United States Government Accountability Office

GAO Report to Congressional Requesters

DEFINED BENEFIT 

PENSIONS 

Conflicts of Interest 

Involving High Risk or 

Terminated Plans 

Pose Enforcement 

Challenges 

June 2007 

 

GAO-07-703 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

June 2007

DEFINED BENEFIT PENSIONS 

Conflicts of Interest Involving High Risk 

or Terminated Plans Pose Enforcement 

Challenges 

Highlights of GAO-07-703, a report to 

congressional requesters 

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 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. 

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. 

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. 
Contents 

Letter 1

Results in Brief 3

Background 6

Some Pension Plan Service Providers May Have Conflicts of 

Interest, but Determining Whether Harm Results Is Difficult 10 

PBGC’s Current Policy and Procedures Are Not Focused on 

Detecting Conflicts of Interest among Service Providers 19 

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 24 

Different Authorities and Roles Have Limited Agency Collaboration 29 

Conclusions 33

Matters for Congressional Consideration 35 

Recommendations for Executive Action 35 

Agency Comments and Our Evaluation 36 

Appendix I Scope and Methodology 39 

Appendix II Econometric Analysis of the Effect of Inadequately 

or Undisclosed Conflicts of Interest on Pension Plan 

Rates of Return 43 

Appendix III Comments from the Pension Benefit Guaranty 

Corporation 56 

Appendix IV Comments from the Department of Labor 57 

Appendix V Comments from the Securities and Exchange 

Commission 60 

Appendix VI GAO Contact and Staff Acknowledgments 61 

Page i GAO-07-703 Conflicts of Interest
Tables 

Table 1: Pension Plan Sponsors Employing 13 Consultants of 

Concern to the SEC Regarding Inadequately Disclosed 

Conflicts of Interest. 41 

Table 2: Selected Descriptive Statistics for Plans included in the 

Econometric Model 45 

Table 3: Econometric Estimates of the Relationship between 

Undisclosed Conflicts of Interest and Plan Returns (OLS 

and Random Effects) 52 

Table 4: Econometric Estimates of the Relationship between 

Undisclosed Conflicts of Interest and Plan Returns (FixedEffects) 54

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 18 

Figure 2: Identifying Plans for GAO’s Pension Plan Sample 44 

Page ii GAO-07-703 Conflicts of Interest
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 

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 

Page iii GAO-07-703 Conflicts of Interest
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.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

 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). 

Page 1 GAO-07-703 Conflicts of Interest
pension plans and their trustees, including DB plans.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 

 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 

http://www.sec.gov/news/speech/spch120505lr.htm (accessed 2007). 

Page 2 GAO-07-703 Conflicts of Interest
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. 

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 

Results in Brief 

Page 3 GAO-07-703 Conflicts of Interest
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. 

Page 4 GAO-07-703 Conflicts of Interest
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 PBGCidentified pension plans that may be trusteed or are high risk as it reviews 

Page 5 GAO-07-703 Conflicts of Interest
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.

ERISA is the primary federal law governing the sponsorship and operation

of private sector employee pension plans, including DB plans.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 fiduciaries4

 and also prohibits certain transactions5

between fiduciaries and parties in interest. Under Title IV of ERISA, PBGC

was established to provide insurance to covered private-sector singleemployer 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, 

Background 

 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.

Page 6 GAO-07-703 Conflicts of Interest
including those resulting from the improper actions of anyone whether or 

not they are considered fiduciaries under ERISA.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.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;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.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.

 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. 

Page 7 GAO-07-703 Conflicts of Interest
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.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.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.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.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 

 1015 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)). 

11Investment 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. 

1215 U.S.C. §§ 78a et seq. 

13GAO, Financial Regulation: Industry Changes Prompt Need to Reconsider U.S.

Regulatory Structure, GAO-05-61 (Washington, D.C.: Oct. 6, 2004). 

Page 8 GAO-07-703 Conflicts of Interest
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.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.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.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 

 14For consultant usage information, see Thomson Nelson, Annual Report of Pension Fund

Consultants 2006 (New York, N.Y.: 2006). 

15For 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), 

http://www.sec.gov/news/speech/spch1205051r.htm (2007). 

16See, Mark Bruno, “Consultants: Fighting for Revenue”, Pensions and Investments Online.

(October 30, 2006).

Page 9 GAO-07-703 Conflicts of Interest
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. 

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.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. 

Some Pension Plan 

Service Providers May 

Have Conflicts of 

Interest, but 

Determining Whether 

Harm Results Is 

Difficult 

 17Most 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. 

Page 10 GAO-07-703 Conflicts of Interest
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. 

Pension Plan Fiduciaries 

and Money Managers Can 

Have Conflicts of Interest, 

Although Little 

Information Is Available on 

Their Prevalence 

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 

Page 11 GAO-07-703 Conflicts of Interest
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.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. 

 18Some 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. 

Page 12 GAO-07-703 Conflicts of Interest
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.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. 

Consultants Identified by 

SEC as Having Significant 

Ongoing Conflicts of 

Interest Provide Services 

to Many Pension Plans 

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 

 19According 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. 

Page 13 GAO-07-703 Conflicts of Interest
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.20 In particular, the 13

consultants: 

 20The 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). 

Page 14 GAO-07-703 Conflicts of Interest
• 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;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;

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.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.

24 Since the 

average return for the ongoing plans that used consultants who did not 

 21Pensions 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. 

22We 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. 

23Our 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. 

24These 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. 

Page 15 GAO-07-703 Conflicts of Interest
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 

Page 16 GAO-07-703 Conflicts of Interest
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.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. 

 25Many 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. 

Page 17 GAO-07-703 Conflicts of Interest
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

012 345 6 7 8 9 10

Fab Industries Inc.

Amcast Industrial Corporation

TSP (Fixed Income)

The Penntraffic Co.

US Airways Inc.

S&P 500 Total Return

CalPERS

United Air Lines Inc.

Galey & Lord Industries Inc.

TSP (L)

Huffy Corporation

RBX Crop.

Falcon Products Inc.

Westpoint Stevens Inc.

BMC Industries Inc. 

Sponsor

Average return 1997 to 2002

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

2.31%

3.73%

3.87%

4.66%

4.87%

5.13%

5.54%

5.63%

6.07%

6.65%

7.73%

7.79%

8.33%

8.90%

Benchmarks

8.00%

Page 18 GAO-07-703 Conflicts of Interest
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. 

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.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. 

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

PBGC’s Current 

Policy and 

Procedures Are Not 

Focused on Detecting 

Conflicts of Interest 

among Service 

Providers 

PBGC Policies and 

Procedures Are Focused 

on Recovering Plan Assets 

 26PBGC 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. 

Page 19 GAO-07-703 Conflicts of Interest
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.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.28 

 27PBGC does collect some service provider contract and fee information when a plan fails, 

but only to assure that the provider is compensated as appropriate. 

28SEC 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.

Page 20 GAO-07-703 Conflicts of Interest
PBGC has the authority, as trustee, to recover losses from any party, 

including service providers that are not fiduciaries under ERISA.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.30 

Although PBGC Has 

Authority to Recover 

Losses, Cost Benefit 

Considerations Shape the 

Agency’s Actions 

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.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 

 2929 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). 

30Some 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 markedup trade. The siphoned returns may be paid to a plan trustee or fiduciary for their business,

to pension consultants, or others. 

31In such instances, spousal claims may prevent the attachment of or lessen the claim 

against a plan fiduciary’s pension benefit. 

Page 21 GAO-07-703 Conflicts of Interest
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 

interest32 

 32According 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. 

Page 22 GAO-07-703 Conflicts of Interest
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.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.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.35 

While Most of Its Pension 

Holders Would Not Likely 

Benefit, Additional 

Monetary Recoveries 

Could Potentially Reduce 

PBGC’s Deficit 

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.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 

 33PBGC 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. 

34See 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). 

35Generally, 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. 

3629 U.S.C. § 1322(c). 

Page 23 GAO-07-703 Conflicts of Interest
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.

37

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’s Enforcement 

Strategy Does Not 

Include Procedures 

That Focus on 

Conflicts of Interest 

Involving PBGC

Trusteed Plans or 

High Risk Plans Likely 

to Terminate 

 37According 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. 

Page 24 GAO-07-703 Conflicts of Interest
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.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. 

EBSA Has No Specific 

Enforcement Strategy for 

PBGC-Trusteed Plans or 

Plans that PBGC Deems 

Likely to Terminate 

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. 

 38A 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). 

Page 25 GAO-07-703 Conflicts of Interest
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.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.

EBSA Has a New Initiative 

to Focus on Conflicts of 

Interest among Service 

Providers 

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.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 

 39As 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. 

40GAO 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). 

Page 26 GAO-07-703 Conflicts of Interest
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.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.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 

 41GAO, Private Pensions: Government Actions Could Improve the Timeliness and

Content of Form 5500 Pension Information, GAO-05-491 (Washington, D.C.: June 2005).

42GAO, Employee Benefits Security Administration: Enforcement Improvements Made

but Additional Actions Could Further Enhance Pension Plan Oversight, GAO-07-22 

(Washington, D.C.: January 2007). 

Page 27 GAO-07-703 Conflicts of Interest
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.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.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 

 43See U.S. Department of Labor, Employee Benefits Security Administration, Selecting And 

Monitoring Pension Consultants - Tips For Plan Fiduciaries, (Washington, DC.: May 

2005). 

44Under 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.

Page 28 GAO-07-703 Conflicts of 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 nonfiduciary 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. 

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. 

Different Authorities 

and Roles Have 

Limited Agency 

Collaboration 

Page 29 GAO-07-703 Conflicts of Interest
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. 

Agency Collaboration on 

Conflicts of Interest 

Largely Informal 

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.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. 46

 45In 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. 

46SEC 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. 

Page 30 GAO-07-703 Conflicts of Interest
Nevertheless, there is no systematic procedure among the three agencies

that would effectively target or monitor service providers engaged in 

conflicts of interest.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 privatesector 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, 

 47GAO 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). 

Page 31 GAO-07-703 Conflicts of Interest
though broker-dealers are considered to be fiduciaries under ERISA only 

under certain circumstances. Pension consultants typically have a 

fiduciary obligation under the Advisers Act48 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 

 48Rules 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)). 

Page 32 GAO-07-703 Conflicts of Interest
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.49 

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. 

Conclusions 

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,

 49PBGC 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). 

Page 33 GAO-07-703 Conflicts of Interest
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 

Page 34 GAO-07-703 Conflicts of Interest
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. 

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. 

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: 

Matters for 

Congressional 

Consideration 

Recommendations for 

Executive Action 

• 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. 

Page 35 GAO-07-703 Conflicts of Interest
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. 

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.

Agency Comments 

and Our Evaluation 

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 PBGCidentified 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 

Page 36 GAO-07-703 Conflicts of Interest
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. 

Page 37 GAO-07-703 Conflicts of Interest
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. 

Barbara D. Bovbjerg 

Director, Education, Workforce, and

Income Security Issues 

Page 38 GAO-07-703 Conflicts of Interest
Appendix I: Scope and Methodology 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. 

Page 39 GAO-07-703 Conflicts of Interest
Appendix I: Scope and Methodology 

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.1

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 

 1

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). 

Page 40 GAO-07-703 Conflicts of Interest
Appendix I: Scope and Methodology 

year 2000.2 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. 

25 largest 

PBGC trusteeships

since 2000

Sponsors of 

plans trusteed

by PBGC 

in 2005

Sponsors of 

ongoing defined 

benefit plans

2000-2004

Sponsors employing 1 or 

more consultants with 

undisclosed conflicts 

9 12 1,009

Total number of sponsors 25 86 4,203

Percentage 36% 14% 24%

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

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.3

• 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. 

 2

These 25 companies’ plans with the largest claims against the PBGC comprised 70 percent

of the total claims against the agency, to date. 

3

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. 

Page 41 GAO-07-703 Conflicts of Interest
Appendix I: Scope and Methodology 

• 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 nonterminated/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. 

Page 42 GAO-07-703 Conflicts of Interest
Appendix II: E

Effect of Inad

C

Return 

conometric Analysis of the 

equately or Undisclosed 

onflicts of Interest on Pension Plan Rates of 

Page 43 GAO-07-703

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. 

Conflicts of Interest
Appendix II: Econometric Analysis of the 

Effect of Inadequately or Undisclosed 

Conflicts of Interest on Pension Plan Rates of 

Return 

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

1111 plans in

5,500 universe

983 plans associated

only with Group A

89 plans associated

only with

Group A and B

39 plans associated

only with Group B

Group A:

13 consultants of 

serious concern to the 

SEC

Group B:

11 consultants of less

concern to the SEC

24 Pension consultants

investigated by SEC

Source: GAO analysis.

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. 

Page 44 GAO-07-703 Conflicts of Interest
Appendix II: Econometric Analysis of the 

Effect of Inadequately or Undisclosed 

Conflicts of Interest on Pension Plan Rates of 

Return 

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

Return (average, 

2000-2004) 

Return (standard 

deviation,

2000-2004)

Assets per plan

(average, 2004)

Sum of 

assets in 2004

Assets per 

plan (average,

2000-2004)

Plans associated with 

Group A 

3.2% 11.5% 186,708,455 183,534,411,177 155,371,479

Plans associated with 

Group B 

4.5% 12.7% 253,121,820 9,871,750,992 214,063,302

Plans associated with 

Group A and B 

4.2% 12.4% 363,821,650 32,380,126,875 317,061,230

All plans 3.4% 11.6% 203,227,983 225,786,289,044 170,426,326

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. 

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 spaceinvariant 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, timeinvariant 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. 

Page 45 GAO-07-703 Conflicts of Interest
Appendix II: Econometric Analysis of the 

Effect of Inadequately or Undisclosed 

Conflicts of Interest on Pension Plan Rates of 

Return 

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

(1) yit = θ + Xitβ + Zi

δ + εit

where y = 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. 

θ = 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 crosssections (pension plans) and a relatively small number of time periods. 

Therefore we specify the composite error structure for the disturbance 

term as follows: 

(2) εit = αi

 + ηit

where αi = plan-specific error component which captures the 

unobserved heterogeneity across plans (either as a fixed- or randomeffect). 

E(Xitηit) = 0 (there is no correlation between ηit and Xit). 

The αi

 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 

Page 46 GAO-07-703 Conflicts of Interest
Appendix II: Econometric Analysis of the 

Effect of Inadequately or Undisclosed 

Conflicts of Interest on Pension Plan Rates of 

Return 

(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 (ηit) 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, θ) and that the individual differences in the intercept values 

of each plan are captured in the error term εit.

1

 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).2

 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.3

 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(Xitαi

) = 0 in addition to the standard assumption

E(Xitηit) = 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 

 1

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.

2

Because αi is in the composite error for each time period t, the error term (εit = αi + ηit) is 

serially correlated across time, invalidating OLS estimates. 

3

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. 

Page 47 GAO-07-703 Conflicts of Interest
Appendix II: Econometric Analysis of the 

Effect of Inadequately or Undisclosed 

Conflicts of Interest on Pension Plan Rates of 

Return 

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, αi

, were found to be unimportant (relative to the 

variance of ηi

) 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, αit 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 fixedPage 48 GAO-07-703 Conflicts of Interest
Appendix II: Econometric Analysis of the 

Effect of Inadequately or Undisclosed 

Conflicts of Interest on Pension Plan Rates of 

Return 

effects vector decomposition approach.

4

 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.5

 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) + 1⁄2(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) + 1⁄2(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. 

 4

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. 

5

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. 

Page 49 GAO-07-703 Conflicts of Interest
Appendix II: Econometric Analysis of the 

Effect of Inadequately or Undisclosed 

Conflicts of Interest on Pension Plan Rates of 

Return 

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.

6

 Our measure of hedge fund performance is the 

Credit Suisse/Tremont hedge fund index.7

 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 

 6

http://www.econ.yale.edu/~shiller/data.htm (2007). 

7

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. 

Page 50 GAO-07-703 Conflicts of Interest
Appendix II: Econometric Analysis of the 

Effect of Inadequately or Undisclosed 

Conflicts of Interest on Pension Plan Rates of 

Return 

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, αi

, are unimportant (relative to the variance of ηit), the randomeffects 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.

8

 8

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. 

Page 51 GAO-07-703 Conflicts of Interest
Appendix II: Econometric Analysis of the 

Effect of Inadequately or Undisclosed 

Conflicts of Interest on Pension Plan Rates of 

Return 

Table 3: Econometric Estimates of the Relationship between Undisclosed Conflicts

of Interest and Plan Returns (OLS and Random Effects) 

OLS/Random 

Effects I

OLS/Random 

Effects II OLS III OLS IV OLS V OLS VI

Independent variable 

Conflict -0.012a-0.014a-0.014a-0.013a-0.014a-0.017b

Mixed -0.006

SP500 0.600a0.676a-0.090a0.050 0.053 0.050

Hedge -0.575a-0.252a-0.263a-0.253a

Bond yield -0.023a0.062a0.062a0.0612a

Assets -0.000 0.000

Funding ratio -0.000

Constant 0.062a0.252a0.043a-0.341a-0.336a-0.330a

Time period 

fixed-effects 

No No Yes Yes Yes Yes

R-square 0.5276 0.5584 0.6388 0.6430 0.6411 0.6423

Durbin-Watson 1.86 1.95 1.61 1.61 1.61 1.61

Sample size 4,170 4,170 4,170 4,170 4,170 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. 

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 

Page 52 GAO-07-703 Conflicts of Interest
Appendix II: Econometric Analysis of the 

Effect of Inadequately or Undisclosed 

Conflicts of Interest on Pension Plan Rates of 

Return 

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. 

Page 53 GAO-07-703 Conflicts of Interest
Appendix II: Econometric Analysis of the 

Effect of Inadequately or Undisclosed 

Conflicts of Interest on Pension Plan Rates of 

Return 

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

Model I Model II Model III Model IV 

Model V 

(no mixed

plans Model VI

Independent variable 

Conflict -0.013a-0.012a-0.025a-0.013c-0.013c-0.013a

Mixed -0.001

SP500 0.103a0.051 0.053a0.051 0.036 0.054c

Hedge -0.115b-0.125c-0.115b-0.063 -0.129b

Bond Yield 0.108a0.106a0.108a0.113a0.107a

Assets -0.000a

Funding ratio -0.000

Constant 0.042a-0.648a-0.594a-0.647 -0.687 -0.637

Time period fixed-effects Yes Yes Yes Yes Yes Yes

R-square 0.742 0.746 0.747 0.746 0.753 0.745

Durbin-Watson 1.94 1.94 1.93 1.94 1.91 1.94

Sample Size 4,170 4,170 4,170 4,170 3,385 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. 

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 fixedeffects 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, 

Page 54 GAO-07-703 Conflicts of Interest
Appendix II: Econometric Analysis of the 

Effect of Inadequately or Undisclosed 

Conflicts of Interest on Pension Plan Rates of 

Return 

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. 

Page 55 GAO-07-703 Conflicts of Interest
Appendix III: Comments from the Pension Benefit Guaranty Corporation Appendix III: Comments from the Pension 

Benefit Guaranty Corporation 

Page 56 GAO-07-703 Conflicts of Interest
Appendix IV: Comments from the Department Appendix IV of Labor : Comments from the 

Department of Labor 

Page 57 GAO-07-703 Conflicts of Interest
Appendix IV: Comments from the Department 

of Labor 

Page 58 GAO-07-703 Conflicts of Interest
Appendix IV: Comments from the Department 

of Labor 

Page 59 GAO-07-703 Conflicts of Interest
Appendix V: Comments from the Securities Appendix V and Exchange Commission : Comments from the Securities 

and Exchange Commission 

Page 60 GAO-07-703 Conflicts of Interest
Appendix VI: 

A

GAO Contact and Staff 

cknowledgments 

Page 61 GAO-07-703

Appendix VI: GAO Contact and Staff 

Acknowledgments 

Barbara Bovbjerg (202)512-7215 

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. 

Conflicts of Interest

Contact 

Staff 

Acknowledgments 

(130554) 
GAO’s Mission The Government Accountability Office, the audit, evaluation and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost

is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts 

newly released reports, testimony, and correspondence on its Web site. To

have GAO e-mail you a list of newly posted products every afternoon, go 

to www.gao.gov and select “Subscribe to Updates.” 

The first copy of each printed report is free. Additional copies are $2 each. 

A check or money order should be made out to the Superintendent of 

Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 

more copies mailed to a single address are discounted 25 percent. Orders 

should be sent to: 

U.S. Government Accountability Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548 

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

Obtaining Copies of 

GAO Reports and 

Testimony

Order by Mail or Phone 

To Report Fraud,

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

PRINTED ON RECYCLED PAPER