of Labor Ann L. Combs on May 31, 2005 released a statement, reading in part: “The GAO’s report illustrates the need for comprehensive reform of the funding rules for single-employer defined benefit plans. Its detailed analysis shows that deficiencies in the current funding rules fail to ensure adequate funding and place the retirement security of more than 34 million American workers and their families at risk.”

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Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.

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