The Benefits of the Doubt

Those who were wondering when—or perhaps if—the issues raised in those revenue-sharing lawsuits would ever actually be tried got a strong, affirmative response last week.

This time, the 8th U.S. Circuit Court of Appeals found triable issues of fact in a case involving Wal-Mart’s 401(k) plan (“8th Circuit Says Wal-Mart 401(k) Suit Requires Further Discussion”), sending the case back for another hearing by the trial court that had dismissed issues raised in the lawsuit, while also taking the time (at least in a footnote) to distinguish some of its findings from a similar case (Hecker v. Deere) that had failed to clear the bar in another circuit (see "The 'Burden' of Proof").

But, IMHO, what distinguishes the ruling in Braden v. Wal-Mart Stores Inc. from all the revenue-sharing cases that have been adjudicated thus far is that the 8th Circuit judges were willing to concede that the plaintiff had alleged facts that, at least on the surface, were sufficient to support a potential claim.

Now, in fairness, the court applied a fairly traditional standard of review in evaluating the motion to dismiss; to give the benefit of the doubt, if you will, to the perspective of the party who has not made a motion to dismiss the case without moving to trial—and it admonished the lower court for not doing so in plain language. In its ruling, the 8th Circuit not only said that the lower court “ignored reasonable inferences supported by the facts alleged,” it went on to criticize that court for not only drawing inferences in favor of the party (Wal-Mart) that had made the motion to dismiss, but for criticizing the plaintiff for “failing to plead facts tending to contradict those inferences.”

What's Different?

So, what did the court find compelling enough to give this case a fuller hearing? The “relatively limited” (10) menu of fund options “selected by Wal-Mart executives despite the ready availability of better options”—“better” in this case including the fact that they were retail rather than institutional class mutual fund shares (there are other, and IMHO weaker, allegations about performance relative to benchmarks and the use of actively managed funds, rather than index alternatives). And then, perhaps by way of “explaining” the use of these allegedly inferior options, plaintiff Braden notes that the Wal-Mart plan funds “made revenue sharing payments to the trustee, Merrill Lynch, and that these payments were not made in exchange for services rendered, but rather were a quid pro quo for inclusion in the Plan.”

Now, IMHO, the plaintiff’s case isn’t ironclad. Even in its ruling sending the case back for another shot, the 8th Circuit noted that “there may well be lawful reasons appellees chose the challenged investment options.” However, that court also pointed out it was not the plaintiff’s job to rule out those alternatives—nor was it, in the appellate court’s view, appropriate for the trial court to basically assume that because there might be alternative explanations, no further inquiry was warranted.

The Duty to Disclose

There is another interesting aspect to the case, IMHO—and it has to do with the duty to disclose revenue-sharing arrangements. While I believe all of the cases presented to date have claimed that such a duty exists—and that every court that has heard that argument to date has just as readily refuted it—the 8th Circuit had a different take. “In the context of this case, materiality turns on the effect information would have on a reasonable participant's decisions about how to allocate his or her investments among the options in the Plan,” the court noted.

The impact of that materiality was heightened by allegations that “those payments corrupted the fund selection process—that each fund was selected for inclusion in the Plan because it made payments to the trustee, and not because it was a prudent investment,” according to the court. And “[i]f true, this information could influence a reasonable participant in evaluating his or her options under the Plan,” the court said – even as it acknowledged that there is no per se duty to disclose these arrangements.

Finally, the 8th Circuit took the lower court to task for basically insisting that the plaintiff prove that the revenue-sharing payments were unreasonable before trial (a threshold that it notes would have been impossible, even if legitimate, since the arrangement between Wal-Mart and Merrill Lynch was confidential).

The 8th Circuit’s actions here don’t necessarily portend a shift in result for these cases, nor should it suggest that there is anything about this particular case that is markedly distinctive from similar cases brought in other jurisdictions. That said, to this point, the courts have, IMHO, been extraordinarily willing to give the employer/fiduciaries the benefit of the doubt in these revenue-sharing cases.

It will be interesting to see how the allegations hold up to a full adjudication of the facts.

—Nevin E. Adams, JD

"Thanks" Giving

Thanksgiving has been called a “uniquely American” holiday, and while that is perhaps something of an overstatement, it is unquestionably a special holiday, and one on which it seems a reflection on all we have to be thankful for is fitting.

Here's my list for 2009:

First off, I’m thankful that the financial markets have stepped back from the precipice we were surely standing at a year ago. I’m thankful that the investment markets have recovered from the worst of the losses of 2008, even if we still have a long way to go. I’m thankful that so many Americans seem to be concerned about the nation’s fiscal health—and hopeful that those concerns will resonate with those who make decisions that affect it.

I’m thankful that relatively few employers felt the need (or took the opportunity) to cut matching contributions this year—and even more thankful to see so many of those who did cut the match restore it.

I’m thankful that so many employers have remained committed to their defined benefit plans and—often despite media reporting to the contrary—continue to make serious, consistent efforts to meet funding requirements that are quite different than when most initially decided to offer these programs. I’m thankful that a core group of lawmakers in Washington continues to be attentive to the very real challenges imposed by those rules, and continue to be proactive in responding to rational relief measures during this difficult economic period.

I’m thankful that so many participants now seem to have a greater appreciation for the importance of prudent, diversified investing—and thankful, though it was a painful lesson for some, that the deep differences in philosophy that underlie target-date investments are being better communicated and understood. I’m thankful that so many participants took it upon themselves to increase their contribution levels during the downturn, and that so few dipped into those retirement plan accounts to tide them through the rough patches.

I’m thankful that plan sponsors will soon have access to more information about the expenses paid by their plans—and optimistic that it won’t be as bad as they fear. I’m thankful that we’re no longer talking about whether fees should be disclosed to participants, but are now trying to figure out how to do it.

I’m thankful for the intelligence, experience, and professionalism of the folks that regulate our industry—and who do so consistently, despite the occasional changes in “the guard.”

I’m thankful to be part of a growing company in an important industry at a critical time. I’m thankful to be able to, in some small way, make a difference on a daily basis.

And, of course, I’m thankful that so many good and capable advisers were available to participants during the worst of the downturn.

I'm thankful for the home I have found at PLANSPONSOR and then with PLANADVISER, and the warmth with which its loyal readers have embraced me, as well as the many who have "discovered" us during the past 10 years. I'm thankful for all of you who have supported—and I hope benefited from—our various conferences, designation program, and communications throughout the year. I’m thankful for the constant—and enthusiastic—support of our advertisers, even in a year that has been tough for so many.

But most of all, I’m once again thankful for the unconditional love and patience of my family, the camaraderie of dear friends and colleagues, the opportunity to write and share these thoughts—and for the ongoing support and appreciation of readers like you.

Thank YOU!

Nevin E. Adams, JD

IMHO: Tractor “Trailer”

About a week ago, Caterpillar agreed to a $16.5 million settlement of one of those allegedly excessive fee/revenue-sharing lawsuits.

It was the first of these suits—launched in September 2006—to come to some sort of “resolution” though, IMHO, it hardly qualifies as such (see “Caterpillar Ready to Ink $16.5M Fee Suit Settlement”).

That said, the settlement’s terms were not just financial; it also included a series of changes in how Caterpillar agreed to administer the plan and monitor its investments. First off, during a two-year settlement period, Caterpillar agreed to "increase and enhance communication with employees about 401(k) investment options and associated fees,” as well as hiring an independent fiduciary (at least during that same two-year period)—and it has also apparently said that it would detail specific fees charged to participants. Caterpillar says it will avoid retail mutual funds as core investment options for the plans, and that the plan’s recordkeeping fees would be “limited,” specifically calculated on a flat or per-participant basis, rather than drawn from asset-based fees (which can go up—or down—with, IMHO, little correlation to the recordkeeping services associated with those asset values).

Caterpillar also committed to not allowing investment consultants to also serve as investment managers and to not receiving compensation from plan investments. Note that from 1992 to 2006 (actually up till about four months before the revenue-sharing suit was brought), the company offered plan investors a group of mutual funds that were advised by a wholly owned subsidiary (that subsidiary now sold off).

So, who are the winners—and losers—here?

Well, while it surely will be categorized as a “win” by those pursuing these suits, and it’s certainly not a loss for them, IMHO, it’s more accurately described as the other party saying “uncle.” In fairness, these suits haven’t fared too well in court—actually, they have had a hard time getting past the hearing stage (see "IMHO:The "Burden" of Proof"). That doesn’t mean they don’t cost the firms being sued time and money; as a mentor of mine once cautioned, “You can spend a lot of money in court being right.” Doubtless, Caterpillar, whatever it saw as the merits of pursuing its defense (admittedly, because for a long period of time, the firm’s money management unit oversaw some of the funds in question, it might have been more vulnerable to charges of excessive fees) eventually figured there were better ways to spend its time and money.

Presumably the Caterpillar participants will benefit as well—from whatever part of the monetary settlement doesn’t go to the lawyers, as well as from the changes in operation agreed to by Caterpillar. Some will no doubt argue that the terms agreed to by this employer will hereafter become something of a talisman for other firms to contemplate, if not adopt, in their own programs. And, talisman status notwithstanding, that wouldn’t necessarily be a bad thing.

However, for those of us on the outside, a settlement is something of a disappointment. Whatever the basis in fact of these lawsuits, they have now, IMHO, put in play legitimate issues of concern for plan sponsors, advisers, and providers—issues that extend well beyond the “starter set” of firms currently involved in this litigation. Issues that, admittedly, the courts have largely dismissed to date, but issues that one senses (if only because the Department of Labor seems not to fully concur with the judicial renderings to date) remain an unsettled area—and one therefore still ripe for litigation. Litigation that, ironically, might later point to plan changes adopted in the wake of these developments as some kind of “smoking gun” admission of impropriety.

So, while the decision to settle may well mark the end of uncertainty for one employer in such matters, it seems to me that it leaves the situation even more UNsettled for the rest of us.

—Nevin E. Adams, JD

The settlement announcement is online HERE

See also Case Sensitive, “Limit” Ed

"Worth" Whiles

I’m sure you’ve seen that commercial where a series of more-or-less everyday events and their price tags are presented, building to larger and more exotic events (and price tags) until they culminate with some extraordinary event—one that the announcer declares is “priceless.”

As an industry, we have long worried about the plight of the average retirement plan participant who doesn’t know much (if anything) about investing, who doesn’t have time to deal with issues about their retirement investments, and who, perhaps as a result, would really just prefer that someone else take care of it, though it’s not always clear how much they value that effort.

What gets less attention—but is just as real a phenomenon—is how many plan sponsors don’t know anything about investments, don’t have time to deal with issues about their retirement plan investments, and who, perhaps as a result, would also really just prefer that someone else take care of it. But how much will they pay for that?

Now, there’s a difference between choosing investments and selecting a trusted adviser to do so. However, as complicated as the former can be, there are certain touchstones that even an amateur can rely on, IMHO: developing a menu that encompasses a broad array of choices, that fill out a style box grid, that factor in performance results, and/or fund rankings. I’m not saying it’s “easy,” or should be entrusted to amateurs (particularly when issues of fiduciary liability are involved), but it’s certainly manageable.

Quantify Able?

Contrast that with the myriad challenges attendant to selecting an adviser—particularly when you consider that PLANSPONSOR’s surveys routinely show that plan sponsors choose an adviser primarily based on the quality of the advice they provide (primarily to committees, but a close second is the advice rendered to plan participants). One can’t help but wonder how that advice is quantified (certainly not in the same way that investment funds can be). Doubtless, that helps explain why so many advisers are hired not on what they know, but on WHO they know.

But for many plan fiduciaries, the obstacle to hiring a retirement plan adviser is financial, not intellectual. Particularly for a plan sponsor who has not previously employed those services—or, more ominously, in the case of one who has hired an adviser that didn’t hold up their end of the bargain—the additional costs of hiring an adviser can be problematic. The question that is frequently asked is, “Why should I hire you?” But, IMHO, the question that is really being asked is “Why should I pay you that much?”

There are ways, of course, to quantify the value of your services, ways that quantify not only what you are worth, but why your fees are what they are. In the most obvious case, you come in and demonstrate the ability to save a plan money. That’s clearly added value, and value that is readily measured (that, of course, only lasts a year, maybe two; after that, the baseline has been reset in terms of savings expectations).

Similarly, your ability to increase plan levels of participation, deferral, and investment diversification also adds value—but value that, IMHO, like the value of retaining qualified talent, is harder to quantify. Many advisers promote their services as a shield against litigation, or at least some kind of buffer against the financial impact of such an event, but in my experience, while most employers are glad to get/take the “warranty” (implied or explicit), they generally aren’t willing to pay very much extra for it.

Where else can you make a difference? You’ve no doubt seen surveys that show that, in the course of a year, most participants spend more time thinking about—and planning for—their vacation than about their retirement plan investments. Ask any plan sponsor client or prospect how much time they spend working on, or worrying about, their retirement plan, and you’ll probably find a similar imbalance. Of course, plan sponsors, like plan participants, know that they should be spending more time on such matters—and most will admit that, no matter how much time they are spending, they should be spending more.

So, how much time are they spending? How much more do they wish they were spending? How can your involvement reduce the time they spend and/or improve the quality of the attention they give their retirement program? You have the ability to share with them insights—from your other clients, from industry surveys that you gain from attending industry conferences; you can help them make better decisions quicker because your experience offers insights to which they wouldn’t otherwise have access.

So, save them money if you can, save them aggravation if you have to, but in this crazy, hectic period, if you can save them time—well, IMHO, that’s truly “priceless.”

—Nevin E. Adams, JD

See also “IMHO: ’Right’ Minded” at