A Change of "Hearths"

There are few things more disruptive to the peace or clarity of a 401(k) plan than a switch in recordkeepers.

Let’s face it—change—even change for the better—is frequently disruptive to the human psyche. Most of us tend to drift into comfortable “ruts” of pattern, or perhaps habit—places where we know what to expect and, roughly anyway, when to expect it. And, at least in my experience, the more frazzled your existence, the more one pines for these oases of quiet and relative clarity.

That’s true, of course, even when the change is instigated by a regular, thoughtful, focused evaluation of the alternatives; and certainly when that change is the product of a desperate quest driven by a truly awful service relationship. But it is perhaps particularly disruptive when the change is thrust on the plan by forces outside of its control or instigation—and for the thousands of plans that have recently or are in the process of a change in recordkeepers due to industry consolidation.

Some changes are less impactful than others on the plan’s daily administration, of course. Changes that trigger a mass departure of key staff can be upsetting, and those that necessitate moving to a new processing platform even more so. Change that requires communication to participants is anathema to most plan sponsors. On the other hand, recordkeeper changes that result in additional resources, better capabilities, a clearer focus, and a stronger commitment to “the business” are not as rare as one might fear.

But—whether for good or ill—a change in recordkeepers—regardless of the motivating forces behind the move—is one of those “choices” that plan fiduciaries are expected under ERISA to evaluate as a prudent expert. And so, regardless of whether the change appears to be good, bad, or inconsequential on its face, plan fiduciaries can be expected to know:

How much your plan pays in fees. And to whom. And for what.

The essence of a recordkeeper/service evaluation is the determination that the services provided—and the fees paid for those services—are reasonable. It starts, of course, with knowing how much is being paid for those services. But you can’t know if those fees are reasonable without knowing the services they support. But this analysis also involves a determination that the services provided are appropriate.  That starts with enumerating the services you received prior to the move—and checking those against the one(s) your new arrangement provides.  

What revenue-sharing is (and where it goes).

At a high level, revenue-sharing is just the redistribution of fees paid to one provider to another. It can be a relatively straightforward matter of compensating a sub-contractor, though in retirement plans it’s generally 12(b)1 marketing/distribution fees collected by a mutual fund company and “shared” with the recordkeeper that is actually doing the “distribution” of the funds. There is a general trend away from such practices—but if they are in place, you need to know how much, to whom, and how they’re paid.

How your investment menu might change.

Changes in recordkeepers don’t always involve shifts in the investment menu offered to participants, though they can and often do. And even if they haven’t—and if you have reviewed them recently—the change in recordkeepers can be a good opportunity to reconsider/affirm your investment options to make sure not only that they are prudent, but that they (still) meet the needs of your workforce, and the objectives of your benefit program.

And you might also want to:

Document your review/decision(s)

Whatever process you are using to evaluate your plan (this doesn’t require a recordkeeper change), the goals and objectives in doing so should be written down, as should the conclusions drawn from the exercise. You might get there with a simple committee review, or perhaps something more formal—like a request for proposal (particularly if you have the time to do so ahead of the move). Indeed, odds are a formal benchmarking process or RFP will produce documentation of those conclusions/considerations as a natural outcome. But if it doesn’t, you should make the effort to make sure it does.

A change in recordkeepers is a good opportunity to reconsider your plan’s design and operations—and one that, as a prudent plan fiduciary—you’re expected to.

- Nevin E. Adams, JD

5 Things of Which Plan Fiduciaries Need to Be Aware

Whoever said ignorance was bliss surely wasn’t talking about fiduciary litigation.

While I’ve had the opportunity over the past decade and change to peruse plenty of filings and findings related to excessive fee suits, the recent amended filing in a case against New York University (NYU) included something new – a long list of statements and acknowledgements by plan fiduciaries that, according to the plaintiffs, “displayed an alarming lack of understanding of basic terms and principles in investment management and fiduciary best practices.” Indeed, one of the plan committee members was called out for their “remarkable unawareness of basic facts” relating to the plan.

Now, one must take care in accepting the assertions in litigation at face value, and it’s too early to say if they – along with a response by the defendants – will carry the day with a judge. Still, it’s hard, more than a decade after the first of the so-called excessive fee cases were filed, to believe that there remain multi-billion dollar retirement plans in operation with committees – and as here, with the involvement of an investment advisor – that don’t know – well, the things that the long-standing practices of these committees suggest are still in place.

The job of a plan fiduciary isn’t all about fees, of course, though it’s certainly been a focus of these excessive fee lawsuits. Still, it seems to me that there are some things that plan fiduciaries of any plan size should be aware, and of which responsible plan fiduciaries should have a working knowledge.

Said another way, a plan fiduciary could be in trouble if you don’t:

• Know how much your plan pays in fees. And to whom. And for what.
• Know how many (and which ones) of your plan’s investment choices are offered in retail class shares. And if institutional class shares are available, and under what circumstances/conditions.
• Know how much of your plan’s investments are in funds that belong to your recordkeeper. And why.
• Know what revenue-sharing is (and where it goes).
• Have a basis for determining that the fees paid by the plan/participants are “reasonable.”

That’s not an exhaustive list, of course though, at least with regard to fees and expenses, I think it covers the key issues, certainly the ones that have arisen in litigation. Remember that plan fiduciaries – who have personal liability for their actions – are charged with “paying only reasonable plan expenses.” And, as noted above, plan fiduciaries – and those who guide them – have had at least a decade to see the writing on the wall on these excessive fee lawsuits.

Arguably, that can’t be done without first knowing what those expenses are, and having some basis of comparison/evaluation to ascertain if they are, in fact, reasonable in view of the services provided.

Particularly if you don’t want to be caught “unawares.”

- Nevin E. Adams, JD
 
See also:

• Your Plan Might Be an Excessive Fee Litigation Target If…
• 4 Things Before You Get to That RFP…
• What You Can Get with an RFP

6 Dangerous Fiduciary Assumptions

There’s an old saying that when you assume… well, here are five assumptions that can create real headaches for retirement plan fiduciaries.

Assuming that not being required to have an investment policy statement means you don’t need to have an investment policy.

While plan advisers and consultants routinely counsel on the need for, and importance of, an investment policy statement (IPS), the reality is that the law does not require one, and thus, many plan sponsors — sometimes at the direction of legal counsel — choose not to put one in place.

Of course, if the law does not specifically require a written IPS — think of it as investment guidelines for the plan — ERISA nonetheless basically anticipates that plan fiduciaries will conduct themselves as though they had one in place. And, generally speaking, plan sponsors (and the advisors they work with) will find it easier to conduct the plan’s investment business in accordance with a set of established, prudent standards if those standards are in writing, and not crafted at a point in time when you are desperately trying to make sense of the markets. In sum, you want an IPS in place before you need an IPS in place.

It is worth noting that, though it is not legally required, Labor Department auditors routinely ask for a copy of the plan’s IPS as one of their first requests. And therein lies the rationale behind the counsel of some in the legal profession to forego having a formal IPS: because if there is one thing worse than not having an IPS, it is having an IPS — in writing — that is not being followed.

Assuming that all target-date funds are the same.

Just about every industry survey you pick up verifies that target-date funds, as well as their older counterparts, the lifecycle (risk-based) and balanced funds, have become fixtures on the defined contribution investment menu. For a large and growing number of individuals, these “all-in-one” target-date funds, monitored by plan fiduciaries and those that guide them, are destined to be an important aspect of building their retirement future.

There are obviously differences in fees, and that can be affected by how the funds themselves are structured, drawn from a series of proprietary offerings, or built out of a best-in-class structure of non-affiliated providers.

However, and while the bulk of TDF assets are still spread among a handful of providers, there are different views on what is an “appropriate” asset allocation at a particular point in time, discrete perspectives as to what asset classes belong in the mix, notions that individuals aren’t well-served by a mix that disregards individual risk tolerances, arguments over the definition of a TDF “glide path” as the investments automatically rebalance over time, and even disagreement as to whether the fund’s target-date is an end point or simply a milepost along the investment cycle. Oh, and a new generation of custom TDFs are now in the mix as well.

(See also, “Five Things the DOL Wants You to Know About TDFs.”)

Assuming that hiring a fiduciary keeps you from being a fiduciary.

ERISA has a couple of very specific exceptions through which you can limit — but not eliminate —fiduciary obligations. The first has to do with the specific decisions made by a qualified investment manager — and, even then, a plan sponsor/fiduciary remains responsible for the prudent selection and monitoring of that investment manager’s activities on behalf of the plan.

The second exception has to do with specific investment decisions made by properly informed and empowered individual participants in accordance with ERISA Section 404(c). Here also, even if the plan meets the 404(c) criteria (and it is by no means certain it will), the plan fiduciary remains responsible for the prudent selection and monitoring of the options on the investment menu (and, as the Tibble case reminds us, that obligation is ongoing).

Outside of these two exceptions, the plan sponsor/fiduciary is essentially responsible for the quality of the investments of the plan — including those that participants make. Oh, and hiring a 3(16) fiduciary? Still on the hook as a fiduciary for selecting that provider.

(See also, “7 Things an ERISA Fiduciary Should Know.”)

Assuming that all expenses associated with a plan can be charged to the plan.

Assuming that the plan allows it, the Department of Labor has divided plan expenses into two types: so-called “settlor expenses,” which must be borne by the employer; and administrative expenses, which — if they are reasonable — may (but aren’t required to) be paid from plan assets. In general, settlor expenses include the cost of any services provided to establish, terminate or design the plan. These are the types of services that generally are seen as benefiting the employer, rather than the plan beneficiaries.

Administrative expenses include fees and costs associated with things like amending the plan to keep it in compliance with tax laws, conducting nondiscrimination testing, performing participant recordkeeping services, and providing plan information to participants.

Assuming that the worst-case deadline for depositing participant contributions is the deadline.

The legal requirements for depositing contributions to the plan are perhaps the most widely misunderstood elements of plan administration. A delay in contribution deposits is also one of the most common signs that an employer is in financial trouble — and that the Labor Department is likely to investigate.

Note that the law requires that participant contributions be deposited in the plan as soon as it is reasonably possible to segregate them from the company’s assets, but no later than the 15th business day of the month following the payday. If employers can reasonably make the deposits sooner, they need to do so. Many have read the worst-case situation (the 15th business day of the month following) to be the legal requirement. It is not.

(See also, “5 Little Things That Can Become Big 401(k) Problems.”)

Assuming you have to figure it all out on your own.

ERISA imposes a duty of prudence on plan fiduciaries that is often referred to as one of the highest duties known to law — and for good reason. Those fiduciaries must act “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”

The “familiar with such matters” is the sticking point for those who might otherwise be inclined to simply adopt a “do unto others as you would have others do unto you” approach. Similarly, those who might be naturally predisposed toward a kind of Hippocratic, “first, do no harm” stance are afforded no such discretion under ERISA’s strictures.

However, the Department of Labor has stated that “[l]acking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.” Simply stated, if you lack the skill, prudence and diligence of an expert in such matters, you are not only entitled to get help — you are expected to do so.

- Nevin E. Adams, JD

‘Talking’ Points

In the course of my day, I talk to (and email with) people, read a lot, and every so often jot down a random thought or insight that gives me pause and makes me think. See what you think.

1. Disclosure isn’t the same thing as clarity. Sometimes it’s the opposite.
2. It’s not what you’re doing wrong; it’s what you’re not doing that’s wrong.
3. Sometimes just saying you’re thinking about doing an RFP can get results.
4. The best way to stay out of court is to avoid situations where participants lose money.
5. The key to successful retirement savings is not how you invest, but how much you save.
6. It’s the match, not the tax preferences, that drives plan participation.
7. Does anybody still expect taxes to be lower in retirement?
8. If you don’t know how much you’re paying, you can’t know if it’s reasonable.
9. You want your provider to be profitable, not go out of business.
10. Retirement income is a challenge to solve, not a product to build.
11. When selecting plan investments, keep in mind the 80-10-10 rule: 80% of participants are not investment savvy, 10% are, and the other 10% think they are. But aren’t.
12. Participants who are automatically enrolled are almost certainly even more inert than those who took the time to fill out an enrollment form.
13. 92% of participants defaulted in at a 6% deferral do nothing. 4% actually increase that deferral. rate.
14. Plan sponsors may not be responsible for the outcomes of their retirement plan designs, but someone should be.
15. Even if a plan has a plan adviser that is a fiduciary, the plan sponsor is still a fiduciary.
16. Most plans don’t comply with ERISA 404(c) – and never have. And, based on litigation trends, apparently don’t need to.
17. Hiring a co-fiduciary doesn’t make you an ex-fiduciary.
18. “Because it’s the one my recordkeeper offers” is not a good reason to select a target-date fund.
19. Given a chance to save via a workplace retirement plan, most people do. Without access to a workplace retirement plan, most people don’t.
20. Nobody knows how much “reasonable” is.
21. Innovative doesn’t mean nobody’s ever thought about it, or that nobody’s ever done it.
22. You want to have an investment policy in place before you need to have an investment policy in place.
23. The same provider can charge different fees to plans that aren’t all that different.
24. You can be in favor of fee disclosure and transparency and still think that legislation telling you how to do it is misguided.
25. The biggest mistake a plan fiduciary can make is not seeking the help of experts.

Thanks to all you “inspirations” out there – past, present and future.

- Nevin E. Adams, JD

15 (More) Retirement Plan Points to Ponder

Working with retirement plans is a complicated, challenging and constantly changing process. That said, there are certain constants — and things that bear repeating and/or reconsidering from time to time.

Since I published my first list of 15 last fall (one of my most popular, as it turns out), I’ve gotten several very good suggestions — and had an epiphany or two.

Here are a few (more) points to ponder:

1. Cheaper isn’t always better, unless it’s the only difference.
2. Sometimes you do get what you pay for — but not always.
3. If you’re not doing anything “wrong,” you probably aren’t doing anything much.
4. You can spend a lot of money in court being right.
5. A fund whose allocation is based solely on date of retirement is sure to miss something, but not as much as a fund whose allocation doesn’t take that into account.
   
6. If you don’t know how much you’re paying, you’re likely paying too much.
7. Don’t assume that those who aren’t saving via your workplace retirement plan know what they are doing — or what they are missing.
8. There’s something about putting decisions down on paper that helps people take them more seriously.
9. Figuring out how much to take out is harder than figuring how much to put in.
10. The werewolves always outnumber the silver bullets.
11. When it comes to workplace retirement plans, there are three kinds of people: those who are ERISA fiduciaries and know it, those who aren’t ERISA fiduciaries and know it, and those who are ERISA fiduciaries and find out via subpoena.
12. If you can’t remember the last time you did a request for proposal, it’s probably overdue.
13. The default deferral rate for a non-automatic enrollment plan… is zero.
14. If you don’t know why “we’ve always done it this way,” it’s time you did.
15. You may not know all the right answers, but it’s worth knowing the right questions.

- Nevin E. Adams, JD

“Fifth” Avenues

The year we began publishing PLANADVISER was a big year in many ways for me – it marked my twentieth wedding anniversary, it was the year my father passed away, the year my eldest went off to college for the first time, and also the year that “catch-up contributions” became an item of more-than-passing interest to me.

In recent weeks, I’ve had occasion to think back on those past five years, and all that has transpired – the Pension Protection Act, QDIAs. the back-and-forth on fiduciary advisers, the first wave (and subsequent flurry) of revenue-sharing lawsuits, the growing emphasis on transparency and disclosure, the growth – and questions about – target-date funds, the “normalization” of a fiduciary role for retirement plan advisers, and more recently, the back-and-forth on an expanded fiduciary definition. Like many of you, I can still recall the tumultuous news of September 2008 – all hitting during our PLANADVISER National Conference that year.

While it’s fun and interesting to look back at what’s gone on the past several years – to imagine what might have been, and perhaps to rue what has, it’s clear that we’ve all come a long way over the past five years - and little question that we have an interesting road ahead as well.


Here are five things I think we can count on for the next five years:

Participant fee disclosure won’t matter.

Let’s face it; most participants don’t do anything with their retirement accounts. Most never realign balances, most don’t ever change the amount they defer, and – thankfully, most leave those accounts alone at times when we’re all worried that they will not. I’m betting, for all the angst about participant fee disclosures, most won’t read them – and even fewer will do anything in response. With luck, by the time they get those disclosures, they won’t feel the need.

Plan sponsor fee disclosure will matter.

It’s no easy thing for a plan sponsor to up and change providers. All other things being equal, most would rather crawl over hot coals than deal with all the additional work (and decisions) attendant with those changes. That said, once fee disclosures become more public, and, shall we say, “systematic” – well, I expect plan sponsors will have a lot of “help” reviewing the information. While I don’t expect a massive surge in provider changes, I think it’s fair to say that a lot of “haggling” will take place.

Advisers that work with ERISA plans will need to be ERISA fiduciaries.

Arguably it’s already tough to win a piece of ERISA business against an adviser willing to claim fiduciary status. But I think we’ve already passed the tipping point, and if market forces weren’t sufficiently persuasive, the regulators now seem determined to press the issue.

We’ll come to regret our complacency about target-date fund designs.

In the aftermath of the 2008 financial crisis, much was made of the variations in target-date glide paths, the disparity in assumptions that resulted in wildly different results for those just a couple of years away from retirement. Since then, the markets have repaired much of that damage, but little appears to have been done in terms of rethinking the assumptions and structures of those funds. More troubling is how little movement has since been apparent among plans that felt burned, but ostensibly were ignorant (willfully or otherwise) of those differences in 2008.

Retirement income will (still) be the big thing we all say needs to be solved that (still) isn’t.

Mark Twain once famously remarked that “everyone talks about the weather, but nobody does anything about it.” Well, you can’t say that people haven’t been doing things about retirement income. In fact, there have been some pretty remarkable developments over the past couple of years. The Obama Administration has certainly tried to jumpstart the discussion, if not adoption of such designs. A truly comprehensive safe harbor could be a game-changer here – but I’m guessing that there won’t be a target-date “simple” solution here. Not that there should be …

- Nevin E. Adams, JD

“Free” Ride?

I was late to the NetFlix game—switching over only when my local Blockbuster closed its doors. Honestly, I was more than a little skeptical about paying to rent movies while spending most of the month waiting for the mail carrier to shuffle things back and forth.

Those fears (along with concerns drawn from early stories about people being sent movies at the bottom of their list, rather than the newer, hotter releases) have turned out to be mostly a non-issue. More recently, I “discovered” the firm’s online library of free movies—and while I would say that most of them SHOULD be free (some you should be paid to sit through), I have enjoyed having that “extra” feature. Sure, there were times when the Internet delivery speed wasn’t optimal, or when a movie would time out a third of the way through, but heck, it was free.

Until, of course, NetFlix announced a change in pricing policy, a change that would cut the cost of the traditional movie rental service, but that would charge—and charge just as much—for the online movie library. Overnight transforming what had been a nice, free, additional service into—well, a pricey, sometimes erratic, delivery system of older, “b” movies. In short order, my willingness to calmly accept certain service “glitches” associated with a “free” service—well, let’s just say I have completely different expectations when I have to pay for it.


The retirement plan industry has long wondered—and worried—what participants would do if they knew how much they were paying for their 401(k)s. Despite the fact that most of those fees have long been disclosed in fund prospectuses, we’re generally inclined to think that most participants haven’t actually read those disclosures—and those who have probably didn’t understand them. That’s all supposed to change—or at least begin changing—with the participant-level fee disclosures slated to take hold next year.

Personally—and I know I’ll get some pushback on this—I’m disinclined to think it will make a big difference. After all, if there’s one thing that participants have demonstrated over the years it’s a strong and consistent propensity to gloss over (if not glaze over) big, complicated, legalistic disclosures. It doesn’t help that retirement plan fee calculations have become complicated structures, imbedded inside the net asset value of mutual funds, with revenue-sharing offsets of varying amounts (see “IMHO: Out of Proportion”), and most expressed in participant-unfriendly terms like “basis points,” or worse—“bips.”

I’m not optimistic about the new regulated disclosures—too much data, and not enough information, IMHO. That said, there are some new disclosures coming to market from the provider community ahead of those regulations that, IMHO, might actually help participants see—and understand—what they’re paying.

Of course, for most, the concern is not that participants will now know how much they are paying—but that some may, perhaps for the first time, realize that they ARE paying.1

—Nevin E. Adams, JD


1 Consider that a survey published earlier this year by AARP indicated that only a quarter of 401(k) participants realize they are paying fees (see “Most 401(k) Participants Not Aware of Fees They Pay”).

"Much" Ado

There were three big disclosure announcements last week. The first two were the pushback of the effective date for 408(b)(2) fee disclosures to April 1, 2012, from the previously announced effective date of January 1 of that year. In the same announcement, the Department of Labor also delayed the compliance date for the participant level fee disclosure regulation for most plans to May 31, 2012 (a month ago, the DoL had said that information would have to be made available no later than April 30)—which, from a practical standpoint, means that the information must be provided by August 14, 2012 (45 days after the end of the second quarter in which the initial disclosure is required)(see “Borzi Chats about Upcoming Definition of Fiduciary Rule”).

Those delays are, doubtless, of some relief to the provider community. They’re not pushed back far enough to significantly delay the beneficial impact of the disclosures (though this is not the first time they have been pushed back), but I’m sure even the best-prepared will appreciate a little extra breathing room.

But the more significant “announcement,” to my ears anyway, came on Friday, when Assistant Secretary of Labor Phyllis Borzi noted in an Employee Benefits Security Administration (EBSA) Web chat that the DoL was “considering, as part of the pension benefit statement regulatory initiative, requiring that pension benefit statements for defined contribution plans express the participant's ‘total accrued benefit’ in the form of a lump sum account balance and in the form of a lifetime income stream”


It’s not a new notion, of course. In fact, legislation has been introduced in Congress (twice) that would basically do the same thing (see “Retirement Income Disclosure Bill Makes a Comeback”). And while such a notion is fraught with potential problems (the assumptions, the presentation, and the caveats attendant with that presentation), I think it could be a real eye-opener for participants and plan sponsors alike. In fact, IMHO, it’s the kind of thing that could really make a difference in how people look at their retirement savings accounts.

Make no mistake, it’s going to be complicated. You can’t project retirement income from a couple of pieces of data (ostensibly current age, salary, and current 401(k) balance) without making several key assumptions. Moreover, I can’t imagine that it will be deemed sufficient to simply provide that number and, in a sentence or two, outline those assumptions. Rather, it’s entirely likely that the volume of disclosures accompanying the new piece of information will serve to obscure the impact.

Ultimately, it’s hard to know how good those disclosures will be and how much impact they will have—but, IMHO, if we expect participants to save enough, it seems well past time that we helped them know just how much “enough” is.

—Nevin E. Adams, JD

All for One?

The underlying theme of last week’s PLANSPONSOR National Conference was “measuring up,” a reference not only to the need to measure the performance and outputs of a retirement plan’s designs, but also to the opportunity to increase and enhance it in the process.

Of late, fees are very much on everyone’s mind, as we all prepare for a new series of plan, and ultimately, participant, disclosures. Just ahead of those disclosures, the industry has launched a new generation of plan fee benchmarking services. Each looks at different things, each has its own set of weightings and assumptions, and each draws from a different source.

But for my money, here are 10 things you should know about any service that purports to help you benchmark your plan:

What is the source of the database that serves as a point of comparison?

Is the database itself large enough to be relevant? Does it include relevant points of comparison with your program in terms of plan size, industry, and/or geographic location?

How old is the data on which comparisons are made?

Is the data on which comparisons are made accurate?


Are the comparisons valid? Do they offer an apples-to-apples comparison?

What assumptions are incorporated in the results?

How are the results of the comparison scored?

What are the credentials of the firm/principals behind the service and/or methodology?

Is the benchmark itself relevant to your needs? Does the comparison help you improve your program?

Is the fee paid for the benchmarking service reasonable, and in the best interests of participants?

There are, admittedly, any number of measures of success for a retirement plan—and while some may be “better” than others, and some surely easier to establish, in my experience, the mere process of measuring brings benefits.

That said, there was a moment at last week’s conference where one of our speakers asked a telling question: not if attendees benchmarked their programs (a surprising number were doing so), nor if they were benchmarking against a variety of criteria (most of those in attendance had moved well beyond the standard of “participation rate” as a metric).

No, the question that gave me pause—as well as a good number of the attendees—was, If the individual members of your retirement plan committee were asked “What do you benchmark your plan against?” what would they say?

Because, if you don’t agree on that answer, the rest of the questions may not matter.

—Nevin E. Adams, JD

You may find useful the cover story of the June issue of PLANSPONSOR, which deals with this new generation of fee benchmarking services, HERE

Out of Proportion

Without question the retirement plan industry has prospered from the long-standing practice of relying heavily – and in some situations, completely - on asset-based fees.

Now, you can certainly argue that that has resulted in plans paying for services they would not otherwise have engaged, and that it has, in some cases, led to plans paying more than they might if they had been more cognizant of the dollars expended. Indeed, one can argue that the imbedding of those fees inside the fund structure has made it easy, perhaps too easy, for the industry to collect its tolls without drawing the kind of scrutiny they were entitled to.

On the other hand, that structure has made it easier for the industry to provide a broad-based level of sophisticated services to plans of all sizes, and has doubtless made it possible for plans to contemplate hiring an adviser that, regardless of the need and/or benefit, would otherwise have been discouraged by an explicit charge for those services.


That said, there are some issues attendant with the current asset-based fee structure that, IMHO, bear discussion:

Asset-based fees go up – pretty much all the time.

For most of the existence of the 401(k), the markets have been fairly good, and as they say, a rising tide lifts all boats. In this particular case, rising markets have also meant rising fees. Proportionately rising fees, of course, but rising fees nonetheless. That, in turn, has meant that those who make their living off asset-based fees have seen some pretty nice pay increases over time – without necessarily having to do anything more or different to “earn” them. Even in bad markets, the steady flow of contributions has cushioned the blow that might otherwise have tamped them down.

Asset-based fees go down when the work – and risks – go up.

One of the great ironies of asset-based fees is that they do sometimes go down, and at the most “inconvenient” times. One need look back only as far as the fourth quarter of 2008 to remember a precipitous decline in asset values – and asset-value-based fees - at the very same time that many noted a steep increase in the “care and feeding” of plan sponsors and participants who had been shaken by what was happening to their retirement plans (not to mention their plans for retirement). Of course, it would probably be viewed as unseemly (at best) to raise your fees during such times – but that is when your work, and your risks, are generally rising.

The bigger your balance, the more you pay.

Admittedly, when you’re talking about fees based on assets, it makes sense that the more assets you have, the more fees you pay. Perhaps that makes a modicum of sense when you are talking about things like investment management (even then, it seems to me that those with large balances are carrying an ironically disproportionate, albeit proportionate amount of the fees). As “industry insiders”, we all know this – indeed, some go so far as to see a more high-minded result; the “rich” underwriting the costs of the less rich, if you will.

On the other hand, it’s not just the rich that have larger balances – frequently those are the balances of lower-income workers who have, nonetheless, been long-time diligent savers. So, said another way, it’s older, longer-tenured workers are underwriting the costs of the folks who have just joined the plan.

Different funds “share” differently

We all know that different types (and brands) of mutual funds charge different fees. What is less obvious to many plan sponsors is that different types (and brands) of mutual funds provide different amounts of revenue sharing. It is not atypical for a plan sponsor to sit down with a recordkeeper, to figure out what the recordkeeping charges will be, to determine what the aggregate amount of the revenue-sharing rebates will be, and then to determine how to manage the difference. But if some funds provide higher levels of revenue-sharing, then the participants investing in those funds are, effectively, shouldering a larger proportion of the administrative costs of the plan.

There are administrative ways to “level” these fee allocations, but many plan sponsors aren’t even aware that this has crept in.

Out of “sight” IS out of mind.

To me the biggest issue with those “imbedded” asset-based fees is that you never really see how much actual money you’re paying. Oh, it’s not like the fees aren’t “disclosed”, and it’s not as though it’s rocket science to figure it out, at least at a high level. But most plan sponsors are lured into what I consider to be the faux comparisons of basis points, rather than actually stopping to figure out what 100 basis points times the assets in a particular fund actually adds up to – and who gets how much for what.


The reality of our world is that a large, and growing number, of retirement plan advisers are already “fee for service”, and the fee disclosure regulations are widely seen as accelerating that trend.

That said, our industry has gotten comfortable, some even complacent, with a fee system structure that tends to raise, not lower, fees over time, a system that apportions fees on a basis that often has little to do with the costs of providing the services it supports, and one that tends to obscure the real costs of the services they ostensibly underwrite.

The current structure may have been “convenient” – but just because it’s “proportionate”, doesn’t mean it’s always fair.

- Nevin E. Adams, JD

The Enemy of the Good?

Over the past couple of years 401(k) evaluation service BrightScope has made quite a splash.

Early on, most folks I spoke with were quite keen on what was being undertaken by the firm. 401(k) fees were unfortunately still mystery meat to many plan sponsors, and thus a service that purported to help them make sense - not only of what they paid, but how it compared to other programs - looked to be a godsend.

As time has worn on, there have been questions and concerns. The data that underlaid Brightscope’s computations was drawn from government files – and while that made it “official”, it apparently didn’t always mean it was accurate, and it surely didn’t make it timely (though the latter is getting better all the time). Moreover, BrightScope employs a proprietary methodology that relies on certain weightings and assumptions that not everyone would agree with – but then, it’s a proprietary methodology, after all. If you don’t like it, or don’t think it does a fair job of representing the real situation, one has only to say so.

What made them different, at least at the outset, was that they went public with that information – and by public, we mean all the way to retail participants - with data for a vast number of plans, and with a good deal of press coverage, to boot.
That created a modest amount of consternation for some plan sponsors and advisers – not because they had a problem (though some surely did), but because the data presented to the public about their plan and its relative competitiveness vis-à-vis other programs (particularly on the sensitive issue of fees) was, as noted above, incomplete, inaccurate, and/or out of date. None of which the BrightScope folks contested, by the way. But in the couple of conversations I have had with them on the subject, their response has been “if our data is wrong, tell us and we’ll fix it.”


Last week BrightScope turned its attention to financial advisers with its BrightScope Advisor Pages; not to rank them or rate them (though who would be surprised to see that come to the fore one day – particularly since there are already placeholders for “qualifications”, “experience”, and “conduct” on the new adviser tool), but rather to provide information to the public. Data that, like the retirement plan information noted above, wasn’t in one place, wasn’t easy to find, and surely isn’t easy to understand for many. And then, as it had with the retirement plan analytics information that launched the firm, it rolled its adviser database out – to everyone.

Well, advisers are sensitive about such things (with good reason), and a number have already checked out the database and found “issues.” Mike Alfred, co-founder and CEO of BrightScope told me last week that “…many of the “errors” we’re being accused of are really just issues with the advisor’s ADV or U-4 which they did not notice until it was published in this format”. And, as was the case with the retirement plan filings, Mike noted that “Once we get the updated information from a public filing, we will always move quickly to have it updated on the site because our foremost concern is having accurate data”.

Of course, I’m guessing that getting “updated information from a public filing” isn’t an overnight process, and Mike acknowledged that the BrightScope team has been “slammed by a very large volume of incoming requests to claim the Advisor Pages profile as well as general messages of both support and dismay.” More troubling have been the published reports and emails from advisers who say they’ve been told they will have to pay to have their information corrected (or at least strongly encouraged to do so), though Alfred dismissed that as “totally untrue.”

Still, the public release of data that may be old, inaccurate, and/or outdated is surely cause for some concern, and hopefully speedy remediation by BrightScope, where appropriate.

After all, Voltaire once famously said that the perfect is the enemy of the good. But IMHO, the real enemy of the good is more often “not ready yet”.

- Nevin E. Adams, JD

Hire Powers

One of the first things you learn in any kind of ERISA primer is that, as a fiduciary, you are expected to conduct yourself either as if you are an expert, or hire someone to help you who is. This so-called “prudent expert” rule is, of course, a significantly higher standard than the one applied to mere common- law fiduciaries—in fact, it is generally described as the highest legal standard. Of course, plan sponsors have long relied on the help of experts—attorneys, third-party administrators, investment managers, and recordkeepers—if only because so much of what a plan sponsor must do in operating their retirement program requires their active involvement.

Not so retirement plan advisers, who, for many plan sponsors, remain something of an optional enhancement to their program. That said, in an environment that remains a legislative, regulatory, and operational thicket for even the most active and engaged plan sponsor, it is a plan option that is rapidly becoming standard equipment. Well-intentioned as such hires often are, they can be done for the wrong reasons. In the February issue of PLANSPONSOR, we asked previous winners of our Retirement Plan Adviser of the Year how plan sponsors can find the “right” adviser.

Today I’d like to turn that around. How can you, as an adviser, get connected with plan sponsors that will not only hire you, but will allow you to do your very best work for them, and for their plan participants?


Start with your friends and/or professional associations. Long a primary source of business for the advisers in our special “panel,” this is now the only channel for many of them. Now, for plan sponsors, this gives them the benefit of a personal reference from a colleague who knows and has perhaps already worked with you. But it also turns out to be a good way for you to “vet” the plan sponsor for a good philosophical fit.

Give them a chance to see you in action. It’s one thing to meet them at the Rotary Club, perhaps even better when you share some kind of board affiliation, but more and more advisers offer local seminars on topics of interest to plan sponsors. It gives you a chance to demonstrate your expertise—and you’ll get a chance to do so in front of potential clients who, by their attendance, have already expressed a more-than-passing interest in the topic.

Don’t be shy about references. This is admittedly a sensitive issue for advisers. After all, having spent a lot of time, energy, and money to develop those relationships, the last thing you want is to put those in the hands of folks who might try to steal them from you. But the top advisers I spoke with didn’t “hide” those references behind a “furnished upon request” curtain. For them, it was a statement of confidence not only in their ability to retain those relationships regardless of a potential “poaching,” but also a testament to the scope of their expertise and the tenure over which those relationships had been developed.

Be clear and concise about your fees. The regulatory winds are making this less of an issue than it once was, but it remains a way to distinguish yourself and your services from those who are less serious about working with retirement plans. I often tell plan sponsors that a good adviser will nearly always be able to save their plan money—though I also caution them that if saving money is their primary motivation, they are likely going to be disappointed.

Be able to demonstrate your commitment. Plan sponsors are increasingly wary of recordkeepers teetering on the brink of “exiting the business,” but when it comes to retirement plan advisers, the worry is that, for you, retirement plans are just a “hobby.” There are any number of ways to do it, but having the answers to the questions below will put your practice in the appropriate light.

Don’t take the relationship for granted. Like any relationship, things change and needs evolve—and that’s true for your relationship with a plan sponsor plan as well as the plan sponsor. Birds of a feather flock together, and ultimately you can really only do your best work if you are working with plan sponsors who are not only committed to their plan, but are open to, and supportive of, your recommendations to make it better.

But IMHO, if they are interested in hiring you as a retirement plan adviser—well, that’s a good sign.

—Nevin E. Adams, JD
You can read the article from PLANSPONSOR magazine here


How to prove your commitment to the retirement plan business.

1. What percent of your firm’s revenue is from retirement plan consulting?
2. How long have you been servicing retirement plan clients? Can this be documented?
3. What recognition have you achieved from independent sources that establishes your expertise and credibility?
4. How many retirement plan clients are handled by the team that will work on a prospective client’s plan? Does that team have individuals with different specialties?
5. How many different vendors do you work with for their existing clients?
6. Can you document ways in which you have helped clients through DoL audits, IRS audits, voluntary compliance issues, partial plan termination determinations, plan mergers or spin offs, plan terminations, and corrective contributions?
7. How—and how often—do you inform clients of regulatory changes and updates?

Source: Chad Larsen, Moreton Retirement Partners

The Duty To Ask

Last week I mentioned a revenue-sharing case that could have far-reaching implications.

That case, Tibble v. Edison International, was decided earlier this month (see “Court Buys Retail vs. Institutional Share Fee Claims”) and, IMHO, is a very interesting case for several reasons: First, most of these cases have been tossed before they actually got to trial; second, this one was decided in the plaintiff/participant’s favor (and that’s a rarer occurrence than much of the coverage and “chatter” would indicate). Moreover, here the court was far less deferential to the plan fiduciary decisions than other districts have been1.

But what I found most interesting about this case wasn’t the decision or the court’s rationale, though both will certainly have ramifications beyond this case. Nor, in large part, were the plaintiffs’ arguments any more compelling than in previous actions. In fact, like many of the revenue-sharing/excessive-fee cases filed since 2006, the plaintiffs here made a LOT of accusations—most of which were, as they have been in other cases (and rightfully, IMHO), summarily dismissed2. In this case, that included the selection of sector funds for the plan, having a money market fund on the menu rather than a stable value offering, and structuring the company stock fund as a unitized fund, rather than using share accounting.

Short Falls

Where this court did hold the plan fiduciaries3 liable was their decision to invest in retail shares rather than institutional shares of the same funds. But what I found most striking about the case wasn’t the allegations or the adjudication, but rather that what was, by outward appearances anyway, a thoughtful and sophisticated plan review structure would manage to overlook such a basic opportunity.

Here you have a large ($2-plus billion) plan that not only has an investment committee, but one separate from the benefits administration function. Moreover, that investment committee has access to, and uses the services of, an investment adviser (Hewitt’s investment consulting arm) to review/select/monitor funds. That’s a reasonably sophisticated set-up, and certainly what one might expect for a plan of this size.

Now, the plan decision-makers are aware of revenue-sharing but consistently make decisions that support the notion that they do not take that into account. In fact, the court noted that in 33 of 39 instances during the period in question, the employer made mutual fund replacements that actually decreased the revenue-sharing received by the plan, leaving the court to note, “This overall pattern is not consistent with a motive to increase revenue sharing.” In fact, the court noted that “[t]he Plan fiduciaries did not make fund selections with an eye toward increasing revenue sharing and did not put the interests of SCE above those of the Plan participants.”4

So, what do they fail to do?

Well, apparently they did not even ASK the investment fund providers to waive the minimums for investment in institutional class shares. That’s right, they never asked if those minimums could be waived—so, of course, they weren’t (particularly damning was the testimony of the employer’s expert that such waivers were routinely granted, and for plans of much smaller size). Think of it as “the duty to ask.”

As you read the court’s description of the process, you get a sense that the investment committee was attentive to an investment policy statement (IPS) that was carefully prepared and to which the committee adhered; that they met regularly, and thoughtfully conducted their review with the assistance of a professional investment consultant. The court even described a situation5 where the investment committee considered—and specifically chose—an institutional share class for a fund over a retail offering, because the institutional class met the criteria established by the IPS, whereas the retail class did not.

Yet, for all of this good structure and process, there was one thing that this particular plan sponsor failed to do: They apparently failed to ask if a “better” share class was available.

In the words of the court, “The only way a fiduciary can obtain a waiver of the investment minimum is to call and ask for one. Yet none of the Edison fiduciaries nor anyone acting on their behalf (including HFS) ever requested that the William Blair Fund waive the minimum investment so that the Plan could invest in the institutional share class. Had someone called on behalf of the Plan and requested a waiver of the investment minimum, the William Blair Fund almost certainly would have granted the waiver.”6

Retail “Sale?”

Not that using retail, rather than institutional shares was inherently wrong, even in this situation7. The court acknowledged that in defending the retail-share decision, witnesses for the defendant/employers offered three possible rationales: If the retail share class of a certain mutual fund had significant performance history and a Morningstar rating, but the institutional share class did not; to avoid confusion among participants resulting from frequent changes in the fund; or if there were certain minimum investment requirements, it might preclude the plan from investing in the institutional share classes. Judge Stephen V. Wilson didn’t say whether he would have found those arguments compelling—but then, he didn’t need to bother because, as he noted in the ruling, “None of these explanations is supported by the facts in this case.”

Rather, he noted that “[t]he Investments Staff simply recommended adding the retail share classes of these three funds without any consideration of whether the institutional share classes offered greater benefits to the Plan participants. Thus, the Plan fiduciaries responsible for selecting the mutual funds (the Investment Committees) were not informed about the institutional share classes and did not conduct a thorough investigation.”

Nor was it sufficient that the plan fiduciaries employed the services of an investment adviser. As the court noted: “While securing independent advice from HFS is some evidence of a thorough investigation, it is not a complete defense to a charge of imprudence. At the very least, the Plan fiduciaries must make certain that reliance on the expert’s advice is reasonably justified.”

It is nearly incomprehensible to me—and I would guess to most of you—that in this day and age, a plan fiduciary could be aware of the distinctions of an institutional share class7, and not take advantage of them.

Perhaps, since participants were paying the freight, the fee differential was simply out of sight and thus out of mind. But I’m guessing that the investment committee saw its duty as restricted to the selection and review of the most appropriate investment options under the terms of the IPS, regardless of cost. I wouldn’t be surprised if they saw expense management as the responsibility of the administrative committee—which, doubtless, either assumed that the investment committee’s deliberation included a consideration of fees, or didn’t feel equipped and/or empowered to inquire as to the availability of a less expensive class of shares. Perhaps both felt that their investment adviser was taking those factors into consideration. Ironically, it may well be that this program had so much structure and process that everybody thought somebody else was dealing with the one thing that now seems so obvious, it’s hard to imagine it was overlooked for so long.

Whatever the explanation, it’s clear that nobody was asking the right questions8, and thus, nobody—including the plan participants—was getting the right answer.

—Nevin E. Adams, JD

1 This writer—and the Department of Labor—have had issues with the approach embraced by the courts in more than one of these revenue-sharing suits (see “IMHO: Court “Case”, “IMHO: The ‘Burden’ of Proof”, “IMHO: Second Opinions”, “IMHO: Winning Ways”, “IMHO: The Letter of the Law”).

2 see “IMHO: Fighting Words” at

3 Plaintiffs filed the suit as a class action on August 16, 2007, against Defendants Edison International, Southern California Edison Company, the Southern California Edison Company Benefits Committee, the Edison International Trust Investment Committee, the Secretary of the SCE Benefits Committee, SCE’s Vice President of Human Resources, and the Manager of SCE’s Human Resources Service Center.

4 Nor was the revenue-sharing arrangement hidden. The use of revenue-sharing to offset recordkeeping fees was not only discussed with employee unions, the court noted that the arrangement was disclosed to participants on approximately 17 occasions after the practice began in 1999.

5 In the course of that review, Ertel realized that the institutional share class of the PIMCO Fund had a significant performance history and a Morningstar rating, whereas the retail share class did not. Ertel also realized that the institutional share class charged less 12b-1 fees to the Plan participants. Thus, the Investments Staff recommended, and the Investment Committees adopted the recommendation, that the retail shares of the PIMCO Fund should be transferred into the institutional share class. These facts are very telling: In the one instance in which the Plan fiduciaries actually reviewed the different share classes of one of these three funds, the fiduciaries realized that it would be prudent to invest in the institutional share class rather than the retail share class. Had they done this diligence earlier, the same conclusion would have been apparent with regard to all three funds, and the Plan participants would have saved thousands of dollars in fees.

6 It surely didn’t help matters any that the expert witness hired by the employer-defendants testified that he had obtained waivers for plans as small as $50 million in total assets, and from the same funds as those in question here.

7 Lest some try to rely on this decision as absolute proof that the use of retail class funds is inherently imprudent in 401(k) plans, the court acknowledged in a footnote that “[p]laintiffs are not contending, and the Court has not found, that the mere inclusion of some retail share classes in the Plan constituted a violation of the duty of prudence. The only issue here is whether it was a breach of the duty of prudence to select retail shares rather than institutional shares of the same mutual fund where the only difference between the two share classes was that the retail share class charged a higher fee.”

8 Perhaps including this court. Though there were six funds in question, only three were the focus of the ruling, and for which the plan fiduciaries were held to account for the difference in costs between the retail and institutional shares. The other three were added to the fund menu earlier, apparently outside the applicable statute of limitations, but otherwise seemed to have the same institutional/retail class issues—yet the court rebuffed those claims.

What was the difference? Well, it seems that the plaintiffs didn’t challenge the initial decision to invest (my guess would be because they knew it was outside the statute of limitations), but they did argue that there were subsequent events (change in fund name, manager, etc.) that should have triggered a fresh review, a review in which they argued the whole institutional/retail issue should have arisen, and thus they should be liable as they were in the case of the funds added later. However, this judge was apparently only focusing on the initial decision, and found no reason that the subsequent fund changes should have triggered a full review, and thus—no violation of fiduciary duty. So much for the duty to monitor.

Court 'Case'

For all the fuss about fees, a recent friend of the court filing by the Department of Labor reminds us that it’s not just what you pay, it’s what you get for what you pay.

The amicus brief had the DoL once again weighing in on another in the series of revenue-sharing suits that have kept the industry stirred up since the first wave was filed in 2006. Once again, the DoL was expressing its sense that there were real, and triable, issues in the case, this one involving Exelon Corporation (see “Solis Asks Court to Overturn Exelon Excessive Fee Case Decision”).

The DoL had previously expressed similar concerns about a similar dismissal in the same judicial district in a case involving Deere & Co. (see “Hecker Fee Case Prompts Exelon Suit Dismissal”)—a dismissal that was affirmed by the appellate court, and that the U.S. Supreme Court has refused to reconsider.

Those concerns weren’t enough to influence the appellate court in the Hecker case, though it did result in a judicial addendum that sought to limit the broader applicability of its reasoning to cases outside the specific facts in the Hecker case (see “7th Circuit Panel Limits Ruling's 404(c) Effects”). That said, the same court rejected the plaintiff’s arguments in Loomis v. Exelon Corp. as being nearly identical to those in Hecker—and dismissed it just as summarily.

Retail Fail?

In its most recent filing, the Labor Department sought to distinguish the two cases, noting that it wasn’t just the mere allegation that a large plan was offering mutual funds with “retail level fees,” but that—since those participants weren’t receiving services beyond those of any retail customer—those fees were, at least arguably, excessive(1). In fact, the DoL’s amicus brief noted that “[b]y continually returning to the point that the panel's opinion was limited to the particular facts as alleged, Hecker clearly and deliberately left the door open for other cases like this one in which the allegations about fees are tied directly to allegations about services.”

The Labor Department also took issue with the court’s admonitions that fiduciaries had no obligation to “scour the market” for the cheapest fees. “[T]he holding that fiduciaries are not duty-bound to ‘scour the market’ to find the lowest possible fees should not be read to mean they are free to pay any fee the market bears, without making a diligent effort to assure that they are getting reasonable services for the fees comparable to what prudently managed plans of similar size and type plans also pay.”

And the DoL also said that the district court made a mistake by “ruling instead, without inquiry, that the mere existence of fee ratios comparable to those in Hecker (.03 to .96% in this case) meant that the fees must be reasonable and prudently selected....” Indeed, the DoL noted that “[n]othing in ERISA or Hecker establishes that a particular numerical range of fees is either per se prudent or per se imprudent, or authorizes the courts to fashion a simple numerical test, without regard to what the evidence actually shows after the plaintiffs have been given an opportunity to present their case at trial or on summary judgment.” While the court’s reliance on Hecker as a basis for dismissal drew most of the DoL’s focus, it also pointed out that “[i]n an ERISA case alleging excessive fees in terms very similar to the allegations at issue here, the Eighth Circuit, reversing the district court's grant of a motion to dismiss, recently recognized the presumptive inappropriateness of dismissing a prudence claim at the pleadings stage.”(2)

However, at the heart of the DoL’s stance is, as it has been before, that the plaintiffs in the Exelon case had presented a case sufficient to be entitled to their day in court—and that the court’s dismissal of those claims was too preemptory(3), (4), too willing (though not perhaps in so many words) to apply a presumption of prudence to the decisions of the fiduciaries.(5)

What we don’t know yet, of course, is how much extra in types or number of services might be required to justify the payment of retail-level fees by a retirement program (especially a large one)(6), what kind of differential in penalties a court might apply if it found a “reasonable” gap—or if the 7th Circuit will reconsider its threshold for making that case.

However, what we can reasonably infer from the amicus filing is that the Labor Department thinks it should—and that the fiduciary threshold for a plan, certainly a large plan(7), is and, IMHO, should be, more than merely paying retail-level fees for retail-level service.

—Nevin E. Adams, JD


(1) Unlike the Hecker plaintiffs, the Exelon plaintiffs make very clear that they have not received more services for the same amount of money, and therefore the fees are not appropriate for an institutional investor.”

“The participants' amended complaint distinguished it from the one in Hecker by specifically alleging that the challenged fees were too high, not just in the abstract, but in relation to the services received.”

(2) “In Braden v. Wal-Mart, 588 F.3d 585, 595 (8th Cir. 2009), the court held that the plaintiff met the pleading requirements of Twombly and Iqbal, and was not required to plead additional facts explaining precisely how the fiduciaries' conduct was unlawful.” (see “8th Circuit Says Wal-Mart 401(k) Suit Requires Further Discussion”)

(3) “Considering the fact-intensive nature of most ERISA fiduciary-breach claims, and the near monopoly defendants often have over many of the determinative facts, the statutory scheme militates against dismissal at the pleadings stage in the ordinary fiduciary-breach case.”

(4)” It was therefore error for the district court to decide at this stage that under any plausible inference based on the facts as alleged, the defendants could not possibly have acted imprudently when they selected investment options charging retail-level fees and providing retail-level services without, according to the allegations, attempting to obtain the fees (or services) that plans of comparable size are expected to secure in the institutional-fund market.”

(5)” For the reasons stated above, the dismissal was error, not only because it was based on a misreading of Hecker, but because it misapplied the established pleading standards and gave the benefit of the doubt to the wrong party.”

(6) While the DoL’s amicus brief was technically in support of giving the plaintiffs an opportunity to plead their case, it also tipped its hand on what those findings might mean: “It (the plaintiff suit) alleges that the Plan fiduciaries breached their statutory duties by imprudently selecting Plan investment options that were unreasonably expensive for the plan's size and bargaining power and did not provide services commensurate with their high fees.

(7) Such conduct, if true, would constitute a breach of fiduciary duty under ERISA and would make the responsible fiduciaries liable for any resulting losses.”

See also “IMHO: The ‘Burden’ of Proof”

Safety “Knot”

Two weeks ago, the Department of Labor and the U.S. Treasury turned to the retirement plan community for some input on how to “enhance retirement security for workers in employer-sponsored retirement plans through lifetime annuities or other arrangements that provide a stream of income after retiring.”

Now, part of what the DoL is trying to figure out (see Feds Call for Lifetime Income Product Public Comment) is why the take-up rate on annuities (technically “lifetime annuities or other arrangements that provide a stream of income after retiring”) is so dismal—not just because many see them as a superior way to ensure that “stream of income,” but because some are hoping that, if it can be made more available as a distribution option (perhaps even a default distribution option), more participants will take advantage of it.

There are good reasons for the inquiry. We all know that most participants with a non-retirement-related distributable event (such as a job termination) tend to have relatively small balances; that all too often they take that small balance as a cash distribution—and spend it (what’s left after taxes and penalties, anyway). We also know that many, perhaps most, defined contribution plans don’t provide an annuity distribution option. Not that it would likely matter, since defined benefit plan participants who, unlike their DC cousins, are frequently given that option routinely reject it in favor of a lump-sum option (when offered). Therefore, it doesn’t take much imagination to realize that merely having the option available won’t be enough to impact participant behaviors (and trust me, even as a default, when it comes to getting that distribution check, I suspect participants won’t be as pliant as they have been with other automatic design features).

Participants have, it seems, learned to distrust annuities. Stories abound of individuals who have been bamboozled by unscrupulous advisers (and sometimes by annuity providers themselves)—in terms of product, promise, and fees. While the concept of an annuity—giving your money to a firm that will, some years hence, provide you with a specific income stream—is relatively straightforward, the realities are anything but. The here-and-now money being surrendered inevitably seems larger than the promised income stream, and unless you have an actuarial bent, it’s nigh impossible to figure out how badly you’re being ripped off1—assuming that the firm you hand that money over to is still financially viable 20 years out. Moreover, the disclosures attendant with those purchases—certainly on the retail level—are enough to make you long for the brevity, simplicity, and coherence of a mutual fund prospectus. Sure, you can lose your shirt at the craps table, but at least you’ll have some fun doing it.

From an employer standpoint, the current reluctance is, IMHO, even easier to understand. First off, there are all the same issues and concerns that the participant has with regard to the complexity of the product and “disclosures” (and I use the term loosely)—and the ever-present sense that they are getting ripped off (though, at an institutional level, perhaps less so). Take all that, add to it the already-daunting obligations of a plan fiduciary, and extend those not only past employment, but potentially past the lifetime of the participant himself. While the Labor Department has made several efforts to ameliorate those concerns, they can’t really afford to let the fiduciary totally off the hook for making a prudent decision in choosing a provider/product—but let’s face it, whatever stance the DoL may take, litigators may well choose to apply a less stringent standard. However much that plan fiduciary would like to help the participant make the right choice(s), it’s hard to imagine why they would want—or be expected to want—to assume that kind of potential liability today, much less decades into the future.

So, what’s to be done? We are, in essence if not reality, talking about a structure that will allow workers to buy their own personal pension, and, IMHO, the questions that need to be answered aren’t really all that hard to understand.

People want a safe repository where their savings can be comfortably entrusted at the proper time, and from which a secure, predictable stream of lifetime income can eventually be drawn. That comfort will, in turn, require that it be relatively easy to communicate (and understand), and—like any retirement investment—that fees can be disclosed (and understood). It would be a program that, hopefully, plan sponsors can facilitate without becoming co-signers of the obligation. One, it should be said, that won’t put those savings at risk during the interim by imprudent speculation (as the private sector sometimes does) or misappropriation for other purposes (as politicians are wont to do). And one that, IMHO, remains a voluntary choice, not one imposed on participants (if you want to wipe out voluntary retirement savings, just tell people they won’t be able to get their money “out” EXCEPT as an annuity distribution).

Indeed, in my mind, the question about a retirement income solution isn’t so much about why plan sponsors have been reluctant to offer these options at present—and why even fewer participants take it—because I think that, once we give people the right kind of choice, they’ll make it.

- Nevin E. Adams, JD


The Labor Department’s request for information is online HERE


1 Another great rip-off fear: that you’ll hand over your life savings assuming that you’ll get it all back over the rest of your life, only to die prematurely and leave nothing to your heirs, is a very real concern (and one that never seems to be counterbalanced in most participants minds by the notion that you could live longer than anticipated and draw more than was put into your account.

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

Under New Management

Sitting in the audience at the ASPPA/DoL Speaks conference last week, I was reminded just how disruptive it can be to have a new boss.

The conference, which, IMHO, remains unique in both the quantity and quality of access to Labor Department exports, featured many panelists it has been my pleasure to meet and get to know over the past several years. However we practitioners may struggle from time to time with the regulations and interpretations these folks put together, you don’t have to spend much time with any of them to appreciate just how smart, hard-working, and dedicated they are.

Still, I can only imagine what it must have been like to have pressed (as they were surely pressed) to wrap up as much of the pending backlog of regulations in 2008. How it must have felt to see that last package—including the final regulations on investment advice—get all the way to the regulatory finish line, only to have it halted dead in its tracks (see White House Executive Order Snares Fee Disclosure, Advice Regs). And then, over a period of weeks/months, have that work rejiggered, perhaps significantly, “simply” because an election, based on factors that had nothing to do with these issues, brought in new leadership (see EBSA Sets Out Carrot, Stick Agenda).

Starting Over?

Let’s face it, even in the private sector, managers and CEOs fall out of favor all the time and new ones are brought in, along with their new ideas (and sometimes their old friends). Advisers have seen plenty of that over these past 12 tumultuous months.

But for our industry, a few things seem obvious among those “new” priorities: a continued, and probably more insistent, emphasis on transparency in fees and revenue sharing; the rebuilding of walls between advice and compensation flows that could vary based on that counsel; and greater clarity in the targeting and positioning of target-date funds. But, frankly, while we may now achieve those aims in different ways, IMHO, it is at least arguable that we were already on those paths, or would have been shortly.

Looking Ahead

That said, there is a palpable sense that the new leadership will be less employer-friendly than its predecessors, though that need not mean unfriendly. They may be less willing to accept the rationalizations of those who protest that it is too hard, or too expensive, to provide meaningful information to plan fiduciaries; and, though it’s early yet, they seem more inclined to shield, rather than simply inform, participants. Time will tell.

Change, of course, is not only inevitable, it is frequently for the good. It is nearly always, however, “disruptive” as we shift and resift priorities and focus, certainly in the short-term. However, IMHO, if there’s a more disruptive force than change in our lives, it’s uncertainty.

And, for better or worse, I’m betting that this new Administration won’t leave us guessing for long.

—Nevin E. Adams, JD

"Right" Minded

One of the most common—and consistent—inquiries I receive (via e-mail, anyway) is from readers looking for help in choosing a plan provider. I am always flattered by the request, and always try to do my best to point them to the resources we have on our site (our annual Defined Contribution Survey and the annual Recordkeeping Survey are quite popular).

Still, there is only so much help one can offer without a fuller understanding of the current needs of the program, as well as the goals and objectives set for the future. Furthermore, providers, like plan sponsors, have "personalities" and, in my experience, sometimes the chemistry that a good relationship needs to thrive just is not there, even when the plan's needs are reasonable and the provider's capabilities are top-notch.

Yes, picking the best provider for a retirement plan is one of the most important decisions a plan sponsor can make—both in terms of fulfilling their fiduciary obligation and in what might affectionately be called job sanity. That said, many plan sponsors really don’t have the time—or the expertise—to pick the best provider (much less monitor that performance), and so, the smart ones do what ERISA requires—they hire the expertise to pick (and monitor) the best provider. And that’s where the retirement plan adviser comes in.

The “Right” Adviser

However, in my experience, it’s no less challenging to find the “right” adviser/consultant than to find the right provider. In fact, IMHO, it’s harder to find that adviser. Why? Well, most of us have some idea as to the features/pricing we want/are willing to pay for from a provider, but how much is good counsel worth? And how do you know it's good counsel?

Here are seven things that I’ve told plan sponsors that they should know, and in some cases know before they start looking, before they engage an adviser’s services:

(1) Know what you want to accomplish with the adviser/why you want an adviser. Is this for a one-time consultation, or are you looking for an ongoing relationship?

(2) Know where the adviser will be. Do you care if they are geographically proximate, or is a phone call away close enough? How often will they visit? How often will they visit without charging?

(3) Know what the adviser has done for others. Get references—in fact, if you can get references first, and then call the advisers, so much the better.

(4) Know how the adviser is going to go about doing what they say they will do. Get that in writing—and hold them accountable.

(5) Know where the adviser stands on the issue of being a fiduciary to your plan. Know the size and strength of the organization that stands behind that commitment. Know that hiring an adviser who will be a fiduciary to your plan doesn’t diminish your responsibility as a fiduciary.

(6) Know what kind of background/expertise the adviser has. What kind of education, honors, and/or designation(s) do they have? How do they stay current on market and regulatory developments—and how will they keep YOU current?

(7) Know how much—and how—you will be asked to pay for the adviser. More importantly, know how much—and how—the adviser is paid for the services provided to your plan. Be sure that they aren’t compensated in a way that unduly influences (or could be seen to influence) their objectivity. If they won’t answer this question, no matter how good they seem to be, walk—no, run—away.

Of course, ultimately, the choice of the “right” adviser will be a combination of personal chemistry, professional acumen, relevant experience, and—perhaps the most element—trust.

—Nevin E. Adams, JD

P.S. I’m sure that, in the interests of focus and brevity, I have overlooked things. If so—or if you just want to tell me you agree—drop me a note at nevin.adams@assetinternational.com