Feds discover conflict of interest by pension fund managers

WASHINGTON — Federal examiners have found that many pension fund consultants are getting undisclosed payments from advisory firms that manage fund assets, potentially creating conflicts of interest that work against investors, officials of the Securities and Exchange Commission said Monday.

Perhaps even more disturbing, the officials said, was the discovery that many pension consultants do not believe they have a fiduciary duty to safeguard the financial interests of their clients — companies, foundations, and state and local governments — even though the law says they do.

The SEC discovered the latest form of conflict of interest in the securities industry in an inspection “sweep” of 24 pension consulting firms of varying sizes, a cross-section of the 1,742 such firms that operate in the country. It has significant implications for investors in company and public-employee retirement funds.

Even if investors are not financially harmed, the conflicts of interest are a serious problem, said Lori Richards, director of the SEC’s Office of Compliance Inspections and Examinations.

“We do think these findings are very serious,” Richards said at a news conference. “This is an unhealthy dynamic.”

The inspection found that of the 24 pension consulting firms, 13 provided products and services — such as consulting and software — to their clients as well as to fund money managers and to mutual funds. For some of the pension consultants, compensation from money managers comprised a significant part of their revenue.

Pension consultants advise pension plans and their trustees on selecting money managers, mutual funds and brokerage firms and other matters. The SEC officials are concerned that the consultants’ recommendations could be influenced by the money they received from certain money managers and mutual funds.