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Pensions & Benefits Law A Discussion of Canadian and U.S./Cross-Border Pension & Benefit Legal Issues

New 401(k) Fee Controversy Goes Viral: What Should Fiduciaries Really Be Looking At?

Posted in U.S. Pensions & Benefits Law

The web was on fire this past week with reports from advisers whose clients had received some very unusual letters from a Yale law professor who doesn’t teach an ERISA course. In fact, the controversy hit the mainstream this week when The Wall Street Journal described the letter-writing campaign as “causing a ruckus.”

In various versions of this letter, the Yale professor announces that he is the co-author of a study on 2009 plan fees – that year is not a typo – which will be published in 2014. The professor’s letter goes on to inform the recipient that the company’s 401(k) plan was identified in his study as being in the group of plan sponsors with the highest fees, and that ERISA requires plan fiduciaries to monitor fees. Finally, the professor suggests that paying high fees alone is a violation of ERISA, and threatens to release the Company’s name to the press and on the internet.

What Is Wrong with this Picture?

I don’t take issue with the professor to the extent he indicates that there are still plan sponsors who should be paying more attention to evaluating their plan fees. They have a fiduciary responsibility to do so, and several of my prior posts discussed the importance of taking action such as benchmarking fees to make sure that plans aren’t overpaying for the level of services they are getting. (See my September 4, 2012 and July 2, 2012 posts for example.) But has the professor used the right criteria to select his targets? Here are some of the shortcomings of the methodology he describes:

1. Old Data

Why use data from 2009 when the 2011 5500’s are available on www.freeERISA.com? This spread of years is very significant because in 2009, before mandatory fee disclosure, fees were hidden and information about fees was difficult for even diligent plan fiduciaries to obtain. Studies showed that fees were declining in anticipation of the July 1, 2012 effective date for mandatory disclosure. After July 1, 2012, many fiduciaries benchmarked their fees against other plans and, if the results showed their fees were too high, renegotiated with their providers or did RFPs to find new ones. Many plans have different providers and/or fee arrangements now than they did in 2009, but the professor doesn’t know who they are.

2. 5500 Data is Flawed

These forms don’t show fees paid directly by the plan sponsor, often contain inadvertent errors, and don’t show when fees are related to extra services based on complexity or unusual plan design.

3. ERISA Requirements Are Distorted

Any study that establishes rankings will put some people in the least favorable category. It is true that it would be a breach of fiduciary responsibility for fiduciaries to pay more than reasonable fees out of plan assets, but is it really a violation of ERISA simply to have a plan that is in the professor’s highest fee category? Conversely, is it appropriate to automatically assume that plans in the lowest fee category are run by exemplary fiduciaries? Certainly not.

The Department of Labor (DOL) website, in a section updated when fee disclosure became effective, states: “Fees are only one factor” to look at. The quantity and quality of services provided are also important.

A complicated plan requires expertise and more time to administer. ERISA also requires fiduciaries to make sure that services are competently performed, and picking a low cost provider who makes constant mistakes and misses deadlines could also be a violation of ERISA. A provider who performs work efficiently, with great communication and great service to both the sponsor and the participants, is worth a higher rate. Evaluating fees is a complex judgment, and it is difficult to compare service quality, which is why more and more fiduciaries are asking outside advisers to assist them in evaluating fees. One size doesn’t fit all, and it can’t be reduced to a directive to look only at the level of fees.

New DOL Initiative

The Philadelphia office of the DOL has announced that it will be investigating 401(k) plans who appear, based on its internal data, to be paying high fees. This project may be expanding within the DOL. Hopefully, the DOL’s data will not share the flaws of the professor’s methodology, and won’t import the professor’s results. However, as I stated in Osler’s recent webinar, fiduciaries will need to be able to explain why higher fees are appropriate if they are questioned by the DOL. Inability to answer these questions could have serious consequences.

The Bottom Line

If you receive one of the Yale professor’s letters, you should discuss with your ERISA counsel whether you are meeting your fiduciary responsibilities with respect to plan fees and other matters. As always, sound fiduciary practices backed up by documentation recording the reasons for decisions will be your best defense if you are singled out.