PART-TIME JOB THAT KEEPS ON PAYING

If you think mutual fund board pay is getting out of hand, wait till you see the pensions.

Yup, for a job that typically requires four meetings a year — and with 88% of boards holding meetings for all funds on the same day, according to fund consultant Management Practice Inc. — many directors will collect generous pensions in addition to their annual retainers.

In corporate America, institutional investors have been crusading in recent years to eliminate pensions for directors, but in the fund world the practice has gone largely unchallenged. Indeed, with a growing number of directors expected to retire soon, some funds will suddenly be forced to pay out huge sums from shareholder assets, since the plans are unfunded.

Retirement plans are one issue certain to be raised during this week’s Securities and Exchange Commission fund director roundtable. It’s not just whether directors deserve a retirement plan based on the work they put in, but also whether getting a pension makes the director beholden to the fund firm and compromises his or her independence.

“You basically have to pledge allegiance to make sure you get your retirement,” says Harvard Business School Professor Peter Tufano, who has studied the role of mutual fund directors for seven years.

The payouts aren’t peanuts.

Consider the departing gift that Chicago corporate securities lawyer Wayne Whalen will collect when he retires as a director of Morgan Stanley Dean Witter & Co.’s Van Kampen Investments mutual fund unit. In addition to Mr. Whalen’s $285,825 annual pay as a director of Van Kampen’s 103 mutual funds, he’s in line to receive a pension of nearly $1.6 million.

Directors at Amvescap PLC’s Invesco Funds unit in Denver collect 100% of their annual pay in their first year of retirement and then half that annual rate for a minimum of 10 years. Thus, director Daniel Chabris, who retired last September, will receive $84,850 in his first year of retirement. (Mr. Chabris couldn’t be reached for comment. Mr. Whalen did not return calls seeking comment.)

Retirement perks crept into mutual fund board benefits in the late 1980s following their adoption by corporate boards. According to Management Practice, about 44% of mutual fund companies with at least $25 billion in assets maintain retirement plans, and directors receive an average 60% of annual pay after they leave.

Some have ended practice

This perk is usually in addition to more conventional deferral programs that allow directors to salt away a portion of their annual earnings until retirement.

But some fund groups — including Fidelity Investments and American Express’s IDS Mutual Fund Group — have already recognized that appearances count and ended their retirement plans.

“Because it can be misconstrued as an incentive to remain on the board, we eliminated it in 1996,” says Leslie Ogg, general counsel for IDS funds in Minneapolis.

In addition to potentially compromising independence, director pensions force fund shareholders to foot the bill for directors who no longer represent them.

Though few funds are now paying out benefits, that is expected to change dramatically. With the average independent director 62 years old, as many as 700 are expected to step down over the next five years, estimates Management Practice. Because the plans are unfunded, mutual fund shareholders will suddenly be slapped with a huge expense, albeit one that’s spread among thousands of accounts.

The upside, say experts, is that this changing of the guard is a watershed opportunity to bolster the effectiveness of independent directors. Already, a number of headhunters have begun marketing their board evaluation and executive search services to fund groups.

For example, Heidrick & Struggles Inc. is building a fund director practice headed by vice chairman Robert Hallagan in Boston. “Liability issues have focused increased attention on defining the role of an independent director and finding board members that fit the skills required,” says Mr. Hallagan.

“The real issue is who will succeed the 700 who will retire and what their qualifications are,” says C. Meyrick Payne of Management Practice. “We are moving into an era where the money that’s in mutual funds is no longer people’s investments, it’s their savings.”