Chao & Company, Ltd. Disclosure to ERISA Plan Sponsors
The Employee Retirement Income Security Act (ERISA) requires that fiduciaries of employee benefit plans administer and manage their plans prudently and in the interest of the plan’s participants and beneficiaries. In carrying out these responsibilities, plan fiduciaries often rely heavily on pension consultants and other professionals for help. Findings included in a report by the staff of the U.S. Securities and Exchange Commission released in May 2005, however, raise serious questions concerning whether some pension consultants are fully disclosing potential conflicts of interest that may affect the objectivity of the advice they are providing to their pension plan clients.
Under the Investment Advisers Act of 1940 (Advisers Act), an investment adviser providing consulting services has a fiduciary duty to provide disinterested advice and disclose any material conflicts of interest to their clients. In this context, SEC staff examined the practices of advisers that provide pension consulting services to plan sponsors and trustees. These consulting services included assisting in determining the plan’s investment objectives and restrictions, allocating plan assets, selecting money managers, choosing mutual fund options, tracking investment performance, and selecting other service providers. Many of the consultants also offered, directly or through an affiliate or subsidiary, products and services to money managers. Additionally, many of the consultants also offered, directly or through an affiliate or subsidiary, brokerage and money management services often marketed to plans as a package of bundled services. The SEC examination staff concluded in its report that the business alliances among pension consultants and money managers can give rise to serious potential conflicts of interest under the Advisers Act that need to be monitored and disclosed to plan fiduciaries.
To encourage the disclosure and review of more and better information about potential conflicts of interest, the Department of Labor and the SEC have developed a set of questions to assist plan fiduciaries in evaluating the objectivity of the recommendations provided, or to be provided, by a pension consultant. The following represents Chao & Company, Ltd.’s response to each question.
- Chao & Company, Ltd. the firm’s Form ADV Part II is made a part of the required disclosure documents. The firm’s Form ADV is available by searching the SEC’s Investment Adviser Public Disclosure Web site or on the company’s website: www.ChaocCo.com.
- Chao & Company, Ltd. is an independent investment management, pension consulting and employee benefit advisory firm. The firm and its staff are not affiliated with, a subsidiary of, or have any formal relationship with money managers, broker dealer firms, third party retirement plan administration companies, recordkeepers, actuaries, investment research and publishing companies, custodians, or any financial or investment companies that the firm recommends, considers for recommendation, or otherwise mentions to any plan sponsor clients. Notwithstanding the foregoing however, Chao & Company, Ltd. has access to online reporting tools and facilities from Charles Schwab & Company if a plan sponsor uses Schwab as the plan custodian, recordkeeper or retirement plan service provider. However, there is no compensation, directly or indirectly between this firm and Schwab.
- Chao & Company, Ltd. serves as a pension consultant, fiduciary investment advisor or a discretionary investment manager to an ERISA plan sponsor. This firm has no alliances nor financial relationships with money managers or other service providers, thereby removing the potential for material conflicts of interest.
- Chao & Company, Ltd. and its representatives do not receive any payments from money managers they recommend, consider for recommendation, or otherwise mention to the plan sponsor for consideration.
- Attached is a copy of the Chao & Company, Ltd. Statement of General Policy regarding its Code of Ethics and is applicable to all employees.
- Agreed to fees paid to Chao & Company, Ltd. by a plan sponsor are clearly stated in writing between the two parties and paid in arrears to Chao & Company, Ltd. in the case of ongoing services. The plan sponsor has the sole discretion regarding the payment source. Although some of the plan sponsors pay Chao & Company, Ltd. from plan assets, many pay from the employer’s general assets. The compensation to Chao & Company, Ltd. is typically a fixed fee on a per hour, per project or negotiated basis. The firm is not a member of FINRA and is not licensed to receive securities commissions or fees.
- The majority of plans Chao & Company, Ltd. advises are participant self-directed, account –based 401(k) plans using open-end mutual funds traded on a net asset value basis with no commissions payable to any party.
- Chao & Company, Ltd. is not affiliated with nor is a member of any broker-dealer firm and does not have any arrangement with any broker-dealer firm related to trading.
- Chao & Company, Ltd. acknowledges in writing to any plan sponsor client that it will serve in the capacity of a co-investment fiduciary. A such, Chao & Company must act prudently and solely in the interest of the plan’s participants and beneficiaries and for the exclusive purposes of providing benefits in accordance with Section 404(a)(1) of ERISA.
- Being a co-investment fiduciary, Chao & Company, Ltd. shall abide by and perform consistently to the fiduciary standards promulgated under ERISA.
- Chao & Company, Ltd. does not receive any compensation, directly or indirectly, in cash or in kind, from any third party for recommending or implementing money managers, investment funds, brokerage services or other service providers.
For more information on the SEC staff’s findings, please read “Staff Report Concerning Examinations Of Select Pension Consultants”. Plan trustees, pension consultants, and other service providers can learn about their fiduciary responsibilities under the Employee Retirement Income Security Act (ERISA) by visiting the Web site of the U.S. Department of Labor. Pension consultants who have questions concerning their obligations under the Investment Advisers Act of 1940 should either consult with an attorneyywho specializes in the federal securities laws or contact the staff of the SEC’s Division of Investment Management.
The original fact sheet has been developed by the U.S. Department of Labor, Employee Benefits Security Administration, Washington, DC 20210. It is made available upon request: Voice phone: 202.693.8664; TTY: 202.501.3911 or via DOL website: