From Education and Labor Chairman George Miller:
Miller, Markey Release New Report Showing that Undisclosed Conflicts Reduce Pension Plan Returns
Workers Likely Bear Brunt of Lower Returns in the Form of Reduced Pension Benefits
WASHINGTON, D.C. — Pension plans may earn substantially lower rates of return when they are assisted by consultants who have significant conflicts of interest that are not disclosed, according to a new report by government investigators released today by Reps. George Miller (D-CA) and Ed Markey (D-MA).
The report, from the Government Accountability Office, analyzed the financial returns of pension plans assisted by 11 consultants that disclosed conflicts of interest and of plans assisted by 13 consultants who had material conflicts of interest that they did not disclose. The report found that the plans using the latter 13 consultants achieved annual returns that were 1.2 to over 1.7 percentage points lower during the 2000 to 2004 period than did the other plans. The 13 consultants with undisclosed conflicts together advised pension plans with over $4.5 trillion in assets.
It is likely that these reduced returns would lead to reduced pension benefits for retirees. That's because, according to the Democratic staff of the Education and Labor Committee, employers are more likely to reduce plan benefits than increase plan contributions in order to offset any reduction in plan returns resulting from conflicts of interest.
Even a seemingly small difference in the returns that workers get on their pension plans can have a big impact on how much money they'll have when they retire. A 1.4 percentage point difference in annual returns — which is roughly the midpoint in the GAO's estimated range — can reduce retirement benefits by more than 30 percent for a worker with 30 years of service.
“This report shows that there is potentially a significant cost to workers and retirees when consultants or money managers have conflicts of interest,” said Miller, the chairman of the House Education and Labor Committee. “Americans are concerned about having enough money to get them through their golden years. We can't allow the challenge of saving for retirement to be made even more difficult by pension consultants who choose to enrich themselves when they should be acting with pensioners' best interests in mind.”
“American workers face enough struggles when it comes to saving for retirement. The last thing they need or deserve is to discover that after all their hard work, their pension is smaller than expected because conflicts-of-interests led fund managers to make bad investment decisions. Today's report from the Government Accountability Office makes clear that we need better oversight and regulation of pensions,” said Markey. “When it comes to the management of pension funds and workers' hard-earned savings, investment decisions should be driven by thorough analysis and research, not by the pursuit of fees that pad profit margins of consultants to the detriment of fund beneficiaries.”
In 2005, the Securities and Exchange Commission examined 24 pension consultants and found that 11 of them had conflicts of interest that had been disclosed and that 13 of them had significant conflicts of interest that had not been closed. The GAO based its report on the 24 consultants reviewed by the SEC.
The GAO report concluded that the federal agencies that handle pension issues — the SEC, the Employment Benefits Security Administration, and the Pension Benefit Guaranty Corporation — have different missions that have prevented them from properly coordinating to address and prevent conflicts of interest.
Miller and Markey requested the GAO report in December 2005.
On March 6, the Education and Labor Committee held a hearing at which pension experts testified that hidden fees that can take a significant bite out of workers' 401(k)-type retirement savings account balances, often without workers' knowledge. For more information, click here.
Click here for a copy of the GAO report.