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Posted September 13, 2007 The full Governing Management Letter | Subscribe to The Governing Management Letter Bonus columns: GIRARD MILLER’S BENEFITS BEAT Retirement Vendor Kickbacks Is somebody taking a cut of your employees’ retirement savings? Questions, success stories or anecdotes about benefit issues in government? In the public pension world, occasional convictions over kickbacks have been a black eye for a generally clean industry. Money and politics go hand in hand, but when money is held in trust for the exclusive benefit of retirees and plan participants, a higher standard of duty is required by law. It's called the "duty of loyalty" by the fiduciary bar. Simply put, the law requires that trustees and administrators of retirement systems put the interests of the plan participants first — always. 
In the world of defined contribution and deferred compensation plans for state and local governments, the same ethical and legal rules should apply. Particularly when it comes to endorsements. Heads have been turning lately in light of a lawsuit alleging "kickbacks" through an endorsement deal between a teachers' 403(b) plan administrator and the National Education Association. The suit alleges that 57,000 schoolteachers are being overcharged as a result of the arrangement. This isn't the only endorsement deal in the public-sector defined contribution market. Other governmental, labor and professional associations have participated in various arrangements that favor one vendor or another, with differing degrees of due diligence and financial support. Other lawsuits have been filed making similar allegations, and the New York attorney general's office conducted an investigation of another such arrangement which resulted in a multi-million-dollar settlement payment.
If plaintiffs prevail in the NEA case, the door will likely open even wider to similar litigation elsewhere. Ordinarily, state and local government plans are exempt from provisions of the federal Employee Retirement Income Security Act (ERISA). The courts could still find a violation of fiduciary law, however, because the duty of loyalty is deeply engrained in all benefits trusts. Moreover, the SEC is scrutinizing '12b-1' marketing fees charged by mutual funds, and similar arrangements. Further, there is already class-action investor litigation pending in federal courts on similar charges involving marketing and administrative payments to third parties by mutual funds. Finally, if a scandal draws their attention, Congress or the IRS could take a dimmer view of these deals and tax them as 'unrelated business income' instead of tax-exempt royalties. Facing tight budgets, some local governments have asked their recordkeepers and plan administrators to make contributions to their DC plans for administrative costs and to pay for the fees of the consultants who select them (!). In essence, the employees are paying for the employer's expenses of plan administration. While these arrangements are well-intended, and the U.S. Department of Labor has accepted similar arrangements in the private sector, it would not take much of an extension of the logic of the pending fee litigation to put these employers in legal jeopardy for commandeering employees' money. Most vulnerable would be plans that require mandatory employee contributions, not just optional savings. These lawsuits and investigations may compel changes in marketing arrangements and fees. Meanwhile, public officials, trustees, plan administrators and association boards would be prudent to ask probing questions about endorsements, "reimbursements" and marketing fees in their defined contribution and deferred compensation plans. Plan websites, plan documents and investment materials sent to employees should make full disclosure in specific, aggregate dollar terms as well as per-investor. Associations making endorsements or granting exclusive "partnership" or "sponsorship" status for a fee, royalty or similar franchise right should prominently disclose the deals and the dollars on their tax-exempt websites. At least one vendor, a major insurance company subsidiary named in similar litigation, has reportedly made such a disclosure of a $7 million endorsement deal in an honest effort at transparency on its part — yet ironically the recipient association apparently has not followed suit. The National Association of Government Defined Contribution Administrators' (NAGDCA) annual meeting next week might consider proclaiming full disclosure an industry best practice and a recommended condition for bid awards, especially if the members take their fiduciary responsibility seriously. If anything could attract unwanted federal regulation of state and local government benefits management, federal taxation of these nonprofit association revenues, or more class-action lawsuits, it would be hidden deals with privileged fees. How can public-sector associations tell the feds to stay out of their back yards on retirement plan oversight if they are pocketing money on the sly? As they say, "sunshine is the best antiseptic." Professionals, both public and private, can hold their heads a little higher if everybody steps up to full disclosure — and watches every penny of fees. Last month: Girard Miller, an analyst of benefits and investments with 30 years of experience in the public, private and nonprofit sectors, can be reached at Girardinmalibu@charter.net. © 2007, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
