Category Archives: Uncategorized

A Chasm of Good Intentions

September 29, 2014

Having just returned form the 2014 Annual Meeting of NAGDCA (National Association of Government Defined Contribution Administrators) in San Antonio, I am struck by how little has really changed in the government market in the past 35 years.

I have a soft spot in my heart for NAGDCA. I attended both of the original formation meetings in Chicago in 1980 and 1981, and attended the first Annual Meeting in Biloxi, Mississippi in 1982. I also helped create, and served on, the first Industry Board. I’ve attended all the Annual Meetings except two.

While not unique to NAGDCA, it seems that most pension conferences just keep having the same sessions on the “retirement crisis” in America; too many people saving too little. Every year, there’s another public figure, academic or media personality telling us how bad the crisis is. But we know all that. We’ve known that for over three decades.

What we need to focus on is what to do about it.

It’s time to stop diagnosing the problem and focus on the cure:

  1.  Automatic Enrollment and Automatic Escalation

Every government defined contribution plan in American should be compulsory when you are hired. Period.

Employees are free to opt-out, but we know that only a fraction will. Every plan sponsor should be actively implementing this. If your state has garnishment or other laws that prohibit automatic enrollment, you need to focus on changing the law. Go to your state capitol and explain the issue. Be sure your local city council or county commissioners pass a resolution endorsing a change in the law. Get legislative and vendor sponsors, and get your public employee unions on board.

In my nearly 40 years in the public sector pension market, I’ve seen providers and plan sponsors spend hundreds of millions of dollars over decades to improve enrollment. Advertising campaigns, videos, splashy brochures; yet we have barely moved the needle on “voluntary” enrollment. It’s time to stop wasting money on things that don’t work and focus on making automatic enrollment and automatic escalation our number one priority. Don’t take “no” for an answer. We all know that the inertia of automatic enrollment really works in the long run so let’s just get that done for every governmental defined contribution plan in America.

  1. Scrap The Individual Fund Selection Process

If the “people aren’t saving enough” theme is the number one recurring topic at pension conferences, a close second is the “people are poor investors” sessions. Ok, we get it. So let’s do something about it.

Enroll everyone in managed accounts, target date funds, or risk-based asset allocation funds. Discourage participants from individual fund selection. Make them sign a form that they are a “knowledgeable investor” before they pick their own funds in an alternate core line up or brokerage account.

Most of the evidence points to managed accounts as the best way to structure a portfolio that takes into account your defined benefit plan, the pension plan of a participant’s spouse or partner, and other factors such as social security or personal savings. Target date funds can’t and don’t do that. While it is true that portfolios in managed account programs may be similar to those in target date programs, the big difference is that managed accounts put the participant into the fund that is right for them, based on their unique set of circumstances (of which age is only one of the factors). Target date funds can never measure up to that degree of customization. They just aren’t designed to operate that way.

However, if you can’t offer managed accounts for a reasonable fee, then opt for target date funds. They are far from perfect. The “off the shelf” target date funds are often tailored for the corporate 401(k) market, and many are loaded with proprietary funds of the investment manager. Custom target date funds are great for jumbo plans but they carry added fiduciary risk and are really only economically feasible for very large plans. Nonetheless, anything is better than asking your participants to pick from an investment menu of mutual funds. So if you don’t opt to put your participants in managed accounts, target date funds are a good second option.

Risk-based funds are also another option. Given the issues with target date funds (one size fits all for people in a certain age bracket) the risk-based alternative at least permits some degree of customization if the participant has other retirement plans and/or personal savings or a spouse/partner with another retirement plan. However, most participants will need help selecting a risk-based fund so if you can’t easily offer that, then stick with managed accounts or target date funds.

The important thing is to scrap individual fund selection. Only a small minority of participants really do it well, and most plan sponsors spend way too much money and time “monitoring, hiring and firing” specific fund managers for asset classes that most participants don’t understand or use wisely. For the very small percentage of people who are capable of constructing their own portfolio, let them do it in the brokerage account. There’s no need for the plan sponsor to “select or edit” core funds for knowledgeable investors, so just scrap individual funds. Think of the time and money you will save when you end this practice that is really of little long- term value to the bulk of your participants.

       3.  It’s Time to Reallocate Your Plan Governance Dollars

Once you have all of your employees in the plan, and safely tucked into a managed account, target date, or risk-based fund default option, it’s time to spend your consulting fees and investment advisory fees in a more creative manner.

Providing your plan participants with projected future income statements is a great starting place. Ideally, you should include all future sources of retirement income; your defined benefit pension plan, the defined contribution plan, personal savings, retirement income from a spouse/partner and even social security, if applicable. This tool would a far better way to spend plan-level funds instead of wasting money on individual fund selection and monitoring.

Once you no longer have to worry about enrolling participants and helping them select investment options, your plan vendor (record keeper) can devote resources to counseling sessions with participants and their spouse/partner to help them understand their retirement income projection statement. All of those boring and repetitive “enrollment meetings” would be replaced with personal counseling sessions (every two years, at least), where the focus would be on the projected retirement income statement, and not on plan investments or other topics that simply confuse the bulk of participants.

No One Ever Complained About Having Too Much Money in Retirement

 It’s highly unlikely any participant is going to be angry at their employer for making them save too much money for retirement. It’s time we really focus on what actions we can take that truly help our employees. Unfortunately, it takes a bit of courage to step over a chasm of good intentions and make decisions that really have a profound and positive impact on the financial well being of employees. It is far easier to stick with the status quo, even if it isn’t working well.

The deck is stacked against this type of transformative change. The existing infrastructure of the government defined contribution plan market (and to a degree the DB market as well) is loaded in favor of the government and private entities that benefit from the existing and inefficient plan architecture. But this change will occur, because there are leaders in the market, both in the public and private sector who know these are the changes that need to be made. They are prepared to step over the chasm to make these important changes happen, and transformative change will ultimately occur. Your choice is to be a leader, or one of the followers.

Gregory Seller Consulting, LLC

All rights reserved. May not be reprinted in whole or in part without written permission. Provided for information only and is not legal or investment advice. 


City of Baltimore Takes a Bold Step Toward Pension Reform

An article Gregg wrote on exemplary pension reform efforts at the City of Baltimore was published Friday,  August 8, 2014 by Plan Sponsor.  Standard & Poor’s recently upgraded City of Baltimore Bonds to AA, citing improved financial conditions for the City.

You may view the article by pasting this link into your web browser:

Sample Annotated Request for Proposal (RFP) Available

Plan sponsors who follow “best practice” guidelines conduct formal bids on a regular basis to ensure that their plan participants have the most attractive program available.  A bid process is normally referred to as a Request for Proposals (RFP).  A prudent plan sponsor will generally issue an RFP at least every five years.  Some state or local ordinances may require formal bids on a more frequent basis.

One of the most common requests we receive is for some guidance on what should be in an RFP, and how to score the proposals you receive.  One of the best ways to develop your own RFP and scoring methodology is to request samples from other public plan sponsors with plans of similar size and characteristics to yours.  Or, if you hire a consultant to assist you with a public bid process, they will likely have a RFP and scoring format that they use.  You should evaluate several RFP’s and scoring mechanisms before concluding upon which is best for you.  It is generally advisable that your criteria and scoring be consistent for various bids, if possible.  This makes it easier to score and evaluate proposals on a consistent and unbiased basis.

A sample Annotated RFP is available from our firm, which contains a listing of the most commonly asked questions in an RFP.  There is also a sample scoring and evaluation criteria, with scoring ranges that are most commonly used by plan sponsors for public employee defined contribution plans.  Both documents are available to you free of charge.  Please simply send your mailing or email address to and we will be pleased to send you the documents in hard copy or electronic format.

The sample Annotated RFP and Scoring Suggestions are for information and educational purposes only, and are not legal or tax advice.



Pension Reform Presentation by Gregg at US Conference of Mayors 82nd Annual Meeting

Gregg was a speaker on Pension Reform at the 82nd Annual  Meeting of the United States Conference of Mayors in Dallas on June 23, 2014.  Co-presenters for the workshop on Pension Reform were:

  • Stephanie Rawlings-Blake, Mayor of Baltimore
  • Chuck  Reed, Mayor of San Jose
  • Theresa Cruz Myers, VP, Great-West Financial

The following topics were discussed during Gregg’s portion of the  presentation.

Public Pension Reform:

Consider Your Many Options…..Before You Have Few of Them

 Why All The Turmoil in the Public DB World?

 Three Major Pressure Points on Public DB Plans:

  • GASB 68 Reporting Standards
  •  “Net Pension Liability” or NPL
  • Funding Status
  • Unfunded Liabilities & Low Funding Ratios for Current Benefit Accruals
  • Cost
  • Many Plans More Expensive Than Anticipated or Employer Can No Longer Afford
  • Costs Rising Dramatically, Even for “Healthy” Plans

The Other Shoe……….

The Elephant in the Room is the Assumed Rate of Return:

  •  Most Public Plans use 7%-8.5% Assumed Rate of Return (ARR)
  •  Average Among 126 Larger Plans is 7.72%*
  •  Average Discount Rate for Corporate Plans is 4.56% (mandated to use Aa corporate bond rates)
  • Many Experts Believe Future Returns Will Be Much Lower than Historic Yields
  •  Investment Return Is About 60% of the Revenue for Public Plans
  •  Investment Returns Below the ARR Can Dramatically Increase the Cost of the Plan

Most Public Plan Sponsors Considering Their Options

  •  Responses to GASB 68 Depends Upon Your Plan Status:
  • “Healthy” Plans That Are Well Funded:
  • Tweak Benefit Formulas to Bring Long Term Costs Down
  • Plans With Funding Issues:
  1.          Hybrid Plan (combination DB & DC)
  2.          Cash Balance Plan
  3.          Defined Contribution Plan
  •  Most (but not all) Would Apply to New Employees Only

“Healthy” Plans:

  •  Increase retirement age for new employees
  •  Reduce COLA formulas
  • Eliminate “Spiking” and/or change definition of compensation
  • Change or eliminate DROP Plans
  • Review plan funding assumptions, in particular the Assumed Rate of Return.

For Cities That Determine the DB Plan is not Sustainable: 

  • Create a “Hybrid” Plan:
  • Combination DB & DC
  • Employer funds a smaller DB benefit (i.e; 1% of pay times years of service)
  • Employee funds a DC account (5%-10% of payroll)

Cash Balance Plan

  • A DB Plan funded like a DC Plan

DC Only Plan

  • 401(k) style plan like those used in private sector


  •  ”Pension Reform” of some type is affecting all cities
  • The Steps You Must Take Depends on a Variety of Factors:
  • Funding status of your plan
  • Affordability
  • Political climate back home
  • Stakeholders (employees, unions, taxpayers) interests

The Important Thing is to Take Action While You Have Many Options Available – Waiting Too Long Reduces Your Options 

*Source: NASRA, April 2014

The above presentation is for information and education purposes only.  It is not legal or investment advice.  The presentation solely reflects the views of the presenter and not the United States Conference of Mayors or any of the co-presenters. 

For more discussion and topics on public pension policy, find us at:














Collective Bargaining for DC Vendors Has Risks for Plan Sponsor and Plan Participants

Some plan sponsors in the pubic sector have added vendors to their IRC Section 457 or other plans as a result of collective bargaining with one or more public employee unions.  This can be a risky decision that is fraught with potential problems for both the employer and employees.

While at first this may seem an easy benefit to provide that is not costly to the public employer, it is a practice that may have financial consequences for the plan sponsor in the long run:

1.    Fiduciary responsibility trumps collective bargaining

A number of rulings and lawsuits have made it clear that the plan sponsor must act  “in the best interests of plan participants and beneficiaries.”  Most recently, the 8th U.S. Circuit Court of Appeals affirmed the position of the Department of Labor that the plan sponsor must prudently monitor fees paid to plan providers.  Failure to do so can result in financial liability for the employer.[1]

Adding another vendor simply because it was a condition of collective bargaining does not relieve the plan sponsor of its duties to monitor fees and other plan features in the best interests of plan participants.  Many union-sponsored arrangements are “bundled” arrangements over which the plan sponsor has no control in the area of fees, investments or features.  Yet, while the plan sponsor cannot control these elements, it remains the plan fiduciary.  In other words, you have all the risk but someone else is making all the decisions. 

2.    Adding a program that failed an independent review

In many situations, another vendor was added as an available option even though that program failed to pass an independent public bid evaluation process.  This not only applies to union-sponsored programs, but situations where a local broker or financial adviser proposed a program that failed to pass muster in a formal bid review process, yet was added later due to political or collective bargaining pressure.  This is never an acceptable action for a prudent plan fiduciary.

3.    Increased risk of liability for failure to disclose available options

 How would you respond if this situation unfolded at your city, county or special district?

A plan sponsor selected a vendor for their plan following a competitive bidding process.  A consultant was involved, along with a review committee.  The result of the process was to select a vendor that ranked highest according to the criteria of the public bid.  The plan sponsor entered into a contract with that vendor.

Shortly after the bid process, a union bargained for their endorsed program to be added as a secondary option for employees.  The employer, in a collective bargaining process agreed.  The union program had been submitted for consideration in the original process to select a single vendor, but it scored poorly compared to other bidders and was not selected for general employees.

Nonetheless, the plan sponsor added the second vendor as a result of negotiations with one of the unions.  The union routinely signed up new union employees in its endorsed program. About a year later, a union employee who automatically joined the union endorsed program discovered that another program was also available, when his spouse took a job with the same employer.  As a general employee, she was enrolled in the program that was created as a result of the public bid process.  Both employees were confused as to why they were enrolled in separate programs.  The general employee spouse worked in finance, so she prepared a comparison of her program and the program her husband was enrolled in.  Both spouses were surprised at the high fees and poorer performing investment options in the union sponsored program.  They were also surprised to learn that the union was receiving a share of the fee revenue from the endorsed program.  That fact was not disclosed to participants at enrollment.

The union employee then claimed that he was never made aware of the alternative plan when he joined the public entity.  He alleges that the employer was negligent in failing to inform him that he was eligible for another less expensive plan.  He also alleges that the employer failed to inform him that the endorsed plan had been independently reviewed, but did not score well and was therefore excluded from consideration for general employees.

This is a nightmare situation for any public plan sponsor.  In this instance, the plan sponsor exercised due diligence in selecting one vendor for all employees, but did not do so in signing a contract for another segment of employees. Furthermore, the employee automatically enrolled in the union plan allegedly had no knowledge that he could have joined the other plan.

So, the question is:

  • Is this simply a disclosure issue for the plan sponsor, or;
  • Would this be viewed as the plan sponsor turning their back on their obligation to be certain that all of their offerings were “in the best interests of plan participants and their beneficiaries?”

If the plan sponsor could be held liable for their decision (as indicated in Tussey v. ABB) then the financial ramifications of this situation could be severe.

4.    The role of a third party sponsor

 Public employee unions play an important role for their members and constituents, so the issues raised in this article are not negative towards unions or other third party sponsors of programs. To the contrary, third party oversight can be helpful, particularly for smaller public employers who cannot afford an independent consultant and/or who don’t have the expertise to conduct a full market review or public bid.

One major area of concern on third party sponsored programs is how independent the sponsor is from the vendor they have selected.  I took a look at the four largest union and third party affinity sponsored programs used in the public sector.  Of the four, one had conducted a public review with an independent consultant in the past five years, and openly discussed the findings of that review with participating entities.  It was not clear from publicly available information what public reviews or bids were undertaken recently by the other three sponsoring organizations.  Only one of the four had information about a public market review on their web site.  There was no mention of independent reviews on the other sites.  Interestingly, only one of the four had actually changed vendors in the past several years.  One appears to have had the same vendor for over 30 years.

These findings don’t imply anything bad or improper with endorsed programs.  However, any prudent plan sponsor should require some evidence of a formal independent review on a regular basis if they are asked to sign a contract as a result of collective bargaining, and not due to an independent market review.

5.    The union as fiduciary      

In at least one instance, an employer who agreed to add a program through collective bargaining did so but refused to sign the contract with the union endorsed company. They required that the union sign the contract and assume the fiduciary liabilities that go with it. This option poses an interesting legal question.  While a fiduciary can delegate all or some of their obligations to a discretionary trustee, you would need the opinion of your own legal counsel to determine whether or not your circumstances permit you to delegate fiduciary responsibility to a third party, and if so, who that third party can be.  For example, even if you are able to delegate fiduciary responsibility to a third party, what due diligence must you perform to be certain you are delegating fiduciary responsibility to an entity that is financially sound and is qualified to act in that role?  These are all questions for your legal counsel, but the delegation issue is in interesting concept when the employer agrees to add a vendor negotiated through collective bargaining and not through a formal bid process or market review.

6.    How many programs are enough?

Finally, once an employer begins adding program options through collective bargaining, and not through a formal review process, it opens a floodgate for other employee groups to add their own endorsed program.  There are many situations where a city or county has multiple vendors, most of whom were added through collective bargaining or because one particular group (management, unions or both) had a preferred vendor. These multiple-vendor programs can be very confusing to employees, and begs the question about who benefits from this –employees or the sponsoring organizations?  It would be hard to demonstrate that you carried out your fiduciary duties in a responsible manner when all you did was add whatever programs you were asked to make available.  At the end of the day, the plan sponsor is the fiduciary and has the liability that comes with it.

“Balkanization” of your plan is not a good solution

The term “balkanize” means to “ divide into small, quarrelsome, ineffectual states” as was the case with the break up of the Balkan states in Europe. Chopping up your defined contribution plan to accommodate various groups with financial interests in their own products or endorsement fees is not a prudent way to manage a pension program.  A plan fiduciary should design your defined contribution plan “in the best interests of plan participants and their beneficiaries” and not for the benefit of other parties.

Unions and other employee and employer organizations can play an important role in public pension policy, and in the products, services and features a defined contribution plan should offer employees.  These groups can play a valuable role as part of an overall review committee or board that selects a vendor to manage the plan for the benefit of all employees.  This process is used by most  larger plan sponsors and it works well to use combined purchasing power and collective talent to develop a program with low fees and attractive features available to all employees.

Chopping you plan up into small pieces, each one chosen through collective bargaining or political pressure, and not by independent review and evaluation, is not a “best practice” for a plan fiduciary.  It entails risks for the plan sponsor and can hardly be viewed as being in the “best interests” of the employee.

Gregory Seller Consulting, LLC

All rights reserved.  May not be reprinted in whole or in part without written permission. Provided for information only and is not legal or investment advice.  Plan sponsors should seek their own legal counsel on the impact of court rulings on their fiduciary liability.

[1] Tussey v. ABB

Court Affirms That Plan Sponsor Is Responsible For Monitoring Fees Charged To Participants

Plan sponsors should take note:  It is the employer (plan sponsor) who is responsible for monitoring fees charged to participant accounts, and not the record keeper or plan investment providers.  Furthermore, the plan sponsor can be held financially liable for failing to act in the best interests of plan participants, especially when it comes to fees.

In a lengthy ruling handed down last month by the 8th U.S. Circuit Court of Appeals, the court affirmed what the Department of Labor (DOL) has been telling fiduciaries for years.  The DOL position is that the plan sponsor must prudently monitor fees paid to plan providers.  Plan sponsors can’t blame their inaction or ignorance on plan providers.  The court held that the employer (Swiss-based ABB, Ltd) was liable for monitoring fees, and not Fidelity (the plan record keeper). The circuit court upheld the $13.4 million damage award against the employer.  The court determined that ABB failed to complete its due diligence for fees paid to the record keeper.

The lawsuit is known as Tussey v. ABB, which has been winding through the courts since 2006.  Aside from the issue of excessive record keeping fees, the lawsuit alleges breach of fiduciary duty for high investment management fees on mutual fund options, and earnings on “float” interest by the record keeper.  The most recent ruling overturned a lower court decision against Fidelity on float income, and ordered the lower court to reconsider the $21.8 million granted to plaintiffs on excessive mutual fund fees.  However, with respect to record keeping fees, the circuit court upheld the ruling against the employer for failing to monitor and take action on record keeping fees.

In the public sector, especially in the smaller-plan market, we sometimes hear employers say that they rely on the plan provider to monitor fees.  Or, the plan sponsor, upon learning that their fees may be excessive, fails to take action in an expedient and prudent manner to remedy the situation.  While this lawsuit is not over, the courts have thus far been consistent on the fee issue; that the plan sponsor is responsible for monitoring fees, and can be held financially liable for failing to do so.

Gregory Seller Consulting, LLC

All rights reserved.  May not be reprinted in whole or in part without written permission. Provided for information only and is not legal or investment advice.  Plan sponsors should seek their own legal counsel on the impact of court rulings on their fiduciary liability.



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.