More On Legal & Compliancefrom The Advisor's Professional Library
- Best Practices for Working with Senior Investors Securities examiners deal harshly with RIAs that do not fulfill their fiduciary obligations toward senior investors, as the SEC and state securities regulators view older investors as particularly vulnerable and in need of protection.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
After performing an “in-depth analysis,” a group of ERISA lawyers at Drinker Biddle & Reath have sent a letter to the 401(k) community debunking a recent Yale professor’s claim that they had breached their fiduciary duties with respect to plan costs and investments.
In his letter, sent in mid-July to 6,000 sponsors of 401(k) plans, Ian Ayres, a William K. Townsend professor at Yale Law School, suggested that the recipients were operating a “potentially high-cost plan” and that they may have breached their fiduciary duties.
In some of the letters, Ayres also said that he intended to publicize his study on plan expenses next spring.
But Fred Reish, partner and chair of the financial services ERISA team at Drinker Biddle & Reath, told ThinkAdvisor on Tuesday that because “a number of people” have written to Ayers as well as to Yale University noting their concerns about the report and the quality of the underlying data, as well as its results, “My understanding is that the professor has agreed that, while he will release the study together with aggregated information, he no longer plans to release information about individual plans.”
Also, Ayres has “backed off” his stance that he would publicize the study data in major newspapers like The New York Times and The Wall Street Journal, as well as via Twitter, the Drinker Biddle attorneys told plan sponsors in their open letter.
Bruce Ashton, a partner at Drinker Biddle who works with Reish on the ERISA team, told ThinkAdvisor that while Drinker Biddle has not sent its rebuttal letter and conclusions to the Department of Labor or Congress, as they “don’t think [the issue] rises to the level of a regulatory or legislative” matter, “I assume [both] are aware of the issue in light of the publicity the [Yale professor’s] letters have received.”
Reish (left) says in the open letter that he and his team have concluded that Ayres' study has a number of “material limitations,” and, as a result, “does not provide a valid basis for concluding that fiduciaries have breached their duties.”
The “primary deficiencies,” Reish and his team say, “relate to assumptions we believe to be inaccurate and errors in data sampling.” As a result, “we believe that the study’s findings are not reliable as an indicator of the reasonableness of fund fees either on an aggregate industry-wide or a plan-by-plan basis or for determining whether there has been a breach of fiduciary duty in any individual case.”
Reish and his team then cite the following areas of deficiencies:
- Failure to consider fiduciary practices that have lead to cost reductions in recent years;
- Failure to consider plan design differences and services in relation to costs;
- Failure to consider the impact of revenue sharing;
- Use of outdated information;
- Reliance on data from the Form 5500, which may be misplaced; and
- Failure to consider or misapplication of other data, e.g., failure to consider the impact of ERISA accounts, assuming that plans invest in funds that bear front-end loads and use of an inappropriately limited universe of plans.
“Besides misunderstanding of the ERISA fiduciary rules,” the study also relies on outdated Form 5500 data from December 2009, the attorneys note. They cite a Government Accountability Office report which found that the Form 5500 was not intended to be a "comprehensive database of plan fees," and that it's difficult for plan sponsors to use 5500 for that purpose.
Eric Ryles, managing director of Judy Diamond Associates, publisher of retirement and employee benefits industry prospecting tools and plan data, agrees that Form 5500 is only a "starting point" when beginning to assess a retirement plan. "The diligent advisor will use the information gathered from the 5500 as a conversation starter and as the basis for a more informative and detailed discussion with plan fiduciaries," Ryles says. "The Form 5500 on its own is not sufficiently comprehensive to identify a breach in fiduciary duties."
Ryles adds that the Ayers’ study is an "attempt to bully plan sponsors by threat of public shaming, on the basis of incomplete data from four years ago," and that it "diminishes our industry and demeans the dedicated professionals who practice it."
Ayers’ study also relies on index funds for comparison of fund fees, and, as Reish says, “is biased against actively managed funds that can be prudent choices under ERISA.”
For example, Reish says his team’s analysis shows that, “to evaluate fund fees, [Ayres’] study compared the expense ratios of Vanguard index funds with the mutual funds held in plans, thereby virtually ensuring that all actively managed funds would be considered expensive.” The analysis, they say, “also fails to take into account revenue sharing used to pay the costs of plan administration and/or to provide a return to the participants.”
Reish and his team conclude that as with any economic analysis, Ayers’ study conclusions “are necessarily limited in their validity by the quality and reliability of the data and assumptions upon which they are based.” The primary deficiencies Reish and his team identified “and with which we are concerned, relate to assumptions we believe to be inaccurate and errors as to data sampling, not failures as to the [Ayers] study’s analysis.”
The study “contains deficiencies that seriously call into question the conclusions that are drawn, especially when trying to apply those conclusions to specific plans and the conduct of their fiduciaries,” Reish says.
“As a result, we believe that the Study’s findings are not reliable as an indicator of the reasonableness of fund fees either on an aggregate industry-wide or a plan-by-plan basis or for determining whether there has been a breach of fiduciary duty in any individual case.”
The Drinker Biddle attorney stress that a fiduciary’s duty “is to ensure that costs are reasonable in light of the services being provided, not to provide the cheapest plan.”
Plan sponsors do have a fiduciary duty to “prudently monitor plan and investment expenses,” the attorneys say. If plan sponsors have not compared their costs to market data in the last two or three years, “they should do so now, particularly in light of last year’s 408(b)2 disclosures.”
Check out Yale Professor’s Fiduciary Threat Has Retirement Execs Fuming at ThinkAdvisor.