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entitled 'Defined Benefit Pensions: Conflicts of Interest Involving 
High Risk or Terminated Plans Pose Enforcement Challenges' which was 
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Report to Congressional Requesters: 

United States Government Accountability Office: 

GAO: 

June 2007: 

Defined Benefit Pensions: 

Conflicts of Interest Involving High Risk or Terminated Plans Pose 
Enforcement Challenges: 

GAO-07-703: 

GAO Highlights: 

Highlights of GAO-07-703, a report to congressional requesters 

Why GAO Did This Study: 

To protect workers’ retirement security, the requesters asked GAO to 
assess: 1) What is known about conflicts of interest affecting private 
sector defined benefit (DB) plans? 2) What procedures does PBGC have to 
identify and recover losses attributable to conflicts? 3) What 
procedures does Employee Benefits Security Administration (EBSA) have 
to detect conflicts among service providers and fiduciaries for PBGC-
trusteed plans? 4) To what extent do EBSA, PBGC, and SEC coordinate 
their activities to investigate conflicts? GAO interviewed experts, 
including agency officials, attorneys, financial industry 
representatives, and academics, and GAO reviewed PBGC documentation and 
EBSA enforcement materials. GAO analyzed Labor, SEC, PBGC, and private 
sector data, including data on pensions, pension consultants, and rates 
of return data, and conducted statistical and econometric analyses. 

What GAO Found: 

A conflict of interest typically exists when someone in a position of 
trust, such as a pension consultant, has competing professional or 
personal interests. Though data are limited on the prevalence of 
conflicts involving plan fiduciaries and consultants, a 2005 SEC staff 
report examining 24 registered pension consultants identified 13 that 
failed to disclose significant conflicts. GAO’s analysis found that, in 
2006, these 13 consultants had over $4.5 trillion in U.S. assets under 
advisement. GAO also analyzed a sample of ongoing DB plans associated 
with the 13 consultants that, as of year-end 2004, had total assets of 
$183.5 billion and average assets of $155.3 million. Additional sample 
analysis showed that the DB plans using these 13 consultants had annual 
returns generally 1.3 percent lower than those that did not. Because 
many factors can affect returns, and data as well as modeling 
limitations limit the ability to generalize and interpret the results, 
this finding should not be considered as proof of causality between 
consultants and lower rates of return, although it suggests the 
importance of detecting the presence of conflicts among pension plans. 
Whether specific financial harm was caused by a conflict of interest is 
difficult to determine without a detailed audit. 

As a creditor and a trustee of terminated plans, PBGC’s policies and 
procedures are oriented toward the likely recovery of assets, rather 
than explicitly focusing on losses associated with conflicts of 
interest involving service providers. Although PBGC has broad legal 
authority to recover losses attributable to conflicts of interest, PBGC 
officials told us that the agency limits its pursuit of cases to those 
in which the recovery will likely exceed the cost of bringing a case to 
court successfully. While monetary recoveries by PBGC may improve the 
agency’s financial position, they generally have little effect on 
participant benefits because most affected participants already receive 
their full benefits promised by their plans. According to PBGC, more 
than 90 percent of all beneficiaries of PBGC trusteed plans received 
their full promised plan benefit. 

While EBSA’s enforcement program is concerned with conflicts of 
interest affecting all private pension plans, it does not have specific 
procedures for plans trusteed or likely to be trusteed by PBGC. EBSA 
has recently initiated the Consultant/Advisor Project (CAP) to focus on 
conflicts among service providers, though it includes no specific focus 
on high risk or terminated plans. Moreover, existing law limits EBSA’s 
efforts to pursue conflicts and redress for financial harm when certain 
service providers are either not fiduciaries under ERISA or did not 
knowingly act in concert with a fiduciary. 

Coordination among EBSA, PBGC, and the SEC on conflicts of interest is 
primarily informal, in part because of agencies’ different 
responsibilities. The agencies’ investigative activities for conflicts 
of interest tend to operate independently. Differences in agency 
missions pose challenges to the three agencies’ developing a 
coordinated focus to pursue conflicts of interest affecting individual 
pension plans. 

What GAO Recommends: 

GAO recommends that PBGC assess the risks from conflicts of interest; 
that EBSA expand enforcement to include a focus on PBGC-identified 
plans; and that each agency share data on conflicts. Congress should 
consider amending ERISA to expand Labor’s authority to recover losses 
against non-fiduciaries. Each agency generally concurred with the 
report, although EBSA expressed some methodological concerns. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-703]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Barbara Bovbjerg at (202) 
512-7215 or Bovbjergb@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Some Pension Plan Service Providers May Have Conflicts of Interest, but 
Determining Whether Harm Results Is Difficult: 

PBGC's Current Policy and Procedures Are Not Focused on Detecting 
Conflicts of Interest among Service Providers: 

EBSA's Enforcement Strategy Does Not Include Procedures That Focus on 
Conflicts of Interest Involving PBGC Trusteed Plans or High Risk Plans 
Likely to Terminate: 

Different Authorities and Roles Have Limited Agency Collaboration: 

Conclusions: 

Matters for Congressional Consideration: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Econometric Analysis of the Effect of Inadequately or 
Undisclosed Conflicts of Interest on Pension Plan Rates of Return: 

Appendix III: Comments from the Pension Benefit Guaranty Corporation: 

Appendix IV: Comments from the Department of Labor: 

Appendix V: Comments from the Securities and Exchange Commission: 

Appendix VI: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Pension Plan Sponsors Employing 13 Consultants of Concern to 
the SEC Regarding Inadequately Disclosed Conflicts of Interest. 

Table 2: Selected Descriptive Statistics for Plans included in the 
Econometric Model: 

Table 3: Econometric Estimates of the Relationship between Undisclosed 
Conflicts of Interest and Plan Returns (OLS and Random Effects): 

Table 4: Econometric Estimates of the Relationship between Undisclosed 
Conflicts of Interest and Plan Returns (Fixed-Effects): 

Figures: 

Figure 1: Average Annual Rates of Return Achieved by Plans Terminated 
in 2005 Sponsored by Publicly Traded Companies Compared to CalPERS, TSP 
and the S&P 500 Benchmarks, 1997-2002: 

Figure 2: Identifying Plans for GAO's Pension Plan Sample: 

Abbreviations: 

CalPERS: California Public Employees' Retirement System: 

CAP: Consultant Advisor Program: 

DB: defined benefit: 

DC: defined contribution: 

DOL: Department of Labor: 

EBSA: Employment Benefits Security Administration: 

ERISA: Employee Retirement Income Security Act: 

GLS: generalized least squares: 

MOU: memorandum of understanding: 

OCIE: Office of Compliance Inspection and Examinations: 

OLS: ordinary least squares: 

PBGC: Pension Benefit Guaranty Corporation: 

SEC: Security and Exchange Commission: 

S&P: Standard and Poor's: 

United States Government Accountability Office: 
Washington, DC 20548: 

June 28, 2007: 

The Honorable George Miller: 
Chairman: 
Committee on Education and Labor: 
House of Representatives: 

The Honorable Edward J. Markey: 
House of Representatives: 

The bankruptcies of United Airlines, Bethlehem Steel, and other firms 
since 2000 have resulted in the termination of a number of large 
underfunded pension plans and their becoming the responsibility of the 
Pension Benefit Guaranty Corporation (PBGC), the federal guarantor of 
private sector defined benefit (DB) plans. Since then, the number of 
pensioners who depend on the agency for their retirement benefits has 
almost tripled, and the agency's single employer insurance program has 
moved from a surplus of $9.7 billion to an accumulated financial 
deficit in 2006 of more than $18 billion. Recent experiences involving 
the termination of large DB plans have illustrated the weaknesses in 
funding rules.[Footnote 1] Adding to concern over the health of DB 
plans have been recent reports about conflicts of interest among 
pension consultants - advisers who often play a major role in guiding 
plan investments. In June 2005, the Aircraft Mechanics Fraternal 
Association, which represents certain employee groups in terminated 
United and Northwest Airlines DB plans, expressed concern that 
conflicts of interest may have been present in the DB plans of 
employees the union represents. The union's concerns were raised as a 
result of a May 2005 study by Securities and Exchange Commission (SEC) 
staff on conflicts of interest among pension consultants. The SEC study 
revealed that many pension consultants have failed to adequately 
disclose conflicts of interest in the process of advising pension plans 
and their trustees, including DB plans.[Footnote 2] A conflict of 
interest is typically a situation in which someone in a position of 
trust, such as a pension plan trustee or investment adviser, has 
competing professional or personal interests. Such competing interests 
can make it difficult for fiduciaries and others, in general, to 
fulfill their duties impartially and could cause them to breach their 
duty to act solely in the interest of investors, plan participants, or 
beneficiaries. Having a conflict in and of itself does not constitute a 
breach of fiduciary duty. However, given the potential of financial 
harm to plan sponsors and participants, concerns have been raised about 
the extent and nature of these conflicts of interest. 

In view of the importance of protecting the retirement security of plan 
participants and bolstering the financial position of the PBGC, you 
asked us to pursue the following questions: 

* What is known about conflicts of interest on the part of service 
providers and plan fiduciaries to single employer, private sector DB 
plans? 

* What policies and procedures does the PBGC have in place to identify 
and recover losses attributable to conflicts of interest in plans it 
trustees? 

* Does the Department of Labor's (Labor) Employee Benefits Security 
Administration (EBSA) have procedures in place to detect conflicts of 
interest among service providers and fiduciaries for plans now trusteed 
by PBGC? 

* To what extent do EBSA, PBGC, and SEC coordinate their activities to 
identify and investigate conflicts of interest? 

To determine what is known about the existence of conflicts of interest 
in the context of single employer private sector DB plans, we 
interviewed a variety of professionals with expert knowledge of the 
issue, including agency officials, forensic auditors, accountants, 
attorneys, financial industry representatives, and academics. We also 
analyzed Form 5500 data, Nelson's Directory of Plan Sponsor data, 
Nelson's Directory of Pension Consultants data, SEC examination data, 
Pensions and Investments periodicals, and data received from the PBGC 
associated with terminated DB plans. In addition, we analyzed Standard 
and Poors (S&P) rate of return and asset allocation data for ongoing 
and terminated plans. To determine the policies and procedures PBGC has 
in place on conflicts of interest, we interviewed PBGC and EBSA 
officials and reviewed PBGC documentation related to this issue. To 
determine the procedures EBSA has in place to detect and investigate 
conflicts of interest at service providers or plan fiduciaries, we 
reviewed EBSA's enforcement materials, our previously issued reports on 
EBSA's enforcement program, and interviewed EBSA officials. To 
determine EBSA's, PBGC's, and SEC's coordination efforts, we 
interviewed officials at all three agencies and reviewed previously 
issued reports that provided related information on this issue. We 
conducted our work between February 2006 and May 2007 in accordance 
with generally accepted government auditing standards. See appendix I 
and appendix II for more information on our scope and methodology. 

Results in Brief: 

Although no complete information is available regarding the prevalence 
of conflicts of interest, pension plan consultants assisting 
significant numbers of pension plan sponsors may have conflicts of 
interest, as a result of their affiliations or business arrangements 
with other firms that could affect the advice they provide to these 
sponsors. A May 2005 SEC staff study of pension consultants registered 
as investment advisers found that 13 of the 24 consultants reviewed 
that had provided services to sponsors of pension plans, including 
ongoing DB and PBGC trusteed DB plans, had failed to disclose 
significant ongoing conflicts of interest to their pension fund 
clients. Our analysis of data found that, in 2006, these 13 consultants 
had over $4.5 trillion in U.S. assets under advisement, which included 
DB, DC, and other types of assets. We also analyzed a sample of ongoing 
DB plans associated with the 13 consultants that, as of year-end 2004, 
had assets of $183.5 billion for these plans and average assets of 
$155.3 million. Additional analysis found that the DB plans using these 
13 consultants had annual returns generally 1.3 percent lower than 
those that did not. Because many factors can affect returns, and data 
and modeling limitations limit the ability to generalize and interpret 
the results, this finding, while suggestive, should not be considered 
as proof of causality between consultants and lower rates of return. 
Lack of data prevented a similar study of PBGC trusteed plans or high 
risk plans likely to terminate. Although SEC staff have reported that 
some of the consultants examined in its study have since taken some 
corrective action, this finding nevertheless illustrates the importance 
of detecting the presence of undisclosed conflicts of interest among 
ongoing plans, and likely among terminated plans. However, independent 
experts, EBSA and PBGC officials all concur that while analyzing rates 
of return is a useful first step, determining whether conflicts 
resulted in financial harm to individual plans and the magnitude of 
that harm is often extremely difficult without a detailed forensic 
audit. 

As a creditor and a trustee of terminated plans, PBGC's policies and 
procedures are oriented toward the likely recovery of assets, rather 
than specifically focusing on losses associated with conflicts of 
interest involving service providers. When assuming responsibility for 
a terminated plan that is underfunded, PBGC takes steps to identify 
improper activities of the plan fiduciary, such as theft or improper 
loans of plan assets, but does not collect and evaluate service 
providers' records to identify their conflicts of interest and any 
associated losses to the plan. PBGC officials told us that, given the 
agency's mission, balancing scarce resources against the likelihood of 
recovering losses makes pursuing conflicts of interest cases 
particularly risky for PBGC. Although PBGC has broad legal authority to 
pursue and recover losses attributable to conflicts of interest, PBGC 
officials told us that the agency limits its pursuit of cases to those 
in which the recovery will likely exceed the cost of identifying and 
gathering evidence and bringing a case through the courts successfully. 
While monetary recoveries of missing assets by PBGC may improve the 
agency's financial position, they generally have little effect on 
participant benefits because most participants of PBGC trusteed plans 
already receive their full plan benefits. According to a PBGC 2004 
report, more than 90 percent of all beneficiaries of PBGC trusteed 
plans received their full plan benefit. 

EBSA's enforcement program is concerned with conflicts of interest 
affecting private-sector pension plans generally and does not have 
specific procedures for plans trusteed by PBGC. EBSA officials told us 
they do not focus their enforcement efforts on PBGC-trusteed plans and 
generally leave the responsibility of identifying potentially harmful 
conflicts of interest to PBGC for those plans under PBGC control. EBSA 
has recently expanded its enforcement activities to focus more heavily 
on conflicts of interest involving service providers through a new 
initiative known as the Consultant/Adviser Project (CAP). However, EBSA 
officials said there are no explicit procedures in the CAP that focus 
on service providers of plans that PBGC deems as likely to terminate or 
those plans now under PBGC's control. EBSA officials also noted that 
existing law limits their efforts to pursue conflicts involving those 
service providers that are not fiduciaries under ERISA or that did not 
knowingly participate in a breach by a fiduciary. 

The current level of coordination among EBSA, PBGC, and the SEC 
regarding conflicts of interest is limited, largely because of the 
different authorities and missions of each agency. Exchanges of 
information are informal and have occurred both between staff at these 
agencies' headquarters and between their local offices. At the national 
level, for example, SEC has shared examination reports that it 
concluded would be helpful to EBSA and provided access to the non- 
public exam files related to its 2005 pension consultants study. 
Locally, information is generally exchanged when two or more local 
agency offices have good working relations. Differing agency 
responsibilities tend to reinforce limited collaboration among these 
agencies. For example, SEC is primarily concerned with regulating 
investment advisers to ensure compliance with securities laws, while 
EBSA is tasked with protecting participant benefits. PBGC, in contrast, 
provides an insurance program for plans in the event a plan is 
terminated without sufficient assets to cover promised benefits. 
However, more regularized coordination could improve agency efforts 
regarding conflicts of interest. Because of their different missions, 
these agencies have not established systematic procedures for regular 
sharing and coordinating on conflicts of interest. 

We are making recommendations to Labor and PBGC that are intended to 
improve the detection and oversight of conflicts of interest, and 
strengthen EBSA's enforcement ability over non-fiduciaries and recovery 
of losses to PBGC-trusteed plans and to improve the collaboration among 
EBSA, PBGC, and SEC. We are also asking that Congress consider amending 
ERISA to give the Department of Labor greater authority to recover 
losses from non-fiduciaries. We provided a draft of this report to 
Labor, PBGC, and the SEC for their review and comment. 

We obtained comments from the acting Assistant Secretary for the 
Employee Benefits Security Administration, the Deputy Director of the 
Pension Benefit Guaranty Corporation, and the Director of Compliance 
Inspections and Examinations for the Securities and Exchange 
Commission. Each of the agencies also provided technical comments, 
which were incorporated into the report as appropriate. EBSA, PBGC, and 
SEC generally agreed with the findings and conclusions of the report. 
PBGC noted that although it has no authority to take action against 
service providers with conflicts of interest involving ongoing plans, 
its recent initiative to enhance its procedures for identifying and 
pursuing fiduciary breach and other types of claims is fully consistent 
with our recommendation. In its comments, EBSA agreed to consider our 
recommendation to expand the focus of its CAP program to PBGC- 
identified pension plans that may be trusteed or are high risk as it 
reviews the results of its initial efforts under CAP and gains 
additional experience through project investigations. EBSA also noted a 
number of concerns about our statistical analysis and in particular our 
econometric analysis that suggests a negative association between 
consultants with undisclosed conflicts of interest and rates of return 
on assets. In response to these concerns, we now discuss the 
limitations of the analysis more prominently and have added more 
information on our statistical analysis and data in appendix II. All 
three agencies acknowledge the importance of effective cooperation to 
facilitate their respective missions. EBSA's, PBGC's and SEC's comments 
are reproduced in appendix III, appendix IV and appendix V. 

Background: 

ERISA is the primary federal law governing the sponsorship and 
operation of private sector employee pension plans, including DB 
plans.[Footnote 3] Title I of ERISA gives Labor the primary authority 
to enforce requirements governing the conduct of fiduciaries of pension 
and other employee benefit plans. EBSA is the Labor agency responsible 
for administering and enforcing Title I. ERISA has requirements 
relating to the standard of conduct of plan fiduciaries[Footnote 4] and 
also prohibits certain transactions[Footnote 5] between fiduciaries and 
parties in interest. Under Title IV of ERISA, PBGC was established to 
provide insurance to covered private-sector single-employer and 
multiemployer DB plans. The PBGC is not an enforcement agency and 
receives no funds from general tax revenues. When a bankrupt plan 
sponsor terminates an underfunded pension plan, PBGC assumes 
trusteeship of the assets and liabilities of the plan, pays participant 
and beneficiary benefits, and acts as a creditor of the bankrupt 
sponsor in the interest of the plan's participants and beneficiaries. 
As plan trustee, PBGC may file suit to recover missing assets of the 
plan as well as other assets of the bankrupt sponsor or to recover 
losses and debts owed to a plan, including those resulting from the 
improper actions of anyone whether or not they are considered 
fiduciaries under ERISA.[Footnote 6] 

Among other things, ERISA provides that private sector employee pension 
plans, including DB plans, must have one or more named fiduciaries who 
have authority to control or manage the operation and administration of 
the plan.[Footnote 7] ERISA requires fiduciaries to discharge duties 
solely in the interest of the participants and beneficiaries with care, 
skill, prudence, and diligence. The law states that a person acts as a 
fiduciary when they 1) exercise any discretionary control or authority 
over plan management or any authority or control over plan assets; 2) 
render investment advice for a fee or other compensation, direct or 
indirect, with respect to any moneys or property of a plan or has any 
authority or responsibility to do so;[Footnote 8] or 3) have any 
discretionary authority or responsibility in the administration of a 
plan. 

Pension plans and their fiduciaries often rely on consultants and other 
service providers to assist them in plan administration and asset 
management, which include selecting money managers and monitoring money 
managers' performance and brokerage transactions. Not all of these 
consultants and service providers are at all times fiduciaries under 
ERISA. ERISA takes a functional approach to fiduciary status. 
Fiduciaries that breach their plan duties are personally liable for 
making up losses to the plan, restoring any profits made through the 
use of plan assets, and face removal as plan fiduciaries.[Footnote 9] 
To the extent that a service provider was not functioning as a 
fiduciary under ERISA; however, EBSA can seek recovery against that 
provider if it knowingly participated in a breach by a fiduciary. Any 
such recovery is limited to plan funds the service provider received 
(typically in the form of fees paid to it) and any proceeds derived 
from those funds to the extent that they remain in the service 
provider's possession. 

SEC regulates certain money managers and pension consultants under the 
Investment Advisers Act of 1940 (Advisers Act), which requires those 
firms meeting certain criteria to register with the commission as 
investment advisers.[Footnote 10] SEC regulates potential conflicts of 
interests at registered investment advisers and requires that they 
disclose information about affiliations, business interests, and 
compensation arrangements to their advisory clients, primarily by 
providing Part II of SEC's Form ADV or a brochure containing the same 
information to clients at the beginning of a relationship and by 
offering to provide it annually thereafter.[Footnote 11] According to 
SEC, investment advisers have a fiduciary obligation under the Advisers 
Act to provide disinterested advice and disclose any material conflicts 
of interest to their clients. When an adviser fails to disclose 
information regarding material conflicts of interest, clients are 
unable to make informed decisions about entering into or continuing the 
advisory relationship. Failure to act in accordance with requirements 
under the Advisers Act may constitute a violation. According to an SEC 
official, if SEC becomes aware of conflicts of interest that are 
inadequately disclosed or pose harm to investors, it can require a firm 
to remedy the deficiencies or take formal enforcement action against 
the firm. SEC also regulates broker-dealers under the Securities 
Exchange Act of 1934 (Exchange Act), which governs how they may engage 
in transactions in securities for their customers and make 
recommendations to their customers.[Footnote 12] 

The financial services industry and the DB pension system have changed 
significantly since the early 1970s. The globalization of financial 
markets, as well as technological and international regulatory changes, 
has facilitated the development of new financial instruments and the 
complexity of investment opportunities.[Footnote 13] Meanwhile, despite 
the long term decline in the number of plans and active participants, 
DB pension plans remain a major holder of financial assets. 
Consequently, the financial services industry has responded to the 
growing need for assistance with managing, investing, transferring, 
settling, valuing, and holding pension assets. In 2005, over 81 percent 
of large public/government plans utilized a consultant and 42 percent 
of private pension plans did so.[Footnote 14] According to an SEC 
official, as of October 31, 2005, there were more than 1,800 SEC- 
registered investment advisers that indicated on their SEC registration 
forms that they provide pension consulting services.[Footnote 15] The 
official stated that these firms vary widely from small one-person 
operations to large organizations employing hundreds. Some firms only 
provide pension consulting, while others may have started as pension 
consultants, but then added additional business operations such as 
brokerage and money management. It has been reported by a financial 
newspaper that in order to remain competitive, some consulting firms 
are assuming the fiduciary responsibility of making investment 
decisions and have been expanding the range of services they 
offer.[Footnote 16] 

This trend toward diversification leads to the potential for conflicts 
of interest that could harm pension plans because of competing 
professional interests. While conflict of interest is a broad term that 
can encompass many specific arrangements, according to an SEC official, 
conflicts can occur in the case of money managers, broker-dealers, or 
pension consultants when business relationships, particularly those 
that involve business among each other, may make them vulnerable to 
breaching their fiduciary obligation or duty. Such competing interests 
can make it difficult for fiduciaries, in general, to fulfill their 
duties impartially and could cause them to breach their duty to act 
solely in the interest of investors, plan participants, and 
beneficiaries. According to Labor officials, having a conflict in and 
of itself does not constitute a breach of fiduciary duty. However, 
under securities law, acting on and benefiting from the existence of a 
conflict without making full and fair disclosure of all related issues 
to clients potentially affected by the conflict may very well 
constitute a breach. As ERISA fiduciaries, plan trustees also may face 
significant conflicts of interest as they may have allegiance both to 
the plan and its beneficiaries, as well as to the plan sponsor that 
appoints them, and they may receive economic benefits directly or 
indirectly from plan service providers. 

Some Pension Plan Service Providers May Have Conflicts of Interest, but 
Determining Whether Harm Results Is Difficult: 

Although no complete information is available regarding the prevalence 
of conflicts of interests, pension plan consultants assisting 
significant numbers of pension plans sponsors may have conflicts of 
interest as a result of their affiliations or business arrangements 
with other firms that could affect the advice they provide to these 
plan sponsors. A May 2005 SEC staff study of pension consultants 
registered as investment advisers found that more than half (13 out of 
24) of the 24 consultants examined had failed to disclose significant 
conflicts of interest to their pension fund clients, including ongoing 
and PBGC trusteed DB plans.[Footnote 17] We determined that, in 2006, 
these 13 consultants had over $4.5 trillion in U.S. assets under 
advisement, including private DB and defined contribution (DC) plan 
assets, as well as public pension plan and other types of assets. We 
also analyzed a sample of ongoing DB plans associated with the 13 
consultants that, as of year-end 2004, had assets of $183.5 billion for 
these plans, while average assets were $155.3 million. Additional 
analysis found that the DB plans using these 13 consultants had annual 
returns that were generally 1.3 percent lower than those that did not. 
Because many factors can affect returns, and data and modeling 
limitations limit the ability to generalize and interpret the results, 
this finding, while suggestive, should not be considered as proof of 
causality between consultants and lower rates of return. Although SEC 
staff have reported that some of the consultants examined in their 
study have since taken corrective action, our analysis illustrates the 
importance of detecting the presence of undisclosed conflicts of 
interest among ongoing plans, and likely among terminated plans. 
However, independent experts, EBSA and PBGC officials all concur that 
while analyzing rates of return is a useful first step, determining 
whether conflicts resulted in financial harm to individual plans and 
the magnitude of that harm is often extremely difficult to detect 
without a detailed forensic audit. 

Pension Plan Fiduciaries and Money Managers Can Have Conflicts of 
Interest, Although Little Information Is Available on Their Prevalence: 

According to experts we interviewed, fiduciaries of pension plans often 
have an inherent conflict of interest because they are frequently 
employees of the plan sponsor. As fiduciaries, they are charged by law 
to act solely in the interest of plan participants and beneficiaries, 
but they may also have loyalty to the plan sponsor. For example, in 
2004, United Airlines, a plan sponsor, appointed itself fiduciary of 
its employee pension plans after all three members of its plan trustee 
board resigned during bankruptcy negotiations. A conflict of interest 
existed because the newly appointed fiduciaries would have reason to 
make decisions that would benefit the plan sponsor instead of the plan 
participants. In this instance, the fiduciaries of the United Airlines' 
plans faced the obligation to ensure that minimum funding standards 
explicitly set in ERISA were satisfied by the plan sponsor. United 
Airlines subsequently decided to stop making contributions to the 
pension plans it was attempting to terminate. Labor stated that United 
Airlines' decision to stop funding its pension plans made clear the 
need to appoint an independent fiduciary to represent the interest of 
workers and retirees and resolve this conflict of interest. 
Subsequently, Labor and United Airlines agreed that United Airlines 
would appoint an independent fiduciary. 

Plan fiduciaries may also be more prone to conflicts of interest such 
as prohibited transactions involving improper loans or more serious 
actions such as taking money from the pension plan for personal or 
business use when the plan sponsor is financially unstable and may be 
heading toward bankruptcy. Experts told us that plan fiduciary 
conflicts of interest and other acts such as these are less likely to 
occur in larger plans since they often have many professionals to 
assist with a plan's administration and management of plan assets. 
Despite this potential, there is little information on the extent to 
which conflicts of interest occur among plan fiduciaries of DB plans. 

Though no formal study has reported statistics quantifying the 
prevalence of conflicts of interest among money managers, SEC through 
its examination and enforcement efforts has also identified potential 
conflicts of interest at money managers that could result in harm to 
clients, including pension plans. Money managers may in some cases have 
incentives to allocate investment opportunities in a way that could be 
unfair to certain advisory clients. For example, an adviser might make 
more money in fees based on how it allocates an investment opportunity-
-such as an initial public offering--among its clients and steer that 
opportunity to the advisors' more lucrative clients. In deciding 
whether to allocate the opportunity among its clients, the adviser may 
have an incentive to unfairly allocate the investment to a client that 
pays higher fees. For example, as between a hedge fund and a pension 
fund, the adviser could make more money in fees paid by the hedge fund 
(for which fees are generally calculated as a percentage of the fund's 
overall performance, which could increase significantly from the 
investment) than in fees paid by the pension plan (for which fees are 
generally calculated as a percentage of plan assets). Another form of 
this conflict of interest, referred to as "cherry picking," occurs when 
an adviser places a trade without immediately identifying the client 
the trade is associated with, and then allocates the investment after 
learning of its value. If the purchase appears valuable based on market 
conditions, the adviser might place it in its own portfolio or a more 
profitable portfolio, but if it appears less valuable, the advisor 
might instead place it in one of its client's portfolios. 

Money managers, including those at pension plans, may also face 
conflicts of interest because of due to soft dollar payment 
arrangements. Under soft dollar arrangements, money managers use part 
of the brokerage commissions their clients pay to broker-dealers for 
executing trades to obtain research and other services.[Footnote 18] 
These arrangements can create a number of problems. They can create 
incentives for investment advisers to trade excessively to obtain more 
soft dollar services, thereby increasing costs to pension plan clients 
or other clients. They can also influence advisers to place trades with 
a broker-dealer that provides the adviser with soft-dollar services 
rather than another broker-dealer that might provide best execution. 

Consultants Identified by SEC as Having Significant Ongoing Conflicts 
of Interest Provide Services to Many Pension Plans: 

No complete information exists about the presence of conflicts of 
interest at pension plan service providers. However, a 2005 SEC 
examination of the activities of 24 pension consultants from 2002 
through 2003 revealed that 13 out of 24 of the firms examined failed to 
disclose significant ongoing conflicts of interest.[Footnote 19] These 
ongoing conflicts took a number of different forms. For example, SEC 
found that 13 pension consultants or their affiliates were found to 
have conflicts of interest because they provided products and services 
to both pension plan advisory clients and money managers and mutual 
funds on an ongoing basis without adequately disclosing these 
conflicts. Specifically, the study found that 10 pension consultants 
sold money managers analytical software packages, which they use to 
help analyze and improve the performance of clients' holdings. This 
creates a conflict of interest for the pension consultant that might be 
more inclined to recommend to pension plans the money managers that buy 
software because those business relationships are profitable for the 
consultant. Similarly, 13 pension consultants hosted conferences 
attended by pension plan advisory clients, who were typically invited 
to attend without charge, and money managers, who were often invited to 
attend for a fee. A consultant hosting such a conference has a conflict 
of interest because it might be more inclined to recommend to pension 
plans the money managers that pay fees to attend conferences as such 
fees are used to offset costs incurred in hosting the conference. 

SEC staff also found that the majority of pension consultants examined 
had business relationships with broker-dealers that raised a number of 
concerns about potential harm to pension plans. For example, in certain 
directed brokerage arrangements, a pension consultant may convince a 
pension plan client to direct their money manager to place plan trades 
through a broker-dealer that was affiliated with the consultant as a 
means for paying advisor fees a plan owed to its consultant using a 
portion of the brokerage commission paid on such trades. These 
arrangements raised concerns that plans might not have received the 
best price for each trade--or "best execution"--because the directions 
given to a plan's money manager by the plan may have restricted the 
money manager's ability to select a broker-dealer that was the best 
able to execute a trade. These arrangements raised the additional 
concern that consultants might be overpaid because the plan did not 
always know when the fee had been paid in full because brokerage 
commissions were being used to pay the fee rather than checks drawn on 
the plan's checking account. 

Following up on its examinations of 24 pension consultants, in late 
2005, SEC staff subsequently sought to determine what steps these firms 
had taken to address the findings from the earlier examinations. 
According to SEC staff, in general, most pension consulting firms it 
had examined had taken positive steps to reevaluate, revise, and 
implement changes to their policies and procedures. Specifically, 
pension consultants implemented policies and procedures to insulate 
their advisory activities from other activities, including for example, 
creating separate reporting lines and firewalls between employees that 
perform these separate functions, and considering employee compensation 
and incentives. In addition, SEC staff said that most consultants they 
examined had updated their policies and procedures to improve their 
disclosure of material conflicts of interest to pension plan clients 
and potential clients. Many pension consultants the SEC staff examined 
also reviewed and improved their policies and procedures to prevent 
conflicts of interest with respect to brokerage commissions, gifts, 
gratuities, entertainment, contributions, and donations provided to 
clients or received by money managers. However, SEC staff noted that 
while the pension consultants it had examined had improved their 
practices, it was not able to conduct examinations of all 1,800 
investment advisers that indicated that they provide pension consulting 
services. 

Our analysis of industry data regarding the 13 pension consultants that 
failed to disclose serious conflicts of interest found that these 
consultants provided services to a number of pension plans.[Footnote 
20] In particular, the 13 consultants: 

* in 2006, had over $4.5 trillion in U.S. assets under advisement, 
including private DB and defined contribution (DC) plan assets, as well 
as public pension plan and other types of assets;[Footnote 21] 

* provided advisory services to 36 percent (9 out of 25) of the largest 
plan sponsors, in terms of claims, currently trusteed by PBGC since 
2000;[Footnote 22] 

* provided advisory services to 14 percent (12 out of 86) of the plan 
sponsors that were trusteed by the PBGC in 2005; and: 

* provided advisory services to 24 percent (1009 out of 4203) of the 
sponsors of ongoing DB plans between the years 2000 and 2004. 

Our Analysis Shows an Association between Inadequate Disclosure of 
Conflicts and Lower Rates of Return, Although Proof of Financial Harm 
Requires a Detailed Audit: 

We conducted an analysis using ongoing DB plans that revealed a 
statistical association between inadequate disclosure and lower 
investment returns for ongoing plans, suggesting the possible adverse 
financial effect of such nondisclosure. Specifically, we conducted an 
econometric analysis using ongoing DB plans and SEC study data on 
pension consultants that either adequately disclosed their conflicts of 
interest and those who did not.[Footnote 23] We found lower annual 
rates of return for those ongoing plans associated with consultants 
that had failed to disclose significant conflicts of interest, with 
lower rates generally ranging from a statistically significant 1.2 to 
1.3 percentage points over the 2000 to 2004 period, depending on the 
different model specifications tested.[Footnote 24] Since the average 
return for the ongoing plans that used consultants who did not have 
significant disclosure violations was about 4.5 percent, the model 
implies that the average returns for ongoing plans that used 
consultants who failed to disclosure significant conflicts was 3.2 to 
3.3 percent for the period. We did not find significant differences in 
returns for those plans that had associations with both types of 
consultants. As of year-end 2004, our sample of ongoing plans 
represented assets of $183.5 billion for these plans, and average 
assets were $155.3 million. We conducted our analysis using ongoing 
plans rather than terminated plans because the ongoing plans provided 
the necessary sample size to conduct our analysis, compared to a much 
smaller sample of terminated plans. 

While, the results suggest a negative association between returns and 
plans that are associated exclusively with pension consultants that did 
not properly disclose significant conflicts of interest, the results 
should not be viewed necessarily as evidence of a causal relationship 
in light of modeling and data limitations. Although the analysis 
controlled for plan size, funding level, performance of asset markets, 
differences in plan fiscal years and other key variables, other 
unknown, omitted factors could have influenced the results of our 
analysis. While this result gives an indication of the potential harm 
conflicts of interest may cause in the aggregate, these results cannot 
be generalized to the population of pension consultants since the 
consultants examined by the SEC were not selected randomly. In 
addition, while these findings are consistent with the views of the 
experts we interviewed concerning the adverse effect that complex 
service provider related conflicts of interest can have on pension 
plans, we cannot rule out the possibility that some other differences 
between the plans could explained the differences in estimated returns. 
See appendix II for a fuller discussion of the limitations and caveats. 

Although statistical analysis is useful, a detailed audit would be 
needed to uncover a conflict of interest in any one plan. Independent 
experts and officials stated that though a typical first step to 
identify harm related to a conflict of interest is to examine a plan's 
investment returns, determining whether any financial harm is caused to 
an individual pension plan by a conflict of interest requires a 
detailed forensic audit. A rate of return for any single plan is not 
necessarily a good litmus test for deciding whether to pursue an 
investigation. For example, two trusteed sponsors of plans that had 
some history with consultants reported as having business arrangements 
that could pose conflicts of interest had very different rates of 
return for their plans. The U.S. Airways plans, which were trusteed by 
PBGC in 2003 and 2005, had a rate of return that exceeded the average 
measured the benchmark returns earned by the Standard and Poors (S&P) 
500, CalPERS (a major public plan) and the Thrift Savings Plan (the 
defined contribution plan for federal employees). Yet, at some point 
from 2000 through 2005, the U.S. Airways plan used the services of 
consultants who had business arrangements that are of the form 
described in the SEC study that raise concerns regarding conflicts of 
interest. These business arrangements included directed brokerage 
arrangements and hosting conferences. (See figure 1.) 

On the other hand, at some point during that time period United 
Airlines used a pension consultant who had been noted for engaging in 
business arrangements such as directed brokerage and commission 
recapture programs that are similar in form to the type that SEC 
concluded in their 2005 study posed a conflict of interest. During our 
analysis period, United Airlines showed a rate of return somewhat lower 
than three of the four benchmarks.[Footnote 25] (See figure 1). For 
both cases, and very likely most cases, a detailed, forensic audit 
would be necessary to identify any accrued harm from a conflict of 
interest. Even then, the magnitude of the harm could be difficult to 
determine. Experts told us that determining harm often involves a 
resource-intensive audit of a plan's service provider's records and the 
investment performance of the plan's assets. To perform such an audit 
effectively, experts told us that they would need, at a minimum, 5 
years worth of service provider specific documents, including contracts 
with the plan sponsor, fees charged, payments and other financial 
transactions between service providers and those involving plan 
fiduciaries. In addition, experts told us that it would be important to 
review the investigative files and complaint records of agencies like 
the SEC to determine if there is a history of problems at plans and 
service providers. 

Figure 1: Average Annual Rates of Return Achieved by Plans Terminated 
in 2005 Sponsored by Publicly Traded Companies Compared to CalPERS, TSP 
and the S&P 500 Benchmarks, 1997-2002: 

[See PDF for image] 

Source: GAO analysis based on, TSP, PBGC, CalPERS, and S&P 500 data. 

Note: Analysis based on calculated average rate of returns for the 
publicly traded firms taken over by the PBGC in 2005. We selected a 
range of benchmarks beginning with a very conservative benchmark to an 
all stock investment portfolio, the S&P 500. The average return for the 
TSP is based on a conservative portfolio whose allocation mimics the 
conservative Lifecycle Fund 2010, as of April 6, 2007. The TSP 2020 
fund, whose allocation mimics the less conservative Lifecycle Fund 
2020, earned less than the 2010 fund during the period of analysis. As 
a result, we chose the 2010 fund as one of our benchmarks. S&P 500 
returns are based on the actual S&P total return index and therefore do 
not consider the cost involved with maintaining a portfolio indexed to 
the S&P 500. The CalPERS benchmark was selected to provide a more 
realistic comparison given its asset mix of bonds and stock for a 
pension fund than the S&P 500 could. 

[End of figure] 

PBGC's Current Policy and Procedures Are Not Focused on Detecting 
Conflicts of Interest among Service Providers: 

As a creditor and a trustee of a sponsor's terminated plan, PBGC's 
policies and procedures are designed to review a plan's assets and 
liabilities and recover any shortfall. Agency officials told us that 
such audits include identifying missing money and conflicts of interest 
involving improper activities by a fiduciary such as improper loans and 
other prohibited transactions or those that rise to the level of fraud 
and theft of fund assets.[Footnote 26] However, there is no explicit 
focus on potential losses associated with conflicts of interest by 
service providers since these losses are likely to be found in service 
provider records and not in the plan's financial records. Agency 
officials told us that they currently do not collect the service 
provider's records to the extent needed to uncover conflicts. Although 
PBGC has authority to recover losses from a broad group of service 
providers and not merely ERISA fiduciaries, agency officials said it 
may not be cost effective to do so. Our own analysis also indicates 
that while recoveries could have a positive, but likely small effect on 
the agency's financial position, they would have little effect on 
benefits for the large majority of participants. 

PBGC Policies and Procedures Are Focused on Recovering Plan Assets: 

As the insurer of private sector DB plans, PBGC has a primary 
responsibility to provide timely and uninterrupted payment of 
guaranteed pension benefits. Given that plans trusteed by the PBGC have 
insufficient assets to pay all accrued benefits, the agency seeks to 
bridge that gap by reviewing the plan, in part, to help recover assets. 
Such recoveries include the difference between the plan's assets and 
liabilities and quarterly contributions that employers have failed to 
make. PBGC uses plan financial documents and a variety of procedures 
and processes to identify and value plan assets and liabilities. The 
financial documents used also assist the PBGC in uncovering fiduciary 
breaches, including conflicts of interest such as prohibited 
transactions, improper loans and acts of theft and fraud. However, 
these financial documents do not provide financial information that 
would assist the PBGC in uncovering conflicts of interest associated 
with service providers. Agency officials told us that they currently do 
not collect such documents.[Footnote 27] Experts told us that the 
agency would, in fact, need to collect and analyze 5 to 10 years worth 
of contracts between service providers and plan sponsors and documents 
that reveal fees charged, payments, and other financial transactions in 
order to conduct a forensic audit. The agency would also need to 
collect an historical list of investment advisers, pension consultants 
and broker dealers, the plan's investment strategy, the money managers' 
selection process, and the money managers' investment performance gross 
and net of fees. 

According to PBGC officials, the only circumstances in which their 
agency would have examined records to detect potentially harmful 
conflicts by a service provider would be in the case of a complaint 
providing specific allegations of wrongdoing with a plan's assets. 
Agency officials told us that they had never received a complaint 
regarding conflicts of interest by a service provider. In 2005, they 
received a letter involving the underfunded United Airlines plans that 
had been trusteed by PBGC. The letter was filed by union 
representatives of affected participants out of concern emerging from 
the findings of the SEC staff report on conflicts of interest among 
pension consultants. PBGC officials told us that one reason they did 
not conduct a forensic audit of the United Airlines plans under their 
control was that the letter did not direct them to specific violations 
that they should audit. Agency officials also told us that they did not 
find it necessary to conduct a detailed audit of any of the plans 
following the SEC study because: 1) the plan's investment performance 
did not appear out of line; and 2) after reviewing the fees charged, 
assets managed, and the type of disclosures implicated, PBGC concluded 
that it was unlikely that the conflicts could have had a material 
adverse affect on United's pension plans.[Footnote 28] 

Although PBGC Has Authority to Recover Losses, Cost Benefit 
Considerations Shape the Agency's Actions: 

PBGC has the authority, as trustee, to recover losses from any party, 
including service providers that are not fiduciaries under 
ERISA.[Footnote 29] Specifically, ERISA authorizes PBGC to recover from 
any entity that has caused a loss or liability to the plan utilizing 
any available federal or state cause of action. However, agency 
officials and experts explained that since PBGC is not an enforcement 
agency, their responsibility is to bring cases to recover losses to a 
plan, not to bring cases for ERISA violations. For example, a kickback 
arrangement--where an investor receives a financial benefit for 
choosing a particular investment--or other types of self-dealing 
constitute conflicts of interest that may violate ERISA's prohibited 
transaction rules. Although it is often difficult to determine whether 
a kickback causes a loss to a plan, under the prohibited transaction 
provision, the existence of a violation does not depend on whether any 
harm results from the transaction. Hence, identifying and bringing 
these types of cases would not necessarily be something that PBGC would 
pursue unless the violation caused a loss to the plan.[Footnote 30] 

PBGC has pursued cases against plan fiduciaries in an effort to seek 
such recoveries. However, in many instances, according to PBGC 
officials, seeking recoveries from the plan fiduciary of a small plan 
to recover missing money or improper loans may prove fruitless since 
the plan fiduciary may have few assets to place a claim against. In 
fact, in some cases, a plan fiduciary's only asset from which to 
recover may be an accrued pension benefit.[Footnote 31] PBGC officials 
told us that the majority of their cases of fiduciary breach involve 
action by a fiduciary that adversely affected plan assets. The 
officials and outside experts told us that the majority of cases 
against fiduciaries to recover missing money or involving improper 
loans or prohibited transactions occur with small plans rather than 
large plans since large plans typically have many professionals 
involved in the management and administration of the pension plan. 

While identifying and pursuing cases against a small plan's fiduciary 
is typically not resource intensive, agency officials and experts have 
told us that identifying and pursuing harm related to conflicts of 
interest by service providers is a resource intensive effort that does 
not always result in the ability to quantify associated harm and make a 
recovery. Agency officials told us that, given their mission, measuring 
the investment of scarce resources against the likelihood of recovering 
losses makes pursuing conflicts of interest cases particularly risky 
for the PBGC. Further, officials explained that the agency must pursue 
cases where the recovery will likely exceed the cost of investing the 
agency's resources for identifying and gathering evidence and bringing 
a case through the courts successfully. If the agency does not believe 
that a recovery will exceed its costs, it would be imprudent for the 
agency to pursue that case. Nevertheless, as part of the agency's 
efforts to evaluate their exposure to certain risk factors, PBGC has 
undertaken two relevant studies, one of which includes an assessment of 
the risks that relate to the potential for unidentified claims against 
outside parties, which includes conflicts of interest[Footnote 32] 

While Most of Its Pension Holders Would Not Likely Benefit, Additional 
Monetary Recoveries Could Potentially Reduce PBGC's Deficit: 

PBGC recoveries generally have little impact on participants in PBGC 
trusteed plans because, as an insurer, the agency may pay benefits up 
to a guaranteed limit that is higher than the benefits promised to most 
participants of trusteed plans.[Footnote 33] According to a PBGC 2004 
annual report, more than 90 percent of the participants and 
beneficiaries of single employer plans that were trusteed by the agency 
received their full promised plan benefits.[Footnote 34] Officials 
explained that many plans offer benefits that often fall under the 
guaranteed limits. The small percentage of participants and 
beneficiaries who currently could be helped by such monetary recoveries 
represents those that have lost promised plan benefits that were not 
guaranteed by PBGC and were not funded by the plan's assets.[Footnote 
35] 

PBGC is required by law to use a portion of its employer liability 
recoveries and remaining plan assets to cover the non-guaranteed 
benefits of pension holders after guaranteed benefits are funded and 
allocated.[Footnote 36] An expert we interviewed explained that a 
portion of the recovered money goes toward assisting the agency in 
covering the guaranteed benefits it pays out. Agency officials told us 
that recoveries on claims for employer liability are distributed as 
prescribed by law and typically increases a participant's benefit 
payment less than $20 per month. It is not clear whether recoveries 
related to conflicts of interest would provide significant additional 
benefits for participants since, according to experts we interviewed, 
recoveries for conflicts are likely to be small compared to represent a 
small fraction of a terminated plan's total underfunding. 

Benefit recoveries may still help to reduce PBGC's accumulated deficit 
and support the agency's mission. PBGC's financial position declined 
dramatically for single-employer pension plans from fiscal year 2000 to 
2005, with a four-fold increase in underfunding claims of $25 billion. 
As of September 2006, the accumulated deficit for PBGC's single 
employer program was $18.1 billion. Though recoveries from conflicts of 
interest are likely to be small compared with the agency's accumulated 
deficit, agency officials say that pursuing conflicts of interest would 
be beneficial as long as the costs do not outweigh the benefits 
obtained from the recovery.[Footnote 37] 

EBSA's Enforcement Strategy Does Not Include Procedures That Focus on 
Conflicts of Interest Involving PBGC Trusteed Plans or High Risk Plans 
Likely to Terminate: 

Though EBSA's enforcement program is concerned with conflicts of 
interest affecting all private sector pension plans, the agency does 
not have a specific focus on plans that are trusteed by PBGC or ongoing 
high risk plans that PBGC identifies as most likely to terminate. Among 
EBSA's reasons for not having such a focus is the agency's view that 
the PBGC is in the best position to detect conflicts of interest at 
terminated plans and to refer cases to EBSA. Meanwhile, EBSA has 
recently expanded its ERISA enforcement effort by implementing its new 
Consultant/Adviser Project (CAP) to focus more heavily on conflicts of 
interest at all pension plans. EBSA officials also emphasized, however, 
that existing law presents a limitation to their pursuing conflicts on 
the part of several types of service providers. 

EBSA Has No Specific Enforcement Strategy for PBGC-Trusteed Plans or 
Plans that PBGC Deems Likely to Terminate: 

While EBSA's enforcement program does include a focus on conflicts of 
interest affecting all private sector pension plans, agency officials 
told us they have no specific procedures for detecting conflicts that 
may have involved plans that have been trusteed by PBGC or may be 
trusteed in the future.[Footnote 38] There are several reasons for 
this, according to EBSA officials. First, they emphasized the view that 
it is primarily the failure of plan sponsors to adequately fund pension 
plans causing plan underfunding problems rather than poor investment 
advice from self-interested service providers. Second, officials told 
us that while they do have the responsibility to enforce fiduciary 
violations regardless of whether a plan has terminated, they do not 
focus their enforcement efforts on PBGC trusteed plans and generally 
leave the responsibility of identifying potentially harmful conflicts 
of interest to PBGC for the plans under their control. EBSA officials 
also said, that while their agency has subpoena power, PBGC has the 
necessary authority and access to the many documents needed to pursue 
conflicts in the plans it trustees. However, PBGC officials noted that 
while this may be true for terminated plans, it does not have 
jurisdiction to collect such documents for plans that have not yet 
terminated. 

Finally, EBSA officials told us they had not had occasion to 
investigate any PBGC-trusteed plans for conflicts of interest insofar 
as PBGC had not made any investigative referral to EBSA concerning 
conflicts of interest. Further, EBSA officials said they had not 
received any complaints regarding service providers' conflicts of 
interests involving a terminated plan prior to a letter it, along with 
PBGC, received in 2005 from representatives of certain United Airlines 
employees. Agency officials told us that they responded to concerns 
raised in that letter by reviewing the plan performances and the 
portfolio distributions of United Airlines' plans and determined that 
they were in line with those demonstrated in the industry. In fact, in 
some discrete years, the performance for the United Airlines plans 
exceeded some industry benchmarks. Finally, EBSA used United's Form 
5500 information to review the fees paid to service providers and found 
them to be comparable to other plans and reasonable. Thus, the agency 
did not believe that a forensic audit for service provider conflicts at 
United Airlines' plans was warranted. 

EBSA Has a New Initiative to Focus on Conflicts of Interest among 
Service Providers: 

Despite the current lack of information about the extent of any harm 
that may have occurred as a result of conflicts of interest, EBSA 
officials acknowledged that such conflicts are a growing concern for 
their agency. In order to address these concerns, the agency has, 
therefore, undertaken a new national enforcement project, known as the 
Consultant/Adviser Project (CAP), which largely focuses on issues 
identified in the SEC's 2005 study of pension consultants.[Footnote 39] 
In addition, with this project, EBSA hopes to identify other service 
providers that may be using or managing plan assets for personal 
benefit. Specifically the agency will look for improper, undisclosed 
compensation such as kickbacks, pay-to-play arrangements, and soft 
dollar arrangements. Further, to acquire more information about the 
fees charged by service providers, EBSA has proposed several revisions 
to the Form 5500, which plan sponsors are required to file annually. 
Among the many changes, the revised form would require increased 
disclosure regarding the types and amounts of payments made to service 
providers, including amounts paid via third-party arrangements, both 
direct and indirect. 

Despite these changes, EBSA officials said the CAP will not have 
specific procedures focused on examining service providers of high risk 
and underfunded plans once they are trusteed by PBGC. In addition, as 
we previously reported, challenges remain for pursuing more complicated 
conflicts of interest cases impacting plans in the context of EBSA's 
overall enforcement program.[Footnote 40] For example, EBSA uses 
participant complaints and other agency referrals as sources of 
investigative leads and to detect violations. EBSA also identifies 
leads through informal targeting efforts by investigators primarily 
using data reported by plan sponsors on their Form 5500 annual returns. 
While these sources are important, such methods are generally reactive 
and may reveal only those violations that are sufficiently obvious for 
a plan participant to detect or those that are disclosed and not those 
violations that are more complex. Moreover, complaints have primarily 
originated from participants in defined contribution (DC) plans since 
certain problems (e.g., failure to credit participants' accounts with 
deposits) involving DC plans are often more apparent to participants. 
Requiring more information on the Form 5500 could, according to 
experts, uncover or discourage many abuses concerning conflicts of 
interest. However, the Form does not necessarily offer the agency 
timely or accurate information, because of the 285 days allowed for its 
completion and the possibility that errors may be present on the Form 
5500 using the current paper-based filing system.[Footnote 41] 

It is also unclear how much time EBSA investigators, given their other 
duties, will be able to devote to the complex conflicts of interest 
cases similar to those targeted by the CAP. EBSA officials told us that 
they are addressing their resource constraints in the CAP by 
concentrating on a relatively small number of carefully targeted cases. 
They said they are undecided as to whether the agency will expand CAP 
beyond the cases identified as a result of the SEC study once these 
investigations are completed. We had previously reported that Labor's 
revised performance goals for EBSA enforcement may encourage a focus on 
cases that are more obvious and easily corrected, such as those 
involving delinquent employee contributions to DC plans, rather than on 
investigations of complex and emerging violations where the outcome is 
less certain and may take longer to attain. We had suggested changes to 
EBSA's approach to assessing performance to better promote industry 
compliance and address emerging violations although the agency has yet 
to make substantial changes to its performance measures.[Footnote 42] 

Further, though fiduciaries are considered the first line of defense in 
avoiding conflicts of interest, EBSA does not conduct routine 
compliance examinations or routinely evaluate plan fiduciaries that are 
not part of an ongoing investigation to determine how well they select 
and monitor service providers. Agency officials and experts have stated 
that having a formal set of procedures and guidelines in place to guide 
the selection of service providers as well as a formal investment 
strategy to guide how assets are to be invested helps to mitigate 
conflicts of interest. EBSA officials said the agency lacks sufficient 
resources to conduct such general oversight and, instead, uses outreach 
programs to educate fiduciaries on the importance of avoiding conflicts 
of interest. Other expert observers, however, commented that EBSA's 
education program only addresses abuses that occur as a result of 
ignorance or unintentional negligence, not those conflicts that are 
intentional. The experts emphasized that it is difficult to detect 
harmful conflicts of interest without some form of regularized or 
routine examinations. Although EBSA, in concert with the SEC, has 
issued a "tip list" of questions to help plan fiduciaries avoid 
conflicts among service providers, EBSA has no compliance procedures to 
determine whether fiduciaries are generally using this 
information.[Footnote 43] 

EBSA Officials Cite ERISA as Constraint in Pursuing Conflicts of 
Interest: 

EBSA's ability to recover plan losses related to conflicts of interest 
by a service provider is largely limited by the extent to which the 
service provider was functioning as a fiduciary under ERISA. 
Additionally, for EBSA to take action against an individual or entity, 
there generally must be a breach of fiduciary duty. Many service 
providers carefully structure their contracts with plans in an attempt 
to avoid meeting the ERISA definition of a fiduciary, but whether or 
not they do depends on the facts and circumstances in each case. EBSA 
officials said that many service providers, such as accountants, 
auditors, and actuaries are seldom fiduciaries under ERISA even though 
they provide important consulting services to DB plans by evaluating 
plan assets, calculating required funding levels, and evaluating 
financial statements.[Footnote 44] Experts told us that broker-dealers 
are a growing concern, for example, because they have been expanding 
their services to include both consulting and investment services-- 
triggering conflicts of interest questions because offering both 
services raises concerns regarding the best execution of trades and 
introduces incentives that may not promote practices in the best 
interest of plans and participants. Nevertheless, to the extent that a 
broker-dealer is not a fiduciary under ERISA, EBSA typically has no 
authority to take action against them for not acting solely in the 
interest of plans and participants. 

To the extent that a service provider was functioning as a fiduciary 
under ERISA, in addition to recovering any funds taken from the plan 
and profits derived from them, EBSA can recover losses to the plan to 
the same extent that it can recover them from other fiduciaries. To the 
extent that a service provider was not functioning as a fiduciary under 
ERISA, however, EBSA cannot recover from them at all unless the service 
provider knowingly participated with a fiduciary under ERISA in a 
fiduciary breach. EBSA officials said that proving such knowing 
involvement is often quite difficult. Even in cases where EBSA can 
prove that a non-fiduciary knowingly participated in a fiduciary 
breach, however, EBSA is limited in its ability to obtain meaningful 
recoveries. Specifically, EBSA cannot recover plan losses but usually 
only amounts the plan paid to the non-fiduciary and any profits derived 
from those payments. Furthermore, courts have required proof that these 
amounts remain in the possession of the non-fiduciary plan in order for 
them to be recovered. 

In addition to such monetary recoveries, EBSA can also obtain 
injunctions against fiduciaries initiating or continuing, and non- 
fiduciaries knowingly participating with fiduciaries in, activities 
constituting fiduciary breaches. Officials explained that, in theory, 
EBSA does not have to prove that an activity will cause financial harm 
to a plan before obtaining an injunction but as a practical matter it 
is very difficult to persuade a judge to grant one without being able 
to show such harm. 

Different Authorities and Roles Have Limited Agency Collaboration: 

Currently, collaboration on the part of EBSA, PBGC, and SEC regarding 
service providers with conflicts of interest is largely informal. At 
the national level, SEC and EBSA have communicated about staff 
examinations related to the pension consultant study. At the local 
level, information about conflicts of interest involving pension plans 
has been exchanged between agencies where staffs have developed working 
relationships. For example, EBSA officials noted that two of its 
regional offices have been collaborating with regional SEC staff on 
some conflict of interest related cases. However, exchanges of 
information generally occur when local employees of different agency 
field offices have good working relations and decide that such contact 
is helpful. Differences in agency missions and responsibilities tend to 
reinforce such informal coordination. 

Agency Collaboration on Conflicts of Interest Largely Informal: 

Collaboration on the part of EBSA, PBGC, and SEC that might facilitate 
identifying conflicts of interest is largely informal, particularly 
with regard to PBGC trusteed plans. With respect to EBSA and PBGC, 
there is a memorandum of understanding (MOU) for sharing quarterly 
information on the financial status of plans, but it does not provide 
for collaborating over potential conflicts of interest. Moreover, EBSA 
and PBGC officials told us that the data currently shared would not 
likely reveal conflicts of interest. EBSA officials told us that their 
weekly discussions with PBGC representatives are related to financial 
matters of plans that may be experiencing financial trouble. With 
regard to the SEC, there is no formal agreement with the other two 
agencies to share information relevant to conflicts of interest. 
However, EBSA officials stated that there is some collaboration between 
EBSA and SEC both nationally and locally, generally occurring on an 
informal basis. 

At the national level, SEC has shared examination reports that it 
concluded would be helpful to EBSA, including the non-public exam files 
related to the pension consultants study. At the local level, 
information about conflicts of interest involving pension plans has 
been exchanged between agencies where employees developed working 
relationships. For example, EBSA officials noted that two of its 
regional offices had been collaborating with regional SEC staff on some 
conflict-of-interest related cases.[Footnote 45] However, under 
securities laws, SEC is subject to confidentiality restrictions with 
respect to information it can disclose to EBSA pertaining to an ongoing 
investigation, even if the information pertains to possible violations 
of ERISA. Likewise, EBSA investigators can alert SEC to information 
that is discovered during an ERISA investigation that might be of 
interest to SEC. However, unlike EBSA, SEC may not share documentation 
associated with its findings unless EBSA submits a written request for 
information which, if approved, allows access to any evidence that SEC 
has obtained during the course of its investigation.[Footnote 46] 

Nevertheless, there is no systematic procedure among the three agencies 
that would effectively target or monitor service providers engaged in 
conflicts of interest.[Footnote 47] However, more regularized 
coordination could improve agency efforts regarding conflicts of 
interest. For example, during investigations and examinations, SEC and 
EBSA tend to collect documentation that is specific to their individual 
enforcement objectives. Experts told us that creating efficiencies 
through collaborative and supportive enforcement practices where both 
agencies collect and share information that both agencies would find 
useful would be a major improvement in collaboration. 

Different Agency Responsibilities Tend to Reinforce Limited 
Collaboration among EBSA, SEC, and PBGC: 

To some extent, differences in each agency's roles and responsibilities 
affect the level of collaboration regarding conflicts of interest among 
the three agencies. First, EBSA is tasked with enforcing the fiduciary 
standards required under Title I of ERISA, which seeks to ensure that 
fiduciaries operate their plans in the best interest of plan 
participants. Second, SEC enforces securities law and is primarily 
concerned with regulating professional entities, such as pension 
consultants or investment advisers. Finally, PBGC insures benefits for 
the beneficiaries of private-sector DB pension plans. 

Federal law and regulation across the agencies are not consistent on 
the treatment of conflicts of interest. For example, under securities 
law, a conflict of interest that is disclosed may not be a violation, 
and would not necessarily prompt investigation by the SEC, although it 
may prompt investigation by EBSA. However, Title I of ERISA applies 
only to those who have carried out or been associated with fiduciary 
responsibilities, which does not always include all types of service 
providers. In addition, differences in definitions and terminology 
create challenges for the agencies to gather useful information for 
collaborating on investigations. For example, all money managers and 
others that actively manage or invest pension assets have a fiduciary 
obligation under the Advisers Act. Money managers are generally 
considered fiduciaries under ERISA, though broker-dealers are 
considered to be fiduciaries under ERISA only under certain 
circumstances. Pension consultants typically have a fiduciary 
obligation under the Advisers Act[Footnote 48] but may not be 
fiduciaries under ERISA. 

While PBGC has broad authority to recover losses, it is not an 
enforcement agency and therefore is not in the business of 
investigating conflicts of interest or other fiduciary violations 
without the intention of recovering meaningful losses. To the extent 
that there would be meaningful losses to recover, as trustee, PBGC has 
the ability to collect a range of service provider documents that might 
suggest a history of conflicts involving the pension plans it trustees. 
EBSA, which does have authority to investigate and bring conflict cases 
involving plan fiduciaries to court, does not have ready access to 
these documents without a subpoena. Although EBSA does have broad 
subpoena powers, the use of these subpoena powers and enforcing 
subpoenas can involve significant delays in enforcement and case 
resolution. 

The lack of formal collaboration between the three agencies also 
reflects their differing missions. While the SEC and EBSA both have an 
enforcement role, their missions have different orientations. SEC 
enforces securities law and is primarily concerned with regulating 
professional entities, such as pension consultants or investment 
advisers, to the extent that all conflicts of interest are adequately 
disclosed and plan sponsors can make informed decisions about whom to 
hire. In most cases, the SEC is able to act administratively, in that 
it can levy fines and suspend registered advisers without having to use 
federal courts. Further, since advisers have a statutorily imposed 
fiduciary responsibility, investigators do not have the burden of 
proving a fiduciary status before taking action. 

In contrast, EBSA is tasked with enforcing the fiduciary standards 
required under Title I of ERISA, which seeks to ensure that fiduciaries 
operate their plans in the best interest of plan participants. In most 
cases, EBSA must prove that each violation it pursues was caused by a 
plan fiduciary or a party carrying out a fiduciary function. EBSA 
officials told us that a consultant or other adviser is a fiduciary 
investment adviser only to the extent that advice was provided (1) on 
the purchase or sale of securities or other property of the plan, (2) 
on a regular basis, (3) pursuant to a mutual agreement, arrangement, or 
understanding, (4) as a primary basis for investment decisions, and (5) 
based on the particular needs of the plan. While the courts have ruled 
in some cases that EBSA can pursue non-fiduciaries that contribute to a 
fiduciary breach, EBSA officials stated that the remedies they have 
available to them under ERISA are limited when pursuing these entities. 
Moreover, EBSA officials told us that there can be situations where a 
pension consultant may not meet the conditions necessary to be 
considered a fiduciary under ERISA; in which case EBSA generally would 
not be able to take action against the consultant. 

The role of PBGC, in turn, is not to regulate pension plan trustees and 
service providers, but to insure benefits for the beneficiaries of 
terminated pension plans. Therefore, PBGC's primary goal is to preserve 
plan assets to the degree possible in order to pay promised benefits 
and keep expenses to a minimum. Accordingly, PBGC generally does not 
undertake the cost of litigation without a clear opportunity to recover 
assets. PBGC officials stated that the recoveries are typically far 
smaller than their claims on assets, as the agency generally recovers 
at most 10 cents on the dollar. For plans terminating in fiscal 2005, 
for example, PBGC reported $10.8 billion in claims but only $170.7 
million in recoveries.[Footnote 49] 

Conclusions: 

The challenge to sound pension sponsorship posed by financial conflicts 
of interest is largely a consequence of the changes experienced by 
financial markets over the last 30 years. In fact, the pre-ERISA world 
of 1974 never anticipated the multiplicity and complexity of financial 
instruments that have expanded both investment opportunities and risks 
for plan fiduciaries. Index and hedge funds, the growth of complicated 
financial derivatives, and access to international financial markets 
represent only some of the extraordinary number of choices confronting 
today's pension plan fiduciaries. 

Of necessity, DB pension plan fiduciaries must utilize the variety of 
service providers that have become available to help them assess 
choices. While conflicts of interest are not necessarily inherent in 
the provision of such financial services, the prevalence and the 
proliferation of consulting work and the complexity of business 
arrangements among investment advisers, plan consultants, and others 
have increased the likelihood. Our analysis of ongoing plans suggests 
that, in the aggregate, there may be some cause for concern. While many 
consultants have taken remedial action, there are pension plan 
consultants that advise on a sizeable portion of U.S. pension assets 
that did not fully disclose conflicts of interest in the past. Although 
not generalizeable to all consultants and plans, our analysis 
cautiously suggests an association with such undisclosed conflicts and 
plan performance. However, assessing the extent and magnitude of the 
problem of conflicts of interest at an individual plan level, at the 
outset, may require a coordinated effort among the regulatory agencies 
because of the complexities involved and the significant resources 
associated with investigative audits. Regardless of the difficulty of 
finding a financial trail of damage, to the extent that financially 
harmful conflicts of interest exist, they pose a potential threat to 
the investment confidence of sponsors and participants. For this 
reason, alone, credible and visible enforcement is essential to prevent 
such erosion. 

Yet our findings reveal that there is limited regulatory framework for 
deterrence in this area, particularly for terminated DB plans and those 
likely to terminate. EBSA's recent CAP initiative to target conflicts 
of interest among service providers may help, but it does not include 
any specific emphasis on service providers of plans either under PBGC's 
trusteeship or those considered likely to terminate. In addition, as 
EBSA officials have noted, ERISA's definition of fiduciary and 
associated remedies and penalties to correct potential breaches of 
fiduciary responsibility, conceived to address the pension issues of 
the 1970s, are less effective in combating conflicts of interest in the 
far more complex world of today. Further, the SEC concluded in its 
study that many pension consultants do not consider themselves to be 
fiduciaries to their clients. In fact, many pension consultants believe 
they have taken appropriate actions to insulate themselves from being 
considered a fiduciary under ERISA. As a result, it appears that many 
consultants believe they do not have any fiduciary relationships with 
their advisory clients and ignore or are not aware of their fiduciary 
obligations under the Advisers Act. 

Meanwhile, PBGC's recent decision to conduct an overall risk assessment 
and implement new screening procedures acknowledges the need for 
improvement in PBGC's reviews for conflicts of interest and other risk 
factors. Without procedures to evaluate the effect of conflicts of 
interest on high risk and terminated plans, however, potential ERISA 
violations related to such conflicts of interest could possibly go 
undetected. Moreover, the current levels of collaboration among the 
three agencies most involved with DB pension plans --EBSA, PBGC, and 
the SEC --or their service providers, present opportunities that could 
enhance enforcement. Because SEC conducts examinations of some 
registered advisers it oversees, consistent inquiry by EBSA and PBGC 
into SEC's inspection results would be a good first step toward 
bridging the information gap. In addition, in the spirit of creating 
efficiencies with overseeing service providers doing business with 
pension plans, EBSA and PBGC may greatly benefit from SEC's regular 
exams by giving some thought to what SEC could collect during its 
efforts that would be useful to the other two agencies. 

Nevertheless, it would be prudent and responsible to carefully weigh 
the benefits of any new regulatory approaches against their potential 
effect on continued sponsorship of DB plans. Although the percentage of 
the private sector labor force covered by a pension plans has remained 
roughly constant over the last decade, the number of active DB plan 
participants has declined sharply. Nonetheless, given the important 
role that DB plans still play in the retirement security of millions of 
American workers and their families, it would be prudent to weigh any 
proposed regulatory options against the additional administrative costs 
they may generate on DB plans. 

Matters for Congressional Consideration: 

Congress may wish to consider amending ERISA to allow EBSA to recover 
plan losses against certain types of service providers even if they are 
not currently considered fiduciaries under ERISA. 

Recommendations for Executive Action: 

To enhance existing protections of plans and participants, and maintain 
participant and sponsor confidence in the private DB pension system, as 
part of its current risk assessment efforts, the Director of the PBGC 
should: 

* Develop a pilot project to collect the necessary documents on a 
select group of trusteed plans to determine the extent to which 
conflicts of interest may have affected these plans. This pilot project 
should be undertaken with the assistance of EBSA and in consultation 
with the SEC. PBGC and EBSA should provide SEC with ideas that would be 
useful to them on the information SEC could gather during its adviser 
and broker-dealer examinations. 

The Secretary of Labor should direct the Assistant Secretary for EBSA: 

* to enhance current enforcement by expanding the scope of the new CAP 
program to include some emphasis on service providers of those high 
risk plans PBGC deems likely to terminate in the future and plans PBGC- 
trusteed. 

Building on the existing memorandum of understanding (MOU) between EBSA 
and PBGC and a recommendation made in our earlier work, the Assistant 
Secretary of EBSA, the Director of the PBGC, and the Chairman of the 
SEC should: 

* Enter into an MOU to facilitate information sharing on conflicts of 
interest among service providers that either consult or that provide 
money management services to PBGC-trusteed plans and those likely to 
terminate in the future. 

Agency Comments and Our Evaluation: 

We obtained comments from the acting Assistant Secretary for the 
Employee Benefits Security Administration, the Deputy Director of the 
Pension Benefit Guaranty Corporation, and the Director of Compliance 
Inspections and Examinations for the Securities and Exchange 
Commission. PBGC's, EBSA's, and SEC's comments are reproduced in 
appendix III, appendix IV, and appendix V. Each of the agencies also 
provided technical comments, which were incorporated into the report as 
appropriate. 

EBSA, PBGC and SEC generally agreed with the findings and conclusions 
of the report. PBGC noted that although it has no authority to take 
action against service providers with conflicts of interest involving 
ongoing plans, its recent initiative to enhance its procedures for 
identifying and pursuing fiduciary breach and other types of claims is 
fully consistent with our recommendations. In comments, EBSA agreed to 
consider our recommendation to expand the focus of its CAP program to 
PBGC-identified pension plans that may be trusteed or are high risk as 
it reviews the results of its initial efforts under CAP and gain 
additional experience through project investigations. 

All three agencies acknowledge the importance of effective cooperation 
to facilitate their respective missions. SEC notes that it looks 
forward to further developing its currently cooperative relationship 
with EBSA and PBGC through discussion on our recommendations. PBGC 
pointed to the existing information sharing arrangement that it has 
with EBSA and the Internal Revenue Service that it believes could serve 
as a useful model to coordinate with EBSA and SEC, and pledges to work 
with EBSA and SEC to more closely coordinate agency action on PBGC- 
trusteed plans and plans likely to terminate in the near future. EBSA 
also notes both the importance of establishing and maintaining 
effective working relations with other agencies to maximize enforcement 
effectiveness, and has stated that it is prepared to work with PBGC and 
SEC to facilitate information sharing. 

EBSA noted a number of concerns about our statistical analysis and in 
particular our econometric analysis that suggests a negative 
association between consultants with undisclosed conflicts of interest 
and rates of return on assets. EBSA expressed important cautions that 
should be considered when interpreting our results, including some data 
limitations and our use of an estimate for our investment returns 
variable. We agree that our econometric study, while suggestive, should 
not be considered definitive, or a proof of causality, especially in 
light of the data and modeling limitations constraining the analysis. 
The goal of this analysis was to shed some light on a critical public 
policy issue--understanding the relationship between rates of return 
and consultants that have been found to have undisclosed conflicts of 
interest--given the current state of econometric techniques and limited 
real world data. We view our findings as an indicator of the potential 
effects that conflicts of interest can have on returns and as a 
catalyst for further analysis rather than evidence of a causal 
relationship. In response to EBSA's concerns, we now discuss the 
limitations of the analysis more prominently and have added more 
information on our statistical analysis and our data in appendix II. 

We are sending copies of this report to the Director of the PBGC, the 
Secretary of Labor, the Chairman of the SEC, and other interested 
parties. We will also make copies available to others on request. In 
addition, the report will be available at no charge on the GAO Web site 
at http://www.gao.gov. 

If you or your staff has any questions concerning this report, please 
call me at (202) 512-7215. Key contributors are listed in appendix VI. 

Signed by: 

Barbara D. Bovbjerg: 
Director, Education, Workforce, and Income Security Issues: 

[End of section] 

Appendix I: Scope and Methodology: 

To conduct our review of the procedures the PBGC, SEC and EBSA have in 
place to detect and coordinate on conflicts of interest that may impact 
the entities they oversee, we interviewed officials from key agencies 
as well as independent outside experts, lawyers and forensic auditors 
knowledgeable about conflict of interest issues. We conducted 
interviews with officials from SEC's Office of Compliance Inspections 
and Examinations (OCIE) and SEC's Division of Enforcement regarding 
their 2005 staff report concerning examinations of selected pension 
consultants and the agency's general enforcement practices. We 
interviewed various PBGC officials, including staff attorneys and 
accountants, on their departmental procedures policies regarding the 
pursuit of financial recoveries regarding underfunded terminated plans, 
as well as other related issues. We interviewed various EBSA officials, 
including those from EBSA's Office of Enforcement and the Solicitors 
office. We interviewed a number of experts on conflict of interest 
issues, including lawyers and auditing professionals knowledgeable 
about conducting audits related to conflicts of interest, and those 
with expert knowledge on EBSA and PBGC's policies and procedures. We 
also interviewed legal experts on ERISA and securities laws. 

To obtain information about agency procedures, we collected and 
reviewed PBGC's operations and policy manual, and reviewed PBGC court 
cases. We collected data provided by EBSA's Office of Enforcement 
pertaining to the investigation of cases related to conflicts of 
interest and prohibited transaction violations and reviewed EBSA's 
enforcement manual. We reviewed the relevant section of ERISA and 
securities laws in consultation with GAO's legal staff. Finally, we 
reviewed past GAO work on SEC, PBGC and EBSA enforcement efforts with 
respect to conflicts of interest, as well as agencies' general 
enforcement efforts and we consulted the teams within GAO that 
regularly review SEC, PBGC and EBSA operations. 

To conduct our statistical analysis on the 24 pension consultants 
included in the SEC study, we obtained details regarding the type of 
conflicts found and the disclosure issues involving the 24 pension 
consultants from SEC officials. We obtained specific information 
regarding certain finding statements made in the SEC's 2005 staff 
report and reviewed this information at SEC headquarters under their 
oversight. To protect the confidentiality of SEC's exam practice, our 
data analysis was mostly conducted at SEC headquarters. Any additional 
analysis conducted by us at GAO headquarters which could reveal 
information that could identify the consultants reviewed in the SEC's 
2005 staff report has been destroyed. 

Working with the SEC study data, we compiled a list of clients 
associated with the 13 consultants identified by the SEC staff report 
as having undisclosed conflicts of interest using the Form 5500 and 
Thomson Nelson's database of pension consultants and plan sponsors. 
ERISA and the IRC require administrators of pension plans to file 
annual Form 5500 reports concerning, among other things, the financial 
condition and operation of plans. Form 5500 Reports are shared among 
Labor's Employee Benefits Security Administration, IRS, PBGC, and the 
Social Security Administration, and each agency uses the Form 5500 to 
meet its statutory obligations. Plan year 2004 was the most recent year 
for which plan-specific Form 5500 data were available for our review. 
The Form 5500 data presents a number of data limitations. These 
limitations have been well documented in other reports issued by 
us.[Footnote 50] 

We then supplemented our Form 5500 data with information we purchased 
from Thomson Nelson (Nelson). We used the Nelson databases and the 
Thomson Nelson Annual Report of Pension Fund Consultants 2006 The 
Nelson database contains detailed information on various aspects of 
20,000 single employer DB and DC pension plans and on 350 pension 
consultants and other service providers who service those plans. With 
the Form 5500 and Nelson data, we developed a client list for the 13 
pension consultants examined in the SEC study. We regard our client 
list to be a partial list since the sources contained incomplete 
information and no complete source of information was available to us. 
Since creating a complete client list for the 13 consultants identified 
by the SEC staff report as having undisclosed conflicts of interest was 
not possible, we consider our counts of the clients of these 
consultants to be conservative. 

To determine the relationship between the consultants identified by the 
SEC with PBGC trusteed plans and ongoing plans we conducted three 
matches: 

* 24 SEC identified consultants with PBGC's list of the trusteed plans 
of the 25 largest companies in terms of claims since the beginning of 
fiscal year 2000.[Footnote 51] We constructed each match so that we 
looked at plan sponsors rather than plans. PBGC's 25 largest trusteed 
companies since the year 2000 had a total of 67 plans. 

* 24 SEC-identified consultants and our client list with PBGC's list of 
plans that underwent PBGC trusteeship in 2005. The total number of 
plans was 118. 

* 24 SEC-identified consultants and our client list with plans that 
were non-terminated and ongoing between 2000 and 2004. The total number 
of plans was 4832. 

The compilation and matching of our data sources provide the following 
information is illustrated in the table 1: 

Table 1: Pension Plan Sponsors Employing 13 Consultants of Concern to 
the SEC Regarding Inadequately Disclosed Conflicts of Interest. 

Sponsors employing 1 or more consultants with undisclosed conflicts; 
25 largest PBGC trusteeships since 2000: 9; 
Sponsors of plans trusteed by PBGC in 2005: 12; 
Sponsors of ongoing defined benefit plans 2000-2004: 1,009. 

Total number of sponsors; 
25 largest PBGC trusteeships since 2000: 25; 
Sponsors of plans trusteed by PBGC in 2005: 86; 
Sponsors of ongoing defined benefit plans 2000-2004: 4,203. 

Percentage; 
25 largest PBGC trusteeships since 2000: 36%; 
Sponsors of plans trusteed by PBGC in 2005: 14%; 
Sponsors of ongoing defined benefit plans 2000-2004: 24%. 

Source: GAO Analysis of data from PBGC, SEC, Nelson Information, and 
Form 5500 filings. 

[End of table] 

Of the remaining 11 consultants that were of less concern to the SEC: 

* Six were ranked as some of the largest pension consultant firms in 
the U.S. with pension assets under advisement totaling over 1.5 
trillion dollars.[Footnote 52] 

* One of the 11 had an advisory relationship with one of the 25 largest 
PBGC trusteeships at some point during the years they were ongoing, 
although at least one or more of the 13 consultants of concern also 
provided services to this plan sponsor during that same period. 

* One of the 11 had an advisory relationship at some point during the 5 
year period between 2000 through 2004with one of the sponsors with 
plans that terminated in 2005 and was trusteed by PBGC, although at 
least one of the 13 consultants of concern also provided services to 
this plan sponsor during that same period. 

* One or more of the 11 had an advisory relationship with 167 of the 
ongoing defined benefit plan sponsors from 2000-2004, although at least 
one or more of the 13 consultants of concern also provided services to 
99 of these plan sponsors during that same period. 

To match the 13 consultants identified by the SEC with non-terminated/ 
ongoing DB plans, we analyzed Form 5500 information from filing years 
2000 to 2004 to identify the sponsors of DB plans we categorized as 
ongoing. We selected only single employer or multiple employer DB plans 
that filed Form 5500 in 2004 and were not on the PBGC list of plans 
that terminated in 2005. From these we selected plans whose filings 
were not partial year and were not final plan filings. Additionally, we 
selected those plans with at least one other full year filing for the 
period 2000 to 2003. Additionally, we chose only plans with information 
on both beginning and end of year assets reported on Schedule H. This 
resulted in a list of 4,203 sponsors of 4,832 plans. 

To determine the consultants that worked directly for a plan or 
indirectly for a plan through a plans holdings in master trusts 
accounts and other such arrangements, we compiled information on 
service providers reported on the plans Form 5500 schedule C and also 
on service providers reported on the filings of master trust accounts 
and other such plan holdings. We compiled a working list of consultants 
whose service was reported with the codes 17 (Consulting), 20 
(Investment advisory), and 21 (Investment management). We matched this 
list to the list of consultants investigated by the SEC to determine 
which plans used the services of one or more of the consultants that 
were investigated. We augmented this list using consultant and client 
list information available from Nelson. 

Finally, we conducted an econometric analysis to determine whether 
there was a correlation between undisclosed conflicts of interest and 
rates of return for the ongoing DB plans identified as employing the 
services of one or more of the consultants listed in the SEC study. We 
included only the plans that we could link to the 24 consultants either 
directly on the basis of plan form 5500 filings or indirectly based on 
a plans holdings in master trusts accounts and other such arrangements. 
For details of this analysis please see appendix II. 

[End of section] 

Appendix II: Econometric Analysis of the Effect of Inadequately or 
Undisclosed Conflicts of Interest on Pension Plan Rates of Return: 

The SEC has stated that disclosure helps to mitigate the effects of 
conflicts of interest. There is concern that plans that use pension 
consultants who have not properly disclosed conflicts of interest may 
achieve lower net returns on plan assets either because of higher 
administrative costs or due to poor money manager selection, among 
other reasons. To investigate the relationship between returns and 
improperly disclosed conflicts of interest, GAO compiled a database 
using SEC data on pension consultants and the Department of Labor's 
5500 data (as well as some auxiliary data sources to create additional 
control variables). The data contains observations on 1111 pension 
plans over a 5-year period, 2000 to 2004. To analyze the relationship, 
GAO employed various multivariate econometric models using the panel 
data. While, the results suggest a negative correlation between returns 
and plans that are associated exclusively with pension consultants that 
have not properly disclosed conflicts of interest, the results should 
not be viewed necessarily as evidence of a causal relationship in light 
of the modeling and data limitations. This appendix provides additional 
information on the construction of GAO's database, the econometric 
model, additional descriptive statistics, and the limitations of the 
analysis. 

GAO Panel Data Sample Constructed from Two Primary Data Sources: 

To explore the risk areas relating to pension consulting, SEC's Office 
of Compliance Inspections and Examinations (OCIE) conducted focused 
examinations of 24 pension consultants who were registered investment 
advisers, some of whom were considered at high risk for undisclosed 
conflicts. These consultants examined ranged in size and by the types 
of products and services offered. SEC chose its sample in part based on 
geographical dispersion and judgmentally selected the consultants. SEC 
found that 13 of these 24 pension consultants failed to disclose 
significant conflicts of interest while the remaining 11 were found to 
have less significant disclosure issues. Using the Labor's 5500 data, 
GAO used the SEC information to identify 983 pension plans associated 
with these 13 pension consultants and 39 pension plans associated with 
the 11 pension consultants found to have less significant disclosure 
issues. We were also able to identify 89 plans in the 5500 database 
that were associated with both types of pension consultants (see figure 
2). Given the nature of the SEC selection process (it was not selected 
randomly) and the small number of pension consultants, the plans 
included in the analysis should not be considered as representative of 
the population of defined benefit pension plans and the results may not 
be generalizeable. 

Figure 2: Identifying Plans for GAO's Pension Plan Sample: 

[See PDF for image] 

Source: GAO analysis. 

[End of figure] 

To construct the database used to estimate the econometric model, we 
compiled financial information from the 5500 database on these 1111 
plans over 5 years and added additional data on the performance of the 
S&P 500 over various fiscal year end dates taken from Robert Shiller's 
Web site and market performance indicators from Credit Suisse and the 
Federal Reserve Board. As a panel data set, data pooled across all 
plans matched to the 24 consultants reviewed by SEC over the 2000 to 
2004 period, we were able to account for variances in returns across 
plans and over a short period of time and utilizes techniques that 
enhance the validity of the parameter estimates. Because some of the 
plans did not have the requisite data for each year, the panel is 
unbalanced. While this requires minor modifications in the computation 
of the related statistics, it does not preclude the estimation of the 
model. Nevertheless, this panel of 1111 plans was used to empirically 
evaluate the relationship between returns and undisclosed conflicts of 
interest. Table 2 reports some descriptive statistics on the plans 
included in the analysis. 

Table 2: Selected Descriptive Statistics for Plans included in the 
Econometric Model: 

Plans associated with Group A; 
Return (average, 2000-2004): 3.2%; 
Return (standard deviation, 2000-2004): 11.5%; 
Assets per plan (average, 2004): 186,708,455; 
Sum of assets in 2004: 183,534,411,177; 
Assets per plan (average, 2000-2004): 155,371,479. 

Plans associated with Group B; 
Return (average, 2000-2004): 4.5%; 
Return (standard deviation, 2000-2004): 12.7%; 
Assets per plan (average, 2004): 253,121,820; 
Sum of assets in 2004: 9,871,750,992; 
Assets per plan (average, 2000- 2004): 214,063,302. 

Plans associated with Group A and B; 
Return (average, 2000-2004): 4.2%; 
Return (standard deviation, 2000-2004): 12.4%; 
Assets per plan (average, 2004): 363,821,650; 
Sum of assets in 2004: 32,380,126,875; 
Assets per plan (average, 2000-2004): 317,061,230. 

All plans; 
Return (average, 2000-2004): 3.4%; 
Return (standard deviation, 2000-2004): 11.6%; 
Assets per plan (average, 2004): 203,227,983; 
Sum of assets in 2004: 225,786,289,044; 
Assets per plan (average, 2000-2004): 170,426,326. 

Source: GAO Analysis. 

Note: The groups reflected in the table are as follows: Group A 
consists of those consultants that had failed to disclose significant 
conflicts of interest, Group B consists of those consultants that 
failed to disclose less significant conflicts of interest or that had 
no conflicts of interest, and Group A and B consists of members of 
group A and B. 

[End of table] 

Standard Econometric Modeling Procedures for Handling Panel Data: 
Random and Fixed-Effects Model: 

Panel data provides potential advantages over pure cross sectional and 
pure time series designs as it allows us to factor out the time-and 
space-invariant components of the data. As a result, panel data are 
able to identify and measure effects that are not detectable in other 
designs. There are two commonly accepted approaches to estimating panel 
data, the "random-effects" model and the "fixed-effects" model. In a 
"fixed-effects" model individual effects are estimated in this case for 
each plan to reflect the assumption that special features specific to 
each plan such as investment style or skill can be captured best with a 
different, time-invariant intercept for each plan. In a "random- 
effects" model, in this context, these individual effects are captured 
through treating the intercept as a random variable with an unique 
error term for each plan. While each model has its advantages and 
disadvantages, the random effects model is appropriate when we can 
plausibly assume that the individual effects (which are unobserved and 
unmeasured in the model) are uncorrelated with the explanatory 
variables that are measured and included in the model. If this 
assumption holds, the random-effects model is especially attractive if 
the cross-sectional units (pension plans) are drawn randomly from a 
common population or alternatively when the number of cross-sectional 
units is large and the time period is small. Otherwise, the fixed- 
effects model is preferred, especially as a control for omitted 
variables bias. 

Using panel data as stated above, basic model takes the form: 

(1) yit = q + Xitb + Zid + eit: 

wherey = the dependent variable (plan returns). 

X =a matrix of explanatory variables that varies across time and 
individual plans. These variables are control variables that help 
explain the variation in returns across plans such as the performance 
of various markets over a plan's fiscal year, the size of a plan and 
its funding status. 

Z =a matrix of variables that vary across individuals plans but for 
each individual plan are constant across the 5 years. The variables are 
essentially the dummy variables that indicate whether a plan is 
associated with the various types of pension consultants outlined 
above. 

q =constant term. 

i =1, 2, . . ., 1111 and represents the individual pension plans in the 
panel data. 

t =1, 2, . . ., 5 and represents the number of years (2000 to 2004). 

As is the typical case with panel data, we have a large number of cross-
sections (pension plans) and a relatively small number of time periods. 
Therefore we specify the composite error structure for the disturbance 
term as follows: 

(2) eit = i + hit: 

wherei =plan-specific error component which captures the unobserved 
heterogeneity across plans (either as a fixed-or random-effect). 

E(Xithit) = 0 (there is no correlation between hit and Xit). 

The i is the individual effect which can be treated as either fixed or 
random. The fixed-and random-effect models which take account of the 
repetition inherent in the data and allow us to use the individual 
differences effectively. Correspondingly, if we treat the individual 
effect as zero we can estimate the model using the simple ordinary 
least squares (OLS) procedure. Essentially, this is a pooled regression 
model where we assume the intercept and slope coefficients are constant 
across time and space and the normal error term (hit) captures 
differences over time and individual plans. However, when the true 
model is a random-effects model, pooling the observations in this 
manner using OLS produces biased estimates that are also not efficient 
when compared to the more complex GLS procedure (outlined hereafter). 
The pooled OLS model is also susceptible to omitted-variables bias. 

The random-effects technique proceeds under the premise that the 
ignorance about the unobserved differences in returns across plans is 
better captured through the disturbance term rather than the intercept. 
The random-effects model basically maintains that the 1,111 pension 
plans in the sample are a drawing from a much larger universe of such 
plans and that they have a common mean value for plan returns 
(represented by the constant term, q) and that the individual 
differences in the intercept values of each plan are captured in the 
error term eit.[Footnote 53] Given the composite nature of the new 
disturbance term that incorporates the individual random effect of each 
plan, the appropriate method for producing estimates is generalized 
least squares (GLS).[Footnote 54] Feasible GLS derives an estimate of 
the covariance matrix of the error term and uses the information 
(heteroscedasticity from repeated observations of the same cross- 
section unit) to estimate the coefficients in the model. 

Note that the random-effects model uses the heterogeneity across units 
to produce more efficient estimates.[Footnote 55] However, the drawback 
to this approach is that it forces one to make the strong assumption 
that the unobserved random-effects are uncorrelated with the 
explanatory variables in the model (E(Xiti) = 0 in addition to the 
standard assumption E(Xithit) = 0). As a result the random effect 
treatment of the panel data may also produce estimates that suffer from 
the inconsistency because of omitted variables. Therefore, the validity 
of the results in the case would depend more heavily on the control 
variables included in the model to capture differences across plans, 
unless the omitted variables (unobserved heterogeneity across plan) are 
uncorrelated with the conflict dummy variable. If this is the case, the 
random-effect model may produce more appropriate estimates than the 
fixed-effects model. In our case, the unobserved effects, i, were found 
to be unimportant (relative to the variance of hi) as the random-effect 
estimates approximated the pooled OLS results. This made the choice 
between random and pooled OLS a moot point (see below). 

Fixed-Effect Model: 

When there is heterogeneity that cannot readily be explained, another 
analytical approach is to incorporate it into a fixed-effects model. In 
the case of the fixed-effects model, it is estimated uniquely for each 
plan as a fixed coefficient to be added to the intercept term. In this 
way, we take into the account the individuality of each plan (each 
cross-sectional unit) by letting the intercept vary by a fixed amount 
for each plan. The benefit of the fixed-effects estimator is that it is 
consistent in the presence of omitted variables. Because many variables 
that impact returns across plans are difficult to measure or could not 
be obtained this omission could bias the parameter estimates. With 
panel data and a fixed-effect specification it is possible to obtain 
consistent estimates of the impact of undisclosed conflicts of interest 
even when there are correlated omitted effects. The differences that 
exist across plan are essentially pulled out and accounted for 
explicitly, allowing for a more valid estimation of the impact of 
conflicts of interest on plan returns. Moreover, in many cases the 
fixed-effects estimates will still produce consistent estimates even 
when the random effects model is valid. 

While the easiest way to implement the fixed-effects estimator is to 
include a dummy variable for each plan, we could not run a fixed-effect 
model directly due to the nature of our primary regressor of interest. 
Since the fixed-effects are time-invariant and the conflict variable in 
our model is a qualitative variable (dummy) that does not change over 
the 2000 to 2004 period either, the fixed effects model is not able to 
identify the impact of the variable. Essentially the variable is 
collinear with the fixed effect intercepts. Therefore we used an 
alternative procedure to achieve the same effect. To produce the fixed- 
effects estimator we used the fixed-effects vector decomposition 
approach.[Footnote 56] The technique estimates the fixed-effects 
estimator in three stages: the first stage runs a fixed-effect model 
without the time invariant variables (Zi). We then decompose the fixed- 
effects estimator into a portion explained by the time invariant 
variables (Zi) and an error term. The final stage re-estimates the 
first stage with the time invariant and time variant variables and the 
error term from the stage two. In the third stage, estimated by pooled 
regression, we used robust standard errors adjusted for the degrees of 
freedom. In this manner we were able to approximate the unbiased, 
consistent estimator in the presence of time-invariant omitted 
variables.[Footnote 57] While some researchers have found that this 
procedure has better finite sample properties than the alternative 
approaches for estimating the effect of time-invariant variables using 
panel data, it should be noted that this is a recently applied 
econometric technique. 

Variables Included in the Model: 

The dependent variable in all of our econometric models is plan 
returns. Returns were calculated two ways using the Form 5550 data. The 
first return measure calculates plan returns relating the change in 
plan assets (At - At - 1) over the year, netting out the impact of 
benefits payments from the plan (B) and contributions to the plan (C) 
and also accounts for net transfers (T) into the plan. The formula can 
be written: 

(3) ROR1 = [(At - At - 1) + B - C - T] / [(At - 1) + ½(C - B + T)]. 

As an alternative we slightly amend this calculation to account for 
administrative expenses (E) paid by the plan in a different manner. 
This alternative formula can be written: 

(4) ROR2 = [(A - At - 1) + B + E - C - T] / [(At - 1) + ½(C - B - E + 
T)]. 

The results we report below use this measure of returns but we obtained 
similar results using the first estimate of returns. 

The primary variables of interest are the time invariant variables (Z), 
namely a dummy variable (conflict) that equal 1 if the plan is 
associated exclusively with pension consultants found to have 
undisclosed conflicts of interest and 0 otherwise. In many 
specifications we also include a dummy variable (mixed) that equals 1 
if the plan is associated with both types of consultants --pension 
consultants found to have undisclosed conflicts of interest and pension 
consultants that have no conflicts or disclosed conflicts properly and 
0 otherwise. 

Although, the fixed effect model guards against time invariant omitted 
variables bias, it is always advisable to explore possible causes of 
heterogeneity. We included a number of control variables in attempt to 
capture the variation in plan return across plans although time 
constraints restricted the variables we could include. Because 
different plans may allocate assets differently because of investment 
style or age composition of plan participants, some plans may track 
more conservative or aggressive benchmarks rather than the overall 
market. As a result in addition to a general market indicator, the S&P 
500, we also include a measure of hedge fund performance as well as a 
fixed income measure. The broad market measure the performance of the 
S&P 500 over plan i's fiscal year for year t.[Footnote 58] Our measure 
of hedge fund performance is the Credit Suisse/Tremont hedge fund 
index.[Footnote 59] The fixed-income measure is the Moody's yield on 
corporate seasoned Aaa bonds taken from the Federal Reserve Board. 
These variables were constructed in a manner that also accounts for the 
varied fiscal year end dates across plans. Moreover, since the size and 
the funding level of the plan may influence asset allocation and 
investment strategy, we included assets at the beginning of the fiscal 
year and the degree of under-funding as explanatory variables as well. 
Including funding status creates potential simultaneous equations bias 
since the funding ratio is most likely dependent on plan returns. Since 
lagging the variable resulted in a loss of both a year's data and large 
number of observations as well as severe autocorrelation, we included 
the contemporaneous funding ratio but did not include the variable all 
specifications. The asset variable was substantively and/or 
statistically insignificant across multiple specifications and 
therefore it was not included in some instances. 

We also included time period effects whenever possible. This amounts to 
creating a dummy variable for 4 of the 5 time periods covered in the 
database. While, this is straightforward in the OLS and fixed-effects 
models, two way random effects or random effects with a time period 
fixed effect is only possible for balanced panel in the econometric 
software used for the modeling procedure. When we included time period 
fixed effects in the fixed-effects model some of the explanatory 
variables became redundant and added no explanatory power to the 
models. In our case, we did not reproduce the random-effects model on 
the balanced panel in this appendix, since the only variation across 
units were the fixed effects, and the random effects model was 
equivalent to the pooled OLS results. 

Results: Ordinary Least Squares (OLS) and Random-Effects Models: 

The simple econometric model (OLS), suggests that plans associated with 
undisclosed conflicts of interest achieve returns roughly 1.2 to 1.7 
percentage points lower. The results are all significant at the 5 
percent level (table 3). However, this model disregards the space and 
time dimensions of the pooled data and is plagued with a number of 
issues including omitted variables bias, which can impact the parameter 
estimates, as potentially evidenced by the somewhat low Durbin-Watson 
statistic. The random-effect model, which assumes that there are 
differences between the plans and that these differences are random, 
did not produce results distinct from the OLS model. When the 
unobserved effects, i, are unimportant (relative to the variance of 
hit), the random-effects estimates will be closer to a pooled OLS 
model. Our estimation found that the random-effects were unimportant 
and there were no efficiencies to estimating the model via GLS. 
Nevertheless, the relationship between undisclosed conflicts and 
returns estimated by the OLS and random-effects models remained robust 
even when additional control variables were included and, in the case 
of OLS, when time fixed-effects were added to the model.[Footnote 60] 

Table 3: Econometric Estimates of the Relationship between Undisclosed 
Conflicts of Interest and Plan Returns (OLS and Random Effects): 

Independent variable. 

Conflict; 
OLS/Random Effects I: -0.012[A]; 
OLS/ Random Effects II: -0.014[A]; 
OLS III: -0.014[A]; 
OLS IV: -0.013[A]; 
OLS V: -0.014[A]; 
OLS VI: -0.017[B]. 

Mixed; 
OLS/Random Effects I: [Empty]; 
OLS/Random Effects II: [Empty]; 
OLS III: [Empty]; 
OLS IV: [Empty]; 
OLS V: [Empty]; 
OLS VI: -0.006. 

SP500; 
OLS/Random Effects I: 0.600[A]; 
OLS/Random Effects II: 0.676[A]; 
OLS III: -0.090[A]; 
OLS IV: 0.050; 
OLS V: 0.053; 
OLS VI: 0.050. 

Hedge; 
OLS/Random Effects I: [Empty]; 
OLS/Random Effects II: -0.575[A]; 
OLS III: [Empty]; 
OLS IV: -0.252[A]; 
OLS V: -0.263[A]; 
OLS VI: -0.253[A]. 

Bond yield; 
OLS/Random Effects I: [Empty]; 
OLS/ Random Effects II: -0.023[A]; 
OLS III: [Empty]; 
OLS IV: 0.062[A]; 
OLS V: 0.062[A]; 
OLS VI: 0.0612[A]. 

Assets; 
OLS/Random Effects I: [Empty]; 
OLS/Random Effects II: -0.000; 
OLS III: [Empty]; 
OLS IV: 0.000; 
OLS V: [Empty]; 
OLS VI: [Empty]. 

Funding ratio; 
OLS/Random Effects I: [Empty]; 
OLS/Random Effects II: [Empty]; 
OLS III: [Empty]; 
OLS IV: [Empty]; 
OLS V: -0.000; 
OLS VI: [Empty]. 

Constant; 
OLS/Random Effects I: 0.062[A]; 
OLS/ Random Effects II: 0.252[A]; 
OLS III: 0.043[A]; 
OLS IV: -0.341[A]; 
OLS V: -0.336[A]; 
OLS VI: -0.330[A]. 

Time period fixed-effects; 
OLS/Random Effects I: No; 
OLS/Random Effects II: No; 
OLS III: Yes; 
OLS IV: Yes; 
OLS V: Yes; 
OLS VI: Yes. 

R-square; 
OLS/Random Effects I: 0.5276; 
OLS/ Random Effects II: 0.5584; 
OLS III: 0.6388; 
OLS IV: 0.6430; 
OLS V: 0.6411; 
OLS VI: 0.6423. 

Durbin-Watson; 
OLS/Random Effects I: 1.86; 
OLS/ Random Effects II: 1.95; 
OLS III: 1.61; 
OLS IV: 1.61; 
OLS V: 1.61; 
OLS VI: 1.61. 

Sample size; 
OLS/Random Effects I: 4,170; 
OLS/ Random Effects II: 4,170; 
OLS III: 4,170; 
OLS IV: 4,170; 
OLS V: 4,170; 
OLS VI: 4,170. 

Source: GAO analysis. 

[A] denotes significance at the .01 level. 

[B] denotes significance at the .05 level. 

Notes: Conflict indicates a plan that is associated with one of the 
pension consultants identified has having undisclosed conflicts of 
interest. Mixed indicates a plan that is associated with a pension 
consultant with undisclosed conflicts but also a pension consult found 
to be free of conflict or having disclosed them properly. 

Bond Yield, SP500, and Hedge are: Moody's average yield on corporate 
Aaa bonds, the change in the S&P 500, and the change in the Credit 
Suisse/Tremont hedge fund index return over a plan's fiscal year, 
respectively. Assets denote plan assets at the beginning of the year 
(squared). The funding ratio is the ratio of assets to liabilities. 

[End of table] 

Results: Fixed-Effects Models: 

The fixed-effect model, which helps guard against omitted variable 
bias, supports the results from the pooled OLS model. The R-square from 
the fixed-effect regression suggest that the models explain roughly 75 
percent of the variation in plan returns. Again, the results are highly 
significant as the probability of an erroneous statistical conclusion 
in most models is substantially lower than what is commonly accepted as 
significant in hypothesis testing (5 percent or a p-value of .05). 
There is one exception to be noted, when the dummy variable is included 
for those plans associated with both conflicted and non-conflicted 
pension consultants, the significance of the conflict variable falls to 
the 10 percent level (p-value is roughly 6 percent). This implies the 
probability of concluding a negative relationship when none is present 
has increased to about 6 percent. Moreover, when we drop those 
observations associated with both types of pension consultants, the 
conflicted variable was again significant only at the 10 percent level 
(p-value on roughly 6.7 percent). However, when we used the return 
calculation expressed in equation (3) the conflict dummy remains 
significant at the 5 percent level (p-value of roughly 3%) even when an 
independent dummy variable is included for the plans associated with 
both conflicted and non-conflicted pension consultants. It should be 
noted that, against the one-sided alternative, returns are lower for 
conflicted plans (H1: Conflict<0) and the results remain highly 
significant at the 5 percent level or lower. Otherwise, the conflict 
variable is robust to the inclusion of any of the additional control 
variables discussed above and the two measures of returns. We generally 
find that an exclusive association with one of the pension consultants 
identified has having conflicts of interest is associated with a lower 
return by about 1.2 to 1.3 percentage points, and higher in one case. 

Table 4: Econometric Estimates of the Relationship between Undisclosed 
Conflicts of Interest and Plan Returns (Fixed-Effects): 

Independent variable. 

Conflict; 
Model I: -0.013[A]; 
Model II: -0.012[A]; 
Model III: - 0.025[A]; 
Model IV: -0.013[C]; 
Model V (no mixed plans: -0.013[C]; 
Model VI: -0.013[A]. 

Mixed; 
Model I: [Empty]; 
Model II: [Empty]; 
Model III: [Empty]; 
Model IV: -0.001; 
Model V (no mixed plans: [Empty]; 
Model VI: [Empty]. 

SP500; 
Model I: 0.103[A]; 
Model II: 0.051; 
Model III: 0.053[A]; 
Model IV: 0.051; 
Model V (no mixed plans: 0.036; 
Model VI: 0.054[C]. 

Hedge; 
Model I: [Empty]; 
Model II: -0.115[B]; 
Model III: -0.125[C]; 
Model IV: -0.115[B]; 
Model V (no mixed plans: -0.063; 
Model VI: - 0.129[B]. 

Bond Yield; 
Model I: [Empty]; 
Model II: 0.108[A]; 
Model III: 0.106[A]; 
Model IV: 0.108[A]; 
Model V (no mixed plans: 0.113[A]; 
Model VI: 0.107[A]. 

Assets; 
Model I: [Empty]; 
Model II: [Empty]; 
Model III: -0.000[A]; 
Model IV: [Empty]; 
Model V (no mixed plans: [Empty]; 
Model VI: [Empty]. 

Funding ratio; 
Model I: [Empty]; 
Model II: [Empty]; 
Model III: [Empty]; 
Model IV: [Empty]; 
Model V (no mixed plans: [Empty]; 
Model VI: -0.000. 

Constant; 
Model I: 0.042[A]; 
Model II: -0.648[A]; 
Model III: -0.594[A]; 
Model IV: -0.647; 
Model V (no mixed plans: -0.687; 
Model VI: -0.637. 

Time period fixed-effects; 
Model I: Yes; 
Model II: Yes; 
Model III: Yes; 
Model IV: Yes; 
Model V (no mixed plans: Yes; 
Model VI: Yes. 

R-square; 
Model I: 0.742; 
Model II: 0.746; 
Model III: 0.747; 
Model IV: 0.746; 
Model V (no mixed plans: 0.753; 
Model VI: 0.745. 

Durbin-Watson; 
Model I: 1.94; 
Model II: 1.94; 
Model III: 1.93; 
Model IV: 1.94; 
Model V (no mixed plans: 1.91; 
Model VI: 1.94. 

Sample Size; 
Model I: 4,170; 
Model II: 4,170; 
Model III: 4,170; 
Model IV: 4,170; 
Model V (no mixed plans: 3,385; 
Model VI: 4,170. 

Source: GAO Analysis. 

[A] Denotes significance at the .01 level. 

[B] Denotes significance at the .05 level. 

[C] Denotes significance at the .10 level. Standard errors (not 
reported) were adjusted for heteroscedasticity using White's procedure. 

Notes: Conflict indicates a plan that is associated with one of the 
pension consultants identified as having undisclosed conflicts of 
interest. Mixed indicates a plan that is associated with a pension 
consultant with undisclosed conflicts, but also a pension consult found 
to be free of conflict or having disclosed them properly. 

Bond Yield, SP500, and Hedge are: Moody's average yield on corporate 
Aaa bonds, the change in the S&P 500, and the change in the Credit 
Suisse/Tremont hedge fund index return over plan i's fiscal year, 
respectively. Assets denote plan assets at the beginning of the year 
(squared). The funding ratio is the ratio of assets to liabilities. 

[End of table] 

Limitations of Our Econometric Model: 

Like many statistical analyses, the results should be interpreted with 
care. Although the panel data provides many advantages and can produce 
more valid and efficient estimates, drawing causal inferences is still 
difficult. Even with control variables and the fixed-effects models 
there are a number of threats to the validity of our results. First, 
although the fixed-effects estimator is robust to the omission of any 
relevant time-invariant variables, if there are time-varying 
differences that have been omitted the result could be biased. Although 
the analysis controlled for plan size, funding level, the performance 
of asset markets and other key variables, other unknown, omitted 
factors could still influence the results of our analysis or account 
for the differences in estimated returns. There may be additional 
biases resulting from the vector decomposition procedure used to obtain 
the fixed-effect estimates. Second, the existence of statistical 
relationship is not in and of itself, enough to assert causality. Fixed-
effects, while strengthening the validity of model's parameters, do not 
completely solve the problem of drawing causal inferences. Third, the 
use of the 5500 data could lead to measurement error in the dependent 
variable (plan returns). We assume that any errors are random and 
therefore do not impact the validity of the parameter estimates. 
Similarly, although we were careful in identifying and reviewing the 
plans associated with the two types of pension consultants any error, 
random or non-random, would impact the parameter estimates. Moreover, 
we used a potentially unrepresentative sample of pension consultants to 
identify the pension plans included in our investigation that therefore 
limits the ability to generalize the results. A few pension consultants 
that had significant conflicts of interest that impacted their activity 
could very well drive the observed negative relationship. Further, the 
imbalance between the large number of plans associated exclusively with 
conflicted consultants and the small number of those that were not 
raise additional statistical issues and limits the ability to 
generalize the results. Lastly, given the short time period analyzed, 
it could be possible that some plans' return were abnormally low due to 
their investment strategies, and would have higher returns had the time 
period analyzed been lengthened. 

[End of section] 

Appendix III: Comments from the Pension Benefit Guaranty Corporation: 

PBGC Pension Benefit Guaranty Corporation: 
1200 K Street, N.W, 
Washington, D.C. 20005-4426: 

June 18, 2007: 

Barbara D. Bovbjerg, Director: 
Education, Workforce, and Income Security Issues: 
U.S. Government Accountability Office: 
Washington, D.C. 20548: 

Dear Ms. Bovbjerg: 

Thank you for the opportunity to comment on the draft version of your 
report entitled, "Conflicts of Interest Involving High Risk or 
Terminated Pension Plans Pose Enforcement Challenges." 

Under ERISA, when a plan is ongoing, PBGC has no authority to take 
action against service providers with conflicts of interest. However, 
upon termination and trusteeship of plan, PBGC seeks to obtain 
recoveries to cover unfunded benefits. One avenue to obtain recoveries 
relates to fiduciary breach claims, including those relating to service 
providers with conflicts of interest. PBGC takes its obligations in 
this area very seriously and appreciates GAO's work on this important 
issue. 

We believe that our recent initiative to enhance our procedures for 
identifying and pursuing fiduciary breach and other types of claims is 
fully consistent with GAO's recommendation to include as part of our 
plan intake process an assessment of whether there exist conflicts of 
interest with service providers that would support potential claims to 
recover unfunded benefits. We intend to pursue such claims when we can 
achieve beneficial recoveries in a cost-effective manner. 

We will also work with the Department of Labor's Employee Benefit 
Security Administration (EBSA) and the Securities Exchange Commission 
to more closely coordinate regarding such conflicts of interest for 
plans already trusteed by PBGC and those likely to terminate in the 
near future. The current information-sharing arrangements among PBGC, 
EBSA and the Internal Revenue Service will serve as a useful model for 
such coordination. 

This report highlights the importance of PBGC's mission and our efforts 
to safeguard America's pension insurance program. Again, thank you for 
the opportunity to comment. 

Sincerely, 

Signed by: 

Vincent K. Snowbarger: 
Deputy Director: 

[End of section] 

Appendix IV: Comments from the Department of Labor: 

U.S. Department of Labor: 
Assistant Secretary for Employee Benefits Security Administration: 
Washington, D.C. 20210: 

June 25, 2007: 

Ms. Barbara D. Bovbjerg: 
Director, Education, Workforce, and Income Security Issues: 
United States Government Accountability Office: 
Washington, DC 20548: 

Dear Ms. Bovbjerg: 

We have reviewed the Government Accountability Office's (GAO) draft 
report entitled "Defined Benefit Pensions: Conflicts of Interest 
Involving High Risk or Terminated Plans Pose Enforcement Challenges" 
(GAO-07-703). This letter provides our general comments concerning the 
draft report and responses to recommendations; we already have provided 
technical comments directly to your staff. 

The Department is committed to protecting the retirement security of 
American workers, retirees and their families. We agree that 
undisclosed conflicts of interest by pension consultants and others who 
provide services to pension plans could constitute violations of ERISA, 
potentially resulting in losses to plans, particularly where the 
pension consultant or adviser uses its position with the plan to 
generate additional fees for itself or its affiliates. It is for this 
reason that we began a national enforcement project, the Consultant/ 
Adviser Project (CAP), on October l, 2006. The CAP investigations are 
aimed at identifying those potential conflicts of interest that not 
only may affect a plan's financial health but also may erode the 
confidence of plan fiduciaries that rely on consultants and advisers to 
assist them in carrying out their fiduciary duties. It is through the 
CAP that we expect to determine whether these undisclosed conflicts of 
interest are indeed a problem of the magnitude suggested by the GAO in 
its report. 

In addition to our enforcement efforts, the Employee Benefits Security 
Administration (EBSA) is pursing a regulatory initiative addressing the 
disclosure of conflicts. We will soon publish a proposed regulation 
requiring service providers, including pension consultants, to disclose 
to plan fiduciaries information concerning the providers' direct and 
indirect compensation, fees, and other financial arrangements. This 
will ensure fiduciaries have the information needed to assess both the 
reasonableness of the fees and potential conflicts of interest by 
service providers, including pension consultants. 

Recommendation: The Secretary of Labor should direct the Assistant 
Secretary for EBSA to expand the scope of the new CAP program to 
include some emphasis on high risk plans PBGC deems as likely to 
terminate in the future and PBGC-trusteed plans. 

The CAP is designed to target pension consultants and other investment 
advisers who receive indirect, undisclosed compensation. The agency has 
concentrated its initial review on carefully targeted cases, many of 
which were opened as a result of information obtained from the SEC in 
connection with that agency's review of pension consultants. As these 
investigations are completed, the agency may expand its targeting of 
high risk profile consultants and advisers. We will consider the GAO's 
recommendation to shift the focus of the project from pension 
consultants to PBGC- identified, underfunded pension plans as we review 
the results of these initial investigations and make decisions about 
the future course of the project. However, we will, as always, provide 
appropriate enforcement support to the PBGC in connection with the 
plans it trustees. 

CAP is focused on the potential civil and criminal violations arising 
from the receipt of indirect, undisclosed compensation by pension 
consultants and advisers. In addition to investigating the conduct of 
the consultants, we also examine the conduct of the fiduciaries hiring 
the consultants and following their advice to determine if any conflict 
was compounded by a failure in fiduciary duty by the plan, such as not 
abiding by the plan's investment guidelines, or by failing to 
understand the compensation and fee arrangements and to prudently 
select and monitor the consultants. CAP is a well-structured and well- 
designed enforcement project, but as we gam experience through 
investigations under the project, we expect to make adjustments in our 
investigative approaches as necessary. 

Recommendation: Building on the existing Memorandum of Understanding 
(MOU) between EBSA and PBGC and a recommendation made in our earlier 
work, the Assistant Secretary of EBSA, the Executive Director of the 
PBGC and the Chairman of the SEC should enter into an MOU to facilitate 
information sharing regarding conflicts of interest at PBGC trusteed 
plans and those likely to terminate in the future. 

EBSA fully recognizes the importance of establishing and maintaining 
effective working relationships with other agencies. That is we why 
have developed successful relationships with both the PBGC and SEC, and 
we are prepared to work with PBGC and the SEC to develop an MOU if the 
agencies agree that one is necessary to facilitate information sharing. 

Concerns about the GAO's Econometric Analysis: 

Due to the unusually short review period for the draft report, we have 
been unable to confirm the validity of the GAO's novel methodology. The 
results are provocative, as they suggest that the exclusive use of 
"conflicted" consultants may lead to substantially lower returns on a 
plan's investments. However, because of our concerns regarding the 
novelty of the methods and the potential weaknesses in the data (some 
of which are cited by GAO statisticians in the draft report), the 
Department feels that peer review of this analysis would have been 
useful in evaluating these concerns. As GAO notes, the non-random data 
sample used "limits the ability to generalize the results." Our 
additional statistical concerns include the rather skewed data sets 
(described in the report as "the imbalance between the large number of 
plans associated exclusively with conflicted consultants and the small 
number of those that were not"), the mixing of "conflicted" and "non-
conflicted" consultants in groups labeled "non-conflicted," and the use 
of an estimate for the critical variable of investment returns. 
Statistical descriptions of all the variables, by consultant type, 
would help facilitate a better assessment of the validity and 
implications of the report's findings. 

Conclusion: 

EBSA is dedicated to protecting the employer-provided benefits of 
American workers, retirees, and their families, and continues to strive 
to improve our enforcement program to deter, detect, and correct 
violations of ERISA. We appreciate having had the opportunity to review 
and comment on the draft report. Please do not hesitate to contact us 
if you have questions concerning this response or if we can be of 
further assistance. 

Sincerely, 

Signed by: 

Bradford P. Campbell: 
Acting Assistant Secretary: 

[End of section] 

Appendix V: Comments from the Securities and Exchange Commission: 

United States Securities And Exchange Commission: 
Washington, D.C. 20549: 
Office Of Compliance Inspections And Examinations: 

June 21, 2007: 

Barbara D. Bovbjerg Director: 
Education, Workforce, and Income Security Issues: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, DC 20548: 

Re: GAO Report Entitled "Defined Benefit Pensions: Conflicts of 
Interest Involving High Risk or Terminated Plans Pose Enforcement 
Challenges " (GAO-07-703), dated June 2007: 

Dear Ms. Bovbjerg: 

Thank you for sharing with us a copy of the Government Accountability 
Office's report entitled "Defined Benefit Pensions: Conflicts of 
Interest Involving High Risk or Terminated Plans Pose Enforcement 
Challenges" (GAO-07-703), dated June 2007. We were glad to assist GAO 
by meeting with your staff and providing information in connection with 
the preparation of the report. 

While the recommendations in the report are addressed primarily to the 
Director of the Pension Benefit Guaranty Corporation and to the 
Secretary of Labor, the report suggests that certain actions be taken 
in consultation with the SEC. The report also recommends that the 
Assistant Secretary of EBSA, the Executive Director of the PBGC and the 
Chairman of the SEC should enter into a MOU to facilitate sharing of 
certain information regarding conflicts of interest. We have enjoyed a 
collegial and cooperative relationship with EBSA and PBGC concerning 
issues of common interest, and look forward to continuing and 
developing that relationship through future discussions regarding the 
recommendations in the report. 

If I can be of any further assistance, please contact me or have your 
staff contact me at (202) 551-6200, or Gene Gohlke, Associate Director, 
at 202-551-6375. Additional contacts at the SEC are Robert Plaze, 
Division of Investment Management, at 202-551-6702, and Sarah Bessin, 
Division of Enforcement, at 202-551-4593. 

Sincerely, 

Signed by: 

Lori Richards: 
Director: 
Office of Compliance Inspections and Examinations: 

[End of section] 

Appendix VI: GAO Contact and Staff Acknowledgments: 

Contact: 

Barbara Bovbjerg (202)512-7215: 

Staff Acknowledgments: 

In addition to the above, Charles A. Jeszeck, Kimberley M. Granger, 
Joseph Applebaum, Susan Bernstein, Megan Birney, Richard Burkard, Julie 
DeVault, Lawrance Evans Jr., Randall Fasnacht, Cody Goebel, Gene 
Kuehneman, Michael Morris, Walter Vance, and Craig Winslow made 
important contributions to this report. 

FOOTNOTES 

[1] The Pension Protection Act of 2006 revamped funding rules for 
defined benefit plans--generally effective in 2008--and makes changes 
to the PBGC insurance program. Also see, GAO, Private Pensions: Recent 
Experiences of Large Defined Benefit Plans Illustrate Weaknesses in 
Funding Rules, GAO-05-294 (Washington, D.C.: May 2005). 

[2] See U.S. Securities and Exchange Commission, Office of Compliance 
Inspections and Examinations, Staff Report Concerning Examination of 
Select Pension Consultants (Washington, D.C.: May 16, 2005.) The 
report's findings were based on a 2002 to 2003 examination of 24 
pension consultants. See Hyperlink, 
http://www.sec.gov/news/speech/spch120505lr.htm (accessed 2007). 

[3] 29 U.S.C. §§ 1001-1461. 

[4] 29 U.S.C. § 1104. 

[5] 29 U.S.C. § 1106. Although ERISA generally does not prohibit 
conflicts of interest, it establishes a number of prohibited 
transactions, such as sales or loans between fiduciaries and parties in 
interest, as well as any transaction between a plan and a fiduciary 
that's in the fiduciary's interest. ERISA also provides, however, a 
number of detailed exemptions to these prohibitions and permits Labor 
to establish additional ones. 29 U.S.C. § 1108. 

[6] For more information on the financial risks facing PBGC, see GAO, 
Pension Benefit Guaranty Corporation: Single-Employer Pension Insurance 
Program Faces Significant Long-Term Risks, GAO-04-90 (Washington, D.C: 
Oct. 29, 2003). 

[7] 29 U.S.C. § 1102. 

[8] 29 U.S.C. § 1002(21). EBSA officials explained that a consultant or 
other adviser fits within this element of the definition only to the 
extent that advice was provided (1) as to the purchase or sale of 
securities or other property of plan, (2) on a regular basis, (3) 
pursuant to a mutual agreement, arrangement, or understanding, (4) as a 
primary basis for investment decisions, and (5) based on the particular 
needs of the plan. 

[9] 29 U.S.C. § 1109. 

[10] 15 U.S.C. §§ 80b-1 et seq. Rules under the Advisers Act permit 
pension consultants to plans having an aggregate value of at least 
$50,000,000 to register with the Commission (Rule 203A-2(b)). 

[11] Investment advisers use Form ADV to register with the SEC and 
state securities authorities or to amend those registrations and, among 
other things, to disclose their conflicts of interest to advisory 
clients. 

[12] 15 U.S.C. §§ 78a et seq. 

[13] GAO, Financial Regulation: Industry Changes Prompt Need to 
Reconsider U.S. Regulatory Structure, GAO-05-61 (Washington, D.C.: Oct. 
6, 2004). 

[14] For consultant usage information, see Thomson Nelson, Annual 
Report of Pension Fund Consultants 2006 (New York, N.Y.: 2006). 

[15] For information on SEC's pension consultant examination, see SEC, 
Speech by SEC Staff: Conflicts of Interest in Pension Consulting, 
(Washington, D.C.: Dec. 5, 2005), Hyperlink, 
http://www.sec.gov/news/speech/spch1205051r.htm (2007). 

[16] See, Mark Bruno, "Consultants: Fighting for Revenue", Pensions and 
Investments Online. (October 30, 2006). 

[17] Most of the consultants examined in the SEC study had disclosures 
that SEC staff found inadequate; however, 13 of them were of particular 
concern for SEC because the nature of the conflicts of interest 
information is not disclosed. 

[18] Some forms of soft dollar payment arrangements are considered 
legal under a "safe harbor" provision of the Exchange Act in section 
28(e) of the Securities Exchange Act of 1934 that allows advisers to 
pay more than the lowest available commission rate for security 
transactions in return for research and brokerage services and not be 
in breach of their fiduciary duty. 11 U.S.C § 78bb(e). In order to be 
protected against a claim of breach of fiduciary duty under this safe 
harbor, the adviser must make a good faith determination that the 
amount of commission paid is reasonable in relation to the value of the 
brokerage and research services provided by the broker-dealer. 

[19] According to the SEC report, the pension consultants examined 
represented a cross section of the pension consultant community and 
varied in size (measured in terms of the number and size of their 
pension plan clients) and the type of products and services they 
offered. About half of the pension consultants examined was among the 
largest pension consulting firms, measured in terms of the assets of 
the plans they advise. The remainder of the sample consisted of medium 
and smaller consultants. Since the consultants were not selected 
randomly, this sample cannot be generalized to the population of 
pension consultants. 

[20] The report did not seek to identify the financial harm to pension 
plans caused by these conflicts of interest, nor whether there were any 
violations of ERISA. U.S. Securities and Exchange Commission's Office 
of Compliance Inspections and Examinations, Staff Report Concerning 
Examination of Select Pension Consultants, (Washington D.C.: May 16, 
2005). 

[21] Pensions and Investments periodical's list of Top 25 consultants 
ranked by U.S. institutional, tax exempt assets, 2006. 9 of the 13 
consultants made the list of Top 25 consultants. 

[22] We constructed this analysis so that we looked at plans sponsors 
rather than plans. For example, PBGC's 25 largest trusteed sponsors 
since fiscal year 2000 had a total of 67 plans and comprised 70 percent 
of the total claims against the agency between 1975 and 2006. 

[23] Our analysis is based on a data set we constructed by matching SEC 
consultant data with financial information compiled from the Form 5500 
database on 1111 plans over 5 years. Of those, 983 were associated with 
the 13 consultants identified by the SEC as having provided services to 
DB plans that had serious disclosure problems, while 39 were associated 
with 11 consultants that either were in compliance or had minor 
inadequacies with disclosure and another 89 that were associated with 
both types of consultants. A complete discussion of our econometric 
approach, including model specification, variables used, data sources, 
estimation techniques and limitations is provided in appendix II. 

[24] These include an ordinary least squares specification with time- 
fixed effects and various random effect and fixed effect model 
specifications. "Fixed-effects" helps to control for the potentially 
large number of unmeasured forces that can explain the difference in 
plan returns. See appendix II. 

[25] Many factors affect a plan's rate of return. At the individual 
plan level, the poor performance of a plan's investments might not 
reflect the harm of conflicts of interest but could reflect weakly 
performing asset markets, failure to manage these assets in a cost 
effective manner, misallocation of the plan assets, or some combination 
of the three. Lower returns could also signify more conservative 
investment strategies as a result of differences in the age profile of 
pensioners. As a result, the plan's rate of return received on its 
assets must be measured and isolated from the many other industry and 
firm specific factors which may have an impact on an investment's 
value. 

[26] PBGC officials explained that, in a majority of instances, missing 
money and improper loans by fiduciaries occur at small employers with 
small pension plans where the plan fiduciary may also be the owner of 
the company sponsoring the plan and has little or no professional 
assistance with plan administration or asset management. 

[27] PBGC does collect some service provider contract and fee 
information when a plan fails, but only to assure that the provider is 
compensated as appropriate. 

[28] SEC officials told us that they did not review the consultants for 
ERISA violations. Based on PBGC's evaluation work, they also did not 
evaluate United Airline's service providers for possible ERISA 
violations. 

[29] 29 U.S.C. § 1342(d)(1)(B)(iv). Under ERISA, PBGC generally has the 
later of 6 years after the cause of action arose or 3 years after 
trusteeing a plan to initiate a claim to recover the losses. 29 U.S.C. 
section § 1303(c)(6). 

[30] Some kickbacks involve pay-to-play schemes in which a money 
manager pays to gain access to pension plan sponsors, such as a pension 
consultant who only recommends to pension plans the money manager who 
pays the highest fees, while another form of kickback may involve the 
siphoning off of investment returns. In this example, kickbacks are 
siphoned off the investment returns of a client by the money manager 
after a marked-up trade. The siphoned returns may be paid to a plan 
trustee or fiduciary for their business, to pension consultants, or 
others. 

[31] In such instances, spousal claims may prevent the attachment of or 
lessen the claim against a plan fiduciary's pension benefit. 

[32] According to PBGC officials, the agency has very recently 
implemented new screening procedures to identify plans that would 
justify the significant expenditure of resources required to conduct an 
audit of a plan or service provider for conflicts of interest and other 
types of cases. 

[33] PBGC pays vested accrued participant benefits as of the date of 
the plan's termination according to the provisions of each pension 
plan, subject to certain maximum guaranteed limits. Benefits guaranteed 
under section 4022 of ERISA (other than those under subsection (c)) are 
considered basic benefits. 29 U.S.C. § 1322. Some participants receive 
a small portion of non-basic benefits as outlined under section 4022(c) 
as well. For plans terminating in 2007, the PBGC maximum monthly 
annuity for an employee who retires at age 65 was $4,125 per month or 
$49,500 annually. The maximum guaranteed limit is dependent, in part, 
upon the age at which a pension holder begins receiving benefits and 
the type of benefits to be provided. The maximum benefit amount can be 
lower if benefits are received at an earlier age or the pension 
includes benefits for a survivor. However, if an individual is 
disabled, the maximum amount guaranteed is not reduced for age for 
those who begin receiving benefits from PBGC before reaching age 65. 

[34] See GAO See Pension Benefit Guaranty Corporation, Pension 
Insurance Data Book PBGC 2004 (Washington, D.C.: Spring 2005) p.25. 
Also note that participants of terminated pension plans lose future 
accrued benefits. See GAO, Pension Plans: Benefits Lost When Plans 
Terminate, T-HRD-92-58, (Washington, D.C.: September 24, 1992). 

[35] Generally, PBGC guarantees basic monthly benefits that provide 
income when participants retire, but does not guarantee basic benefits 
that exceed the ERISA specified maximum allowance per year and other 
non-basic benefits, such as special supplemental benefits that exceed 
the amount payable at normal retirement age, early retirement payments, 
and lump-sum death benefits. 29 U.S.C. § 1322. PBGC also pays only a 
portion of the benefit increases, the greatest of 20 percent per year 
or $20 per month, in effect less than 5 years before plan termination. 
For those participants who own more than 10 percent of the business, 
stricter limits apply. 

[36] 29 U.S.C. § 1322(c). 

[37] According to PBGC officials, these costs include direct costs of 
pursuing a case and opportunity costs of diverting PBGC staff from 
other mission critical work. Thus, a small net benefit based on direct 
costs could easily be outweighed by opportunity costs. 

[38] A good identifier of high risk or future PBGC-trusteed plans is 
the PBGC list of probable claims. Historically, over 95 percent of 
claims classified as a probable claim on the PBGC's balance sheet do 
subsequently terminate in the future. See GAO, Private Pensions: 
Questions Concerning the Pension Benefit Guaranty Corporation's 
Practices Regarding Single Employer Probable Claims, GAO-05-991R 
(Washington, D.C.: Sept. 9, 2005). 

[39] As its investigations under the CAP are completed, EBSA may expand 
its scope to focus on additional pension consultants and advisers. Each 
of EBSA's 10 regional offices will be involved in identifying and 
investigating service provider activities related to conflicts of 
interest and prohibited transactions. 

[40] GAO has recently identified some steps that EBSA could implement 
that could enhance its enforcement effectiveness. GAO, Employee 
Benefits Security Administration: Enforcement Improvements Made but 
Additional Actions Could Further Enhance Pension Plan Oversight, GAO-07-
22 (Washington, D.C.: January 2007). 

[41] GAO, Private Pensions: Government Actions Could Improve the 
Timeliness and Content of Form 5500 Pension Information, GAO-05-491 
(Washington, D.C.: June 2005). 

[42] GAO, Employee Benefits Security Administration: Enforcement 
Improvements Made but Additional Actions Could Further Enhance Pension 
Plan Oversight, GAO-07-22 (Washington, D.C.: January 2007). 

[43] See U.S. Department of Labor, Employee Benefits Security 
Administration, Selecting And Monitoring Pension Consultants - Tips For 
Plan Fiduciaries, (Washington, DC.: May 2005). 

[44] Under ERISA, a person acts as a fiduciary when he or she 1) 
exercises any discretionary control or authority over plan management 
or any authority or control over plan assets; 2) renders investment 
advice for a fee or other compensation, direct or indirect, with 
respect to any moneys or property of a plan or has any authority or 
responsibility to do so; or 3) has any discretionary authority or 
responsibility in the administration of a plan. 29 U.S.C. § 1002(21). 
In addition, according to EBSA officials, a consultant or other adviser 
who renders advice for a fee or other compensation fits within the 
ERISA definition on that basis only to the extent that advice was 
provided (1) as to the purchase or sale of securities or other property 
of plan, (2) on a regular basis, (3) pursuant to a mutual agreement, 
arrangement, or understanding, (4) as a primary basis for investment 
decisions, and (5) based on the particular needs of the plan. 

[45] In addition to the 2005 SEC study, these two regional projects 
also served as an impetus for EBSA's new CAP designed to address issues 
of whether plan service providers particularly pension consultants, may 
have potential conflicts of interest that could affect the objectivity 
of the advice they provide to their pension plan clients. 

[46] SEC personnel are generally prohibited from disclosing information 
obtained as a result of an examination or investigation. The Commission 
may provide such information, however, when those to receive it show 
that it is needed and provide acceptable assurances of confidentiality. 
15 U.S.C. § 78x. 

[47] GAO has identified the need for greater coordination and made 
recommendations for greater and more formal coordination between EBSA 
and the SEC to improve enforcement efforts. See GAO, Employee Benefits 
Security Administration: Enforcement Improvements Made but Additional 
Actions Could Further Enhance Pension Plan Oversight, GAO-07-22 
(Washington, D.C.: January 2007) and GAO, Pension Plans: Additional 
Transparency and Other Actions Needed in Connection with Proxy Voting, 
GAO-04-749 (Washington, D.C.: August 2004). 

[48] Rules under the Advisers Act require pension consultants to plans 
having an aggregate value of at least $50 million to register with the 
Commission (Rule 203A-2(b)). 

[49] PBGC publishes detailed statistics regarding its program 
operations and benefit protections annually. For more information see, 
Pension Benefit Guarantee Corporation, Pension Insurance Data Book, 
PBGC 2005 (Washington, D.C.: Summer 2006). 

[50] See GAO, Private Pensions: Participants Need Information on the 
Risks of Investing in Employer Securities and the Benefits of 
Diversification, GAO-02-943 (Washington, D.C.: Sept. 6, 2002); 
Retirement Income Data: Improvements Could Better Support Analysis of 
Future Retirees' Prospects, GAO-03-337 (Washington, D.C.: Mar. 21, 
2003); Private Pensions: Multiemployer Plans Face Short-and Long-Term 
Challenges, GAO-04-423 (Washington, D.C.: Mar. 26, 2004); and Private 
Pensions: Publicly Available Reports Provide Useful but Limited 
Information on Plans' Financial Condition, GAO-04-395 (Washington, 
D.C.: Mar. 31, 2004). 

[51] These 25 companies' plans with the largest claims against the PBGC 
comprised 70 percent of the total claims against the agency, to date. 

[52] According to Pensions and Investments periodical list of Top 25 
consultants ranked by U.S. institutional, tax exempt assets, 2006. 6 of 
the 11 consultants made the list of Top 25 consultants. 

[53] The random effects model can be thought of as a regression with a 
random constant term. In other words, it is assumed that the intercept 
is a random outcome variable that is a function of a mean value plus a 
random error. 

[54] Because i is in the composite error for each time period t, the 
error term (eit = i + hit) is serially correlated across time, 
invalidating OLS estimates. 

[55] The technique uses the additional information (heterogeneity) to 
achieve potential efficiency gains, meaning the standard errors on the 
estimator can have minimum variance. These efficiency gains come at the 
risk of biased estimates when compared to the fixed effects model. 

[56] See for example T. Plumper and V. Troeger, "Efficient Estimation 
of Time-Invariant and Rarely Changing Variables in Finite Sample Panel 
Analysis with Unit Fixed Effects." Political Analysis, Vol. 15, 2007. 

[57] Because of the need to estimate the model in steps, the estimator 
is consistent if the assumption underlying our estimator is correct the 
time-invariant variable is uncorrelated with the unobserved unit 
effects. Otherwise, the estimates may be inconsistent. 

[58] Hyperlink, http://www.econ.yale.edu/~shiller/data.htm (2007). 

[59] Credit Suisse/Tremont Hedge Fund Index is compiled by Credit 
Suisse Tremont Index LLC. It is an asset-weighted hedge fund index and 
includes only funds, as opposed to separate accounts. The Index uses 
the Credit Suisse/Tremont database, which track over 4500 funds, and 
consists only of funds with a minimum of US$50 million under 
management, a 12-month track record, and audited financial statements. 
It is calculated and rebalanced on a monthly basis, and shown net of 
all performance fees and expenses. It is the exclusive property of 
Credit Suisse Tremont Index LLC. 

[60] Time period fixed effects were included in the OLS model only 
since two-way random effects or mixed random effects and fixed-time 
effects cannot be estimated for an unbalanced panel. 

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