Imagine what a fiduciary would do if a letter was received from a Yale law professor stating that the plan the fiduciary was overseeing was expensive and that he was going public with the information about the fiduciary’s plan.
Believe it or not, this could become reality for many plan fiduciaries. The retirement plan industry has learned that a Yale professor, Ian Ayres, is sending letters to plan sponsors about a study he and a colleague performed about costs of 401(k) plans.
What was in that letter?
Ayres has drafted a letter, which he plans to send to plan sponsors notifying them that he has, “identified [their] plan as a potential high-cost plan”. The letter also states that Ayres and his colleague plan to publicize the results of the study and share the information with the New York Times and the Wall Street Journal, as well as via Twitter “with a separate hashtag for [each] company”.
Any substance to the letter?
Based on the letter Mr. Ayres plans to send out, one would assume that the fiduciaries of these “high-cost” plans could be in trouble. However, although plan fiduciaries are responsible to make sure that fees are reasonable for the services provided, nowhere does ERISA state that high fees are a fiduciary breach. The issue is whether or not the arrangement with the vendor is reasonable. With any retirement plan, the focus cannot be solely on fees; there is always another component – services. Fiduciaries need to determine if the services being received justify the fees being paid. You simply cannot assume that cheaper is better. If that were true, then one could reason that Yale University, in which Ayres is employed, cannot be a good university as it is “high-cost”. Fees must always be evaluated in light of the services being provided.
Another problem with the study is that it uses old data. The data used came from 2009 Form 5500 filings with the Department of Labor. And, even if the data were up to date, the Form 5500 was never intended to be a comprehensive source of plan fees. The form does not report on all plan fees and even the United States Government Accountability Office, in a report from April 2012, has stated there are obstacles to using Form 5500 data to assess 401(k) plan fees.
What needs to be done?
Ayres’ letter could certainly motivate fiduciaries to make sure they are doing what they need to do. In this new age of lawsuits and media attention for retirement plans, fiduciaries need to pay close attention to their plans and responsibilities. Many people in our society pay close attention to negative publicity, so it seems realistic that participants will take note when their plan is being criticized in traditional and social media outlets for being high-cost. Maybe it’s time fiduciaries start promoting their good fiduciary works and oversight; it would be relatively simple to incorporate a positive message about fiduciary oversight within participant communication programs.
While it may be wise for fiduciaries to let participants know they are properly overseeing the plan, they are not required to do so. Fiduciaries are, however, required to act in the best interest of the participants and use the care, skill, prudence and diligence of a prudent person. Fiduciaries need to consistently monitor their vendors. At certain times, fiduciaries may need to go to market to benchmark their vendors or search for a replacement. And with each step the fiduciary takes to oversee the plan, proper documentation is imperative.
Fiduciaries do have a high standard to maintain, but that standard is not determined by a Yale law professor who has neither all the plan information, nor a clear understanding of the reasonableness of the arrangements of the plans he has scrutinized.
Read more about vendor monitoring.