Monthly Archives: February 2014

Are You Hiding Behind Your Consultant?

February 18, 2014

A qualified and objective consultant can be a great resource for plan fiduciaries in the prudent management of governmental, corporate, and non-profit pension programs.  However, the important thing to consider in all consulting relationships is that the consultant is a resource, and not a shield.

A “Shield” or a “Resource”?

As a plan fiduciary, you are charged with making decisions in the “best interests of plan participants and beneficiaries.”  No matter how many consultants you hire, you are still the fiduciary, and no multitude of consultants is going to relieve you of the serious responsibility to carry out your duties in the most prudent manner possible.

The use of a consultant can create a false sense of security, particularly in the governmental sector where there can be a tendency to use the consultant as a “shield” rather than a resource.  If you are blindly following the advice of your consultant, without considering other sources of advice and input, then you are putting yourself at risk of only considering one source of professional guidance when making key decisions.  Qualified consultants can be a valuable resource, but hiding behind their advice is not going to protect you from the risks of making ill-advised decisions.  To the contrary, a plan fiduciary must be diligent to ensure that the advice they receive from their consultant is relevant and not, in itself, a conflict of interest (see Article Number One: Does Your Consultant Have a Conflict?).

A fiduciary should seek input and advice from a number of qualified sources.  The fiduciary that seeks out advice from multiple parties to fulfill their duties is likely going to make more informed decisions than a fiduciary that blindly follows the advice of a single consultant.

Contrary Advice Can Be A Very Good Thing

 Seeking out a second, third, or fourth opinion on anything can be a good practice.  Whether it is your personal health, an investment decision, or management of a pension plan, seeking out other opinions is good behavior.

If you employ just one consultant for your pension plan, it is wise to purposely seek contrary viewpoints on important topics before making big decisions.  If you are making a major decision on your pension program, you should seek out other opinions even if the advice of your consultant makes sense.  Many times, the advice of a qualified consultant will result in the right decision being made.  However if you don’t seek out alternative viewpoints, it is too easy to be on “consultant autopilot”, and therein lies a big problem for many governmental plan sponsors.

 Other key points to consider:

  •  If you don’t understand what your consultant is advising you to do, ask more questions.  If you still don’t understand, don’t take action until you do.  At the end of the day, you are accountable for the decisions and if you end up defending your actions in court, ignorance of the facts is not an excuse for failing to conduct fiduciary duties appropriately. 
  • Ask other plan sponsors their opinion on key matters.  If someone that is similarly situated to your circumstances made a different decision, ask them why.  Document your discussion and share it with your other fiduciaries, even if you don’t agree with it.
  •  A good consultant will give you options, since good plan governance does not always have absolute answers.  If you aren’t being presented with options to key issues, ask why.
  •  If your consultant makes the same recommendations (on plan design, investment structure, vendors) on other plans as yours, you should be certain you aren’t just getting “cookie cutter” advice that is pre-packaged, no matter who the client is.

 

Finally, you don’t have to always say “yes” to consultant recommendations to show that you are doing your job as a fiduciary.  Sometimes it may be prudent to say no.  There’s a difference between using consultants for advice and education vs. rubber-stamping all of their recommendations, and then hoping for the best.

 Gregory Seller Consulting, LLC.  All rights reserved.  May not be reprinted in whole or in part without written permission.

 

Does Your Consultant Have a Conflict of Interest?

February 5, 2014

A qualified and objective consultant can be a valuable resource in helping plan sponsors manage their retirement programs. Many plans use one or more consultants to assist in vendor selection, evaluating investment managers, and carrying out other plan management and fiduciary responsibilities.

Define Responsibilities

Before hiring any consultant, it is important for the plan sponsor to clearly define exactly what functions the consultant is to provide to the plan. If the primary function of the consultant is to manage a public bid process or help in hiring and firing investment managers, those responsibilities should be clearly outlined. Broad or undefined consulting mandates cannot only be expensive and difficult to supervise, but they could result in potential conflicts of interest that can be detrimental to the plan and participants.

Avoiding Potential Conflicts

Before hiring any consultant, the plan sponsor should establish “red lines” to reduce the possibility that a consultant could create a conflict of interest. The simplest “red line” would be to prohibit the consultant from directly or indirectly benefitting from advice he or she provides to the plan. Examples would be:

• A consultant recommends you create custom target date funds and that he or she be the manager of those funds.

• A consultant recommends that a “multi-manager” stable value fund replace your current stable value fund and that he or she (or their firm) manage, assemble, or oversee that fund, or undertake any activity that generates additional fees to them if this change is made

• A consultant recommends that investment advice or asset allocation tools be made available to the plan, and that their firm (or an affiliate) provide those services.

There are other examples of course, but the important factor is that the consultant clearly understands that they may not benefit from advice they provide to the plan. So, if the consultant recommends a new set of custom target date funds be created, then he or she should understand that their firm may not be the manager of those funds. Or, if the consultant recommends a “multi-manager” stable value fund then their firm, or an affiliate, would be prohibited from managing that new fund or collecting any fees to implement it. To do otherwise is to permit your consultant to benefit from their own recommendations, and in doing so, they may not be able to be objective in rendering advice to your plan.

A Case Study Example

Putting on your “best practice” hat, let’s consider this hypothetical example:

A large county program hires a consultant to manage their public bid process to select a record keeper. The firm they selected did a good job in helping the plan sponsor manage the bid process, select a record keeper, and oversee implementation of the record keeping contract. Shortly after implementation of the record keeping contract, the consultant suggests that their firm be the “investment consultant” to the plan and provide advice on the selection and monitoring of investment options. The plan sponsor agrees, and the consultant that was originally hired to oversee a public bid process for a record keeper is now also the investment consultant. An additional fee will be charged for this service.

A year later, the consultant recommends that custom target date funds be created to replace the “off the shelf” target date funds originally selected during the most recent bid process. The consultant further recommends that they be the manager of the new funds on a “fund of funds” basis (multiple managers). The plan sponsor agrees to this recommendation. An additional fee will be charged for this service.

Shortly after that, the consultant recommends replacing the existing stable value fund with a “multi-manager/multi-wrapper” stable value fund. They also recommended that their firm be selected as the overall manager of the new arrangement. The plan sponsor agrees. An additional fee will be charged to oversee and manage the investment managers and “book value wrappers” of the new fund.

The consultant charges additional fees for all three new mandates:

• Investment consultant

• Management of custom target date funds

• Management of multi-manager/multi-wrap stable value fund

The total fees for this consultant, with the additional mandates, are now three times more than the original bid to simply manage the public bid process. In this example, the plan sponsor automatically awarded all three new mandates to the existing consultant without putting any of the new assignments to public bid. As a plan fiduciary, would you conclude that this plan sponsor was adhering to a “best practice” policy in making this series of decisions?

While this series of decisions may not be illegal or contrary to public bid laws for this particular government entity, it would be difficult to justify this trail of consultant mandates on a “best practice” basis.

Why Are “Red Lines” Important?

In the above hypothetical example, the plan sponsor hired a consultant for one project (in a public bid) and then subsequently awarded that same consultant a series of new mandates where:

• The consultant gained a financial benefit from his or her recommendations, and;

• The plan sponsor did not obtain a second opinion on any recommendation, and;

• The plan sponsor did not check the market to see if any of these new mandates could have been handled better or cheaper by someone other than the consultant who made the recommendation in the first place.

Just to heighten the drama in this example a bit, let’s throw in two other assumptions in this hypothetical case:

• The plan sponsor uses revenue sharing from the plan to pay the consultant fees, and;

• There were other bidders to be consultant when the original consulting contract was awarded.

If these two assumptions were also true, then the trail of decision-making by the plan sponsor becomes even more dubious. First of all, participant funds (and not the funds of the government entity) are being used to pay the consultant for an array of mandates that were never subject to public bid, and were the direct result of the consultant making recommendations that benefitted them financially. The revenue sharing would have (or certainly should have) ended up in the pockets of plan participants and not the consultant, had it not been for these additional mandates. While an argument could be made that the participants are “better off” as a result of these new changes to the plan, it becomes difficult to prove that argument if there were no second opinions or public bids to test the market prices and conditions before the mandates were awarded. The “trust me, you’re better off” scenario could hardly be considered a “best practice” for any plan fiduciary. And, if there were other bidders on the original consulting contract, how are they going to view the automatic award of multiple mandates to the winning consultant? It gives the appearance (whether true or not) that the winning consultant submitted the low bid for the initial work, and assumed they would “feather their nest” down the road with additional work that was awarded without oversight or competition. Whether planned or not, it would appear questionable to others who were originally interested in the work.

All of these potential issues could have been easily avoided if the plan sponsor had simply drawn a “red line” that the consultant may not benefit, directly or indirectly, for any recommendation they make to the plan.

Just to Make it Worse….

There is one final observation to make for this hypothetical example, which makes the series of events even worse. Let’s scroll back to the first recommendation that the consultant made. Following completion of the original assignment to oversee selection of the record keeper, the consultant recommended to the plan sponsor that their firm become the investment consultant, which oversees the evaluation of all the investment managers for the plan. The plan sponsor agreed, as you recall, and began to pay the plan consultant to also be the investment consultant for the plan. As a result of also assigning the same consultant the management of the custom target date funds and the multi-manager stable value fund, the consultant is now manager for the majority of plan assets. Since the stable value fund and target date funds often make up 50%-80% of all plan assets in a typical government plan, this particular plan sponsor is now in the situation where their own investment consultant (who is supposed to oversee all the investment managers) is now managing or co-managing the majority of plan assets themselves. The investment consultant is now evaluating their own performance on the majority of plan assets. So, who is overseeing the investment consultant? Who is assuring that their decisions and actions are in the “best interests of plan participants and beneficiaries”? It’s the classic example of the chef being the sole judge of their own cooking! While that might be acceptable in the restaurant business, it certainly is not a “best practice” in managing a pension program.

“It Wasn’t Supposed to be That Way”

A couple years back when a situation similar to the above hypothetical example actually occurred on a large governmental plan, those were the words of the new Committee Chairperson. After realizing that a series of decisions had resulted in a consultant receiving multiple “no bid” mandates, and a total annual bill that was now four times the original bid award, the startled Chairperson remarked: “It wasn’t supposed to be that way!” Often times, one decision by itself does not appear to be of consequence. But when a series of decisions is made over a period of time without “red lines” to use as a guide in avoiding potential conflicts for decisions, the result can often be “how did this happen?”

In Summary: It’s Easy to Avoid Conflict of Interest

One simple sentence would serve as the “red line” to avoid the string of events outlined above. Simply adhere to the requirement that the consultant may not benefit, directly or indirectly, from any advice they render to the plan. Period. This will also help your consultant in the long run, since they are aware that any advice they render to the plan must be as unbiased as possible, since they can’t benefit from it in any event, regardless of what the recommendation is. If a potential consultant does not want to abide by this restriction, then it could be time to find another consultant. To do otherwise would be accepting the potential for the advice of your consultant to conflict with what is best for plan participants and beneficiaries.

Gregory Seller Consulting, LLC All rights reserved. May not be reprinted in whole or in part without written permission.