This past weekend was Parent’s Weekend at the college where my eldest has now been in residence for the last two months. We’d had a great weekend, but as we went to check out of the hotel, I noticed that the final charges were considerably more than the rate we had been quoted when we made our reservations. Setting aside for the moment concerns that my 14-year-old had discovered the wonders of pay-per-view, closer scrutiny yielded the number I had anticipated—our room charge. But also included in the charges I was now expected to pay were a room tax, a city tax, and an occupancy sales tax.
I suppose one could hardly fault the hotel for those additional charges – they had, after all, provided the room and facilities to my family for the agreed upon rate. I’ll bet that somewhere on their Web site, or perhaps even on the form I signed at registration, the existence of these additional taxes was acknowledged. However, I’m reasonably certain that the hotel was happy to have me think I was getting the base rate when making my booking decision. And, when all was said and done, I’m assuming that comparable hotels in the vicinity had comparable (if not identical) taxes.
In a similar fashion, mutual fund investors have no doubt become a bit desensitized to the disclosure of fees. We talk about investment management fees as a proxy for what we are paying for the actual management of money, but at the same time realize that there are other charges, such as 12b-1s, that go to cover certain required administrative costs of running and maintaining the fund. And, for the most part, we assume that most funds that have comparable administrative structures also have comparable cost structures. We may even assume, as I did with my hotel bill, that those costs aren’t even fees, but simply a recovery of costs.
Well, disclosure isn’t necessarily clarity, and last week we were reminded that there frequently is more than meets the eye even with so-called disclosure. The latest “disclosure,” of course, is the revelations slowly emerging from an SEC investigation into the business practices of some fund company administrators in dealing with the fund complexes (for more details, see HERE). While in most respects, it may not be as monetarily significant, or perhaps not quite as pernicious as the mutual fund trading scandal, it is, nevertheless, one more not-so-shining example of what greed, coupled with an “excess” of funds available to fuel those vices, can yield.
For years, retirement plan investors have been willing to fork over billions of dollars in fees to the mutual fund industry. In turn, we have benefited from professional money management, call-center support, 24/7 access to our accounts via the Internet, the flexibility of daily valuation, the convenience of daily liquidity, and, in many cases, the support of financial professionals to help guide us in the management of our retirement savings accounts. Many of those services have been funded, in whole or significant part, by so-called revenue-sharing arrangements. However, IMHO, many of these mutual fund complexes have either forgotten—or have chosen to deliberately ignore—their obligation to the investing public.
I, for one, am sick and tired of having to fork over redemption fees self-righteously imposed by firms that not so long ago saw fit to profit richly from illicit and profitable arrangements they deliberately struck. I’m weary of 12b-1 fees ostensibly imposed to benefit investors with lower fees resulting from broader fund distributions—but that somehow never seem to achieve that result no matter how broad that dissemination. I’m tired of the oligopolistic mentality that sets a “fair” fee based on whatever the plurality of similarly situated mutual funds already get away with; I’m disgusted with the insidious development of special share classes designed to cloak retail pricing in what appears to be an institutional wrapper, and the sense that investors shouldn’t be troubled with a full, transparent disclosure not only as to how much money is being taken from their accounts, but to what ends, and what parties, it is being directed.
Normally, of course, we don’t seek to delve deep into the product profitability of every dollar we spend. I may have qualms about oil company profitability as I fill my tank—and I may well wonder at the expense of a bag of popcorn at the local cinema—but ultimately, as a consumer, if I believe I am being taken advantage of, I shop somewhere else. A mechanic that appears to gouge me on a simple repair will lose my business forever; a roofer, after repeated attempts to remedy a leaky roof, may gain my ire and a call to the Better Business Bureau.
In recent times, the investment industry has conducted itself in such a way as to not only jeopardize the trust of the investing public, but to suggest that it doesn’t really “get” what the big deal is. Maybe if we started shopping somewhere else, they would.
- Nevin Adams editors@plansponsor.com
Sunday, October 29, 2006
Saturday, October 21, 2006
Fear of Filings
Last week, the elementary schools in Attleboro, Massachusetts, gained a bit of notoriety for their decision to ban kids from playing tag (more specifically, any unsupervised “chase” game). They weren’t the first to do so, but headlines like “Tag, You’re Out!” are just too tempting for journalists to turn their backs on. And, let’s face it, the notion of tag being “outlawed” is the kind of “you’ve got to be kidding me” story that people will read.
The reason for the ban is simple: Recess is "a time when accidents can happen," was a quote attributed to Willett Elementary School Principal Gaylene Heppe, who approved the ban. Having had a dangerous encounter of my own on the school playground during sixth-grade recess (I still have the scars), I can attest to the veracity of the concern. Of course, no one really thinks this is about children’s safety. We all know – and, unfortunately, understand - that it’s about the lawsuits that such accidents will almost certainly engender.
The lunacy of our litigious society is hardly a new phenomenon, but it seems to me that we have entered a new phase. Where once we would have had some kid getting hurt playing tag, the school getting sued, and subsequently banning tag, now we have what is effectively a preemptive action. Like Pavlov’s dogs, as a society, we know what’s coming – and rather than wait for the worst to happen, we take preventive action. Now, there’s nothing wrong with that approach, of course. Properly focused, it’s productive, proactive – even prudent, if not just plain, old-fashioned common sense. But, in a time when the only limits to being sued are the imaginations of a creative litigator and a receptive judiciary, well, you wind up doing things like banning unsupervised tag.
The mindset of retirement plan sponsors is not yet in that vein, so far as I am able to discern. In fact, in my experience, the fear of getting sued is perhaps the strongest consistent motivator of inertia in plan sponsor behaviors. Not that behavioral change is easy to accomplish – after all, when it comes to tough, complicated financial decisions with legal impact, plan sponsors are as inert as any participant.
Still, the fear of getting sued – or, as we tend to euphemistically refer to it, “fiduciary concerns” – remains one of the most frequently cited reasons for inaction. We tend to forgo offering investment advice to participants because we are afraid of getting sued, for instance – and we forestall implementing an investment policy statement – or taking a questionable fund off the menu – for much the same reason.
In fact, while fiduciary awareness is, IMHO, key to innovative, thoughtful plan designs, ironically, fiduciary concerns can be anathema to the same result. Fiduciary concerns are never all that far off a plan sponsor’s radar screen – but motivating good behaviors generally takes more than the fear of getting sued.
- Nevin Adams
The reason for the ban is simple: Recess is "a time when accidents can happen," was a quote attributed to Willett Elementary School Principal Gaylene Heppe, who approved the ban. Having had a dangerous encounter of my own on the school playground during sixth-grade recess (I still have the scars), I can attest to the veracity of the concern. Of course, no one really thinks this is about children’s safety. We all know – and, unfortunately, understand - that it’s about the lawsuits that such accidents will almost certainly engender.
The lunacy of our litigious society is hardly a new phenomenon, but it seems to me that we have entered a new phase. Where once we would have had some kid getting hurt playing tag, the school getting sued, and subsequently banning tag, now we have what is effectively a preemptive action. Like Pavlov’s dogs, as a society, we know what’s coming – and rather than wait for the worst to happen, we take preventive action. Now, there’s nothing wrong with that approach, of course. Properly focused, it’s productive, proactive – even prudent, if not just plain, old-fashioned common sense. But, in a time when the only limits to being sued are the imaginations of a creative litigator and a receptive judiciary, well, you wind up doing things like banning unsupervised tag.
The mindset of retirement plan sponsors is not yet in that vein, so far as I am able to discern. In fact, in my experience, the fear of getting sued is perhaps the strongest consistent motivator of inertia in plan sponsor behaviors. Not that behavioral change is easy to accomplish – after all, when it comes to tough, complicated financial decisions with legal impact, plan sponsors are as inert as any participant.
Still, the fear of getting sued – or, as we tend to euphemistically refer to it, “fiduciary concerns” – remains one of the most frequently cited reasons for inaction. We tend to forgo offering investment advice to participants because we are afraid of getting sued, for instance – and we forestall implementing an investment policy statement – or taking a questionable fund off the menu – for much the same reason.
In fact, while fiduciary awareness is, IMHO, key to innovative, thoughtful plan designs, ironically, fiduciary concerns can be anathema to the same result. Fiduciary concerns are never all that far off a plan sponsor’s radar screen – but motivating good behaviors generally takes more than the fear of getting sued.
- Nevin Adams
Saturday, October 14, 2006
"Losing" Propositions
Last week, participants who had brought a company stock suit against their employer won a settlement. No real surprise there, you say? Well, actually, in approving the relatively modest $11 million settlement in the case of In re: Broadwing, Inc. ERISA Litigation, the court essentially said that plaintiffs should take the money and be glad they could get it—since their odds of winning (“prevailing on the merits” in legalspeak) were uncertain.*
Now, admittedly, that might be something of an overstatement. In approving the settlement, the court basically did what courts are supposed to do in approving a settlement—they ran down a checklist of things that purport to establish that the settlement is fair, particularly in a class action, where most of the plaintiffs aren’t in the courtroom. And one of the conclusions courts are basically required to draw in approving such settlements is that it represents the best deal for a plaintiff under the circumstances.
In Broadwing, the action was brought on behalf of some 5,000 participants, and it claimed that the defendants breached their ERISA fiduciary duties by failing to provide employees with information about the firm’s true financial condition. (This, of course, has become an investigation trigger for any firm that has any kind of earnings “surprise” or some suggestion of accounting mal- or misfeasance. And, for good measure, they also typically charge that participants were not adequately informed of the risks of investing in company stock.)
Still, despite the Enron debacle’s financial shenanigans, and the myriad headlines generated each and every time (including in PLANSPONSOR’s NewsDash) a plaintiff’s law firm initiates an “investigation” and then actually finds a plaintiff or two to represent the litigation class, most of these cases seem to wind up one of two ways—a settlement or a finding for the employer/defendant. In fact, in recent days, there have been a series of these cases that have not only gone to trial, but have wound up in the latter category (see “No Breach in Fiduciary Duties of Airlines’ Co. Stock Cases”). This trend was referenced in a recent $100 million settlement for AOL TimeWarner participants (see “Court OKs $100M AOL Time Warner 401(k) Suit Settlement”).
Despite what, IMHO, is a reasonably rational application of fiduciary law in these cases, I’m not sure that plans with company stock investments can afford to be complacent. Their presence on a retirement plan menu draws a disproportionate, if not downright imprudent, interest from participants—not to mention litigators. There are costs to litigation that go well beyond lawyers’ fees**; the distraction from the business of making money, most obviously—and even winning can be losing on the PR front.
And, as an old boss of mine used to remind me, “You can spend a lot of money in court being right.”
- Nevin Adams editors@plansponsor.com
* "Several district court decisions favor the possibility of establishing liability in cases alleging fiduciary breaches concerning holdings of risky company stock in individual retirement accounts, however, few of these cases reached the stage of a decision based on the merits." - In re: Broadwing, Inc. ERISA Litigation
** Not that one should begrudge professionals being fairly compensated for their expertise, but roughly 23% of the $11,000,000 Broadwing settlement will go to plaintiff’s counsel. Now, since contingent-fee cases routinely take a third of the settlement, one could certainly find that 23% is reasonable. However, that would leave, as best as I can estimate, only about $1,700 each for the roughly 5,000 participants.
Saturday, October 07, 2006
"Chill" Pill?
Last week, another court rejected claims that a cash balance plan was age discriminatory (see “Cash Balance Plan Not in Breach of Age Discrimination Laws”), though you could perhaps be excused for not noticing that result. In fact, my guess is that a random sampling of the adviser universe would reveal two things about cash balance plans: first, a great ignorance about what they are and how they work (see links below); and second, a general sense that they represent an illegal plan design.
Over the past several years, the conversion – and litigation experience – of a single plan – IBM - has dominated the media’s coverage of these programs. Along the way, Congress has cut off funding for the Department of Labor to issue clarifying regulations on these programs (led by Congressman Bernie Saunders, I-Vermont, in whose state IBM is the largest employer), and the IRS quit issuing determination letters on these plans (basically an approval by the IRS that the plan document passes muster).
They continued to be adopted by employers, of course (see “One Bad Apple”), but it surely couldn’t have been easy given all the bad press regarding those programs. And most of that coverage centered around a single case: Cooper, et al. v. IBM Personal Pension Plan, a case brought in the U.S. District Court of Southern Illinois (see “Murphy’s Law: IBM Loses Cash Balance Ruling”) in 2003.
It’s not the only lawsuit that has been brought regarding cash balance plans – but, until recently, it was one of the very few in which plaintiffs’ counsel had actually been able to convince a court that the plans were illegal (and then only in the context of a conversion from an existing traditional defined benefit plan). And, despite a surprising number of cases in different jurisdictions that came to a completely different conclusion – at least one, Tootle v. ARINC Inc., came to a directly different result – the only one that “the media” seemed to care about was the IBM verdict – and they flogged it relentlessly, IMHO. Consequently, while some employers continued to embrace the cash balance concept, they doubtless did so with trepidation. Countless more - we’ll never know the full effect – employers and advisers likely drew their sense of things from the headlines and simply chose to avoid a potential headache. This “chilling effect” is, of course, exactly the result that cash balance opponents had in mind.
In recent weeks, the landscape has changed dramatically. The Pension Protection Act specifically clears up the age discrimination issue, at least on a prospective basis and, coincidentally, within days of that result, the IBM decision was reversed on appeal. Not that either of these results have been headline news in most cases (the headlines in the IBM case have largely been focused on the plaintiffs’ “determination” to carry their case to a higher court).
And not that cash balance plans are a panacea for what ails our current retirement savings system – but they offer a benefit accumulation that seems more portable than traditional pension plans and more consistent with the working patterns of today’s workforce, is supported by the Pension Benefit Guaranty Corporation (PBGC), and is typically employer-funded. The design is, generally speaking, more balance-sheet friendly than traditional pension plans, and its benefit to participants more readily grasped and communicated.
Automatic solutions alone aren’t likely to be enough to stave off the retirement savings crisis, and we’ll surely draw less support from traditional defined benefit plans in the future than we have heretofore (even for the minority that had that support to begin with). We need new solutions, and we need to consider old solutions in a new light.What’s changed about cash balance plans? Not much. What’s changed about their viability as a plan design alternative? Quite a bit, I hope.
- Nevin Adams editors@plansponsor.com
For more on cash balance plans see:
http://www.plansponsor.com/hp_type2/?RECORD_ID=4910
http://www.plansponsor.com/magazine_type3?RECORD_ID=34704
Over the past several years, the conversion – and litigation experience – of a single plan – IBM - has dominated the media’s coverage of these programs. Along the way, Congress has cut off funding for the Department of Labor to issue clarifying regulations on these programs (led by Congressman Bernie Saunders, I-Vermont, in whose state IBM is the largest employer), and the IRS quit issuing determination letters on these plans (basically an approval by the IRS that the plan document passes muster).
They continued to be adopted by employers, of course (see “One Bad Apple”), but it surely couldn’t have been easy given all the bad press regarding those programs. And most of that coverage centered around a single case: Cooper, et al. v. IBM Personal Pension Plan, a case brought in the U.S. District Court of Southern Illinois (see “Murphy’s Law: IBM Loses Cash Balance Ruling”) in 2003.
It’s not the only lawsuit that has been brought regarding cash balance plans – but, until recently, it was one of the very few in which plaintiffs’ counsel had actually been able to convince a court that the plans were illegal (and then only in the context of a conversion from an existing traditional defined benefit plan). And, despite a surprising number of cases in different jurisdictions that came to a completely different conclusion – at least one, Tootle v. ARINC Inc., came to a directly different result – the only one that “the media” seemed to care about was the IBM verdict – and they flogged it relentlessly, IMHO. Consequently, while some employers continued to embrace the cash balance concept, they doubtless did so with trepidation. Countless more - we’ll never know the full effect – employers and advisers likely drew their sense of things from the headlines and simply chose to avoid a potential headache. This “chilling effect” is, of course, exactly the result that cash balance opponents had in mind.
In recent weeks, the landscape has changed dramatically. The Pension Protection Act specifically clears up the age discrimination issue, at least on a prospective basis and, coincidentally, within days of that result, the IBM decision was reversed on appeal. Not that either of these results have been headline news in most cases (the headlines in the IBM case have largely been focused on the plaintiffs’ “determination” to carry their case to a higher court).
And not that cash balance plans are a panacea for what ails our current retirement savings system – but they offer a benefit accumulation that seems more portable than traditional pension plans and more consistent with the working patterns of today’s workforce, is supported by the Pension Benefit Guaranty Corporation (PBGC), and is typically employer-funded. The design is, generally speaking, more balance-sheet friendly than traditional pension plans, and its benefit to participants more readily grasped and communicated.
Automatic solutions alone aren’t likely to be enough to stave off the retirement savings crisis, and we’ll surely draw less support from traditional defined benefit plans in the future than we have heretofore (even for the minority that had that support to begin with). We need new solutions, and we need to consider old solutions in a new light.What’s changed about cash balance plans? Not much. What’s changed about their viability as a plan design alternative? Quite a bit, I hope.
- Nevin Adams editors@plansponsor.com
For more on cash balance plans see:
http://www.plansponsor.com/hp_type2/?RECORD_ID=4910
http://www.plansponsor.com/magazine_type3?RECORD_ID=34704
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