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Transitions Are Never Easy. Just Ask State Street.

Transition management-it's the term used by custodian banks and other service providers to describe how they move the assets of a pension plan or other plan sponsor from one fund manager to another.

It's typically a routine event, and an uneventful one that could take the transition manager anywhere from several days to several weeks to complete, depending on the size of the book of business and the types of assets involved. That is unless something goes awry, as in the recent case involving State Street Global Advisors and a UK pension plan.

In its case, two top ranking SSGA executives departed, after problems emerged in the way the custodian bank handled the transfer of assets of an unnamed pension fund. The unit of State Street on Oct. 7 admitted to reimbursing a client for overbilling. The State Street unit has also confirmed that Ross McLellan, head of State Street's global transition management team, and Edward Pennings, head of the Europe, Middle East and Africa team, no longer work at the bank.

The result has been plenty of talk in the transition management arena not only about what may have gone wrong but what plan sponsors-and their transition managers-can do to prevent misunderstandings-and potential embarrassment.

Pension plans and other plan sponsors typically hire a custodian bank, broker-dealer, fund manager or consultant as a transition manager to handle the movement of their assets to new fund managers. Allowing the new fund manager to sell the old securities and buy new ones simply isn't cost effective so the transition manager has to step in and figure out how to minimize the costs involved-both implicit as in market impact and explicit as in commissions charged. The lower the costs the greater the potential that the value of the new portfolio will be the same as the value of the old portfolio.

Overbilling is an anathema in the world of asset servicing. Reputation is what gets and keeps business. In a letter to clients, SSGA did not identify either the client or the amount of the reimbursement but it said that the customer was billed both commissions and management fees. That was not consistent to the terms of the agreement. Consultants in the transition management industry questioned by Money Management Executive said that transition managers typically do not charge management fees based on assets under management and never charge both commission and management fees without the explicit consent of the plan sponsor.

In its letter to customers, State Street said it is also investigating the fees charged to other European customers to ensure their accuracy.

Just how can a plan sponsor protect itself? While a common question is whether or not the transition manager will act in the role of a "fiduciary" it shouldn't be. An even better question, said Grant Johnsey, director of transition management for Northern Trust in Chicago, is just how the transition manager earns revenues. "Plan sponsors should understand just what it is going to cost them and why," Johnsey said.

The term fiduciary can be misleading. "Fiduciary can be interpreted as a Big F or a little F. A fiduciary working under the Investment Advisers Act of 1940 has to disclose all potential conflicts of interest, while a fiduciary operating under the Employee Retirement Income Act has to avoid all potential conflicts of interest. These are fiduciaries with a capital 'F'," said Steve Kirschner, director of transition management in the Americas for Russell Investments in Seattle. "Some transition managers also use the phrase fiduciary to refer to the term 'trading fiduciary' which would only compel them to fulfill best execution requirements on a trade by trade basis."

Transition managers can trade either on an agency basis or a principal basis. The agency basis means that the firm will not take on a position on any orders it handles.

Such is often the case when it comes to equities, and the plan sponsor can more easily separate out the price paid for the securities and any commissions charged. That's not the case when it comes to fixed-income assets, which is what the U.K. pension plan served by State Street invested in.

Trades in fixed-income securities, currencies or swaps are often done on a principal basis which means that the bank has actually purchased the financial instrument itself and is holding it in its inventory. Therefore, the principal is taking on more risk than an agent because if the principal must hold the financial instrument for some time before selling it to the end client, the value of the holding could change.