Thursday, August 8, 2013

Academic Study Inflames 401(k) Community

Ian Ayres, a Professor of Law at Yale University recently inflamed the 401(k) community by sending roughly 6,000 letters to plan sponsors telling them, in essence, that the fees associated with their investment lineups are too high. They appear to use as a benchmark a family of index funds provided by Vanguard and the fees at which those funds could be available. Additionally, Mr. Ayres is doing working with Quinn Curtis, Associate Professor of Law at the University of Virginia School of Law. Messrs Ayres and Curtis have posted a draft of the paper they intend to publish on the topic. If you were to do an internet search on Ayres/Curtis papers, you would probably find it, but since the authors ask that the paper not be specifically cited, I will leave that to the reader (more hints to come).

Three attorneys at Drinker, Biddle & Reath LLP (Fred Reish, Bruce Ashton, and Joshua Waldbeser) have written a critical analysis directed to the 401(k) community as well as an accompanying "cover memo." If you choose to read them carefully, you might find a way to access the draft paper (Ayres/Curtis).

Essentially, Ayres [and Curtis] has concluded that most participant "losses" in 401(k) plans (losses are cumulative investment returns that are less than optimal) are what they call "menu excess fee losses." While it's not 100% clear to me, I think that they are comparing the cost of a plan's investment menu to the cost of an arguably (or not) comparable Vanguard menu.

FULL DISCLOSURE: I personally have no strong bias for or against Vanguard as compared to their competitors. I have at various times had money invested in Vanguard funds. I know people who work for Vanguard as well as many of their competitors.

There are many factors that the Ayres/Curtis work fails to consider. Reish et al discuss what I would consider to be the large majority of them. I could opine on my own, but for the moment, I will take a different tact.

Suppose you were buying a car. All cars will, at least for a while, provide a capable driver with transportation from one place to another. Some cars are less expensive than others. Should you always purchase the least expensive car that meets your minimum standards? Most readers, I believe, would say no.

Let's return to the real topic at hand. Often times, for a plan sponsor to negotiate the best recordkeeping fee arrangement for plan participants (remember that those fees may be charged back to participants in an ERISA plan), the sponsor must agree to include some of the recordkeeper's proprietary funds in their investment menu. Done properly, the sponsor will have worked with experts internally or externally who have evaluated each of those funds to ensure to their satisfaction that the funds are appropriate for a participant-directed ERISA plan. Presumably, funds that either have poor track records, lack of manager stability, or other red flags that would cause them to be suspect will either not be chosen, or at least placed on a watch list.

As Reish et al point out, most plan committees do strive to fulfill their fiduciary duties. One could surmise this to be the case from the number of lawsuits that have been filed alleging that they are not fulfilling those duties as compared to the number that have not been thrown out by the courts.

Further, the study gathered much of its data from Forms 5500 for the 2009 plan years. Schedule C to Form 5500 is the place where plan sponsors disclose certain fees paid from plan assets. To what extent can a researcher gather this data to determine menu excess fee losses? Do the authors know what Vanguard would be charging the same plan sponsor? Do they know how much the sponsor was paying to the investment firms for each fund? What happens where a plan uses multiple funds from the same vendor and those fees are all listed together? Suppose some of those funds use asset classes not available through Vanguard.

In the limited cases where plan sponsors have been judged to not be fulfilling their fiduciary obligations, I have been critical of them. Personally, however, if I were to perform a study of this sort, I believe that many commentators would tell me that I was fishing for opportunities to serve as an expert for plaintiffs bar. Perhaps Ayres and Curtis are simply performing a service to the 401(k) community. My own feeling though is that they and other academics will always be well-served to seek out the opinions of people who actually work in the field rather than relying entirely on raw data. Perhaps they have, but I have not found evidence.

If Messrs Ayres and Curtis happen to read this, I would be more than happy to allow them to respond to this post. And, to the extent that any of my assertions are incorrect, I will correct them.


  1. Real ERISA lawyerAugust 8, 2013 at 2:52 PM

    I think the only way in which any of your assertions are arguably incorrect is that they are too "easy" on the prof's. Their study should have been described as what it was -- a strictly academic exercise that looked at historic activity involving fees in certain select 401(k) plan directed accounts.

  2. Thanks for reading and commenting, Real ERISA lawyer. If only they would have stopped by simply publishing their academic study. Instead, they wrote letters to what I understand to be about 6000 plan sponsors informing them of their "problems."

  3. So what is the real problem? Let the professors be challenged in court by however many of the 6000 plan sponsors.

  4. Anonymous, thanks for reading and commenting. From where I sit, the real problem is that many plan sponsors have been perhaps needlessly alarmed by what some claim to be a faulty study.