Retirement plan advisors find themselves in a litigious environment as the number of lawsuits filed and settlements made regarding 401(k) plans increases.
New York Life was sued by employees in a class action in July for excessive index fund fees. Cetera was also sued by participants for charging unreasonable administration fees and choosing investments that were too expensive or performed poorly.
Proprietary funds are another risk. Franklin Templeton was sued in July for using its own funds in the company 401(k) instead of better, cheaper funds. The Kansas City Star reported last month that American Century was being sued by employees for excessive fees and only offering its own funds and shares in the company in the investment menu.
Public pensions aren’t immune either, as seen in the Ohio Public Employees Retirement System case against Freddie Mac. OPERS sued Freddie Mac in 2008 alleging that it “concealed its overextension in the nontraditional mortgage market,” according to a 6th Circuit Court of Appeals decision. In late July, the court reversed an earlier district court decision that dismissed the OPERS claim and remanded it for further proceedings.
While the industry has been evolving for several years, lawsuits against advisors and plan providers have picked up speed in the last few years, according to Conor Weir, managing director and a financial consultant at Retirement Benefits Group.
“As more and more advisors recognize the shift and change out the way they’re doing business, these lawsuits will peter out because there will be fewer and fewer targets,” Weir told ThinkAdvisor.
Plan Costs Falling
Plan costs have been falling for the last few years, according to a December report from BrightScope. In 2013, the average plan cost 89 basis points, the report found, down from 102 basis points in 2009.
Larger plans had lower fees. Participants in plans with over $1 billion in assets paid an average 31 basis points. Participants in plans with between $1 million and $10 million paid an average 108 basis points.
However, fees for those smaller plans varied widely, with some plans paying just 68 bps while others paid 153 bps.
All told, 401(k)s held almost $5 trillion in assets as of the second quarter of 2015, according to the report.
The report is based on an analysis by BrightScope and the Investment Company Institute of 2013 Form 5500 filings.
“There has been a shift over time in the role of the advisors and also in the fees paid to advisors,” Weir said. Fees have fallen, and have shifted from commissions to advisory fees. Advisors’ roles have “evolved enormously over the past eight years,” he said, from more of a broker to a fiduciary.
The DOL’s fiduciary rule is driving a lot of that change. Weir noted, “Under the fiduciary rule, they’re going to be required to be a fiduciary. They have fiduciary responsibility for the investments. They’re also helping advise the plan sponsor on the running of the plan,” including running quarterly meetings, discussing participation, education, plan design and fees, among other things. “It’s really expanded the role of the advisor. I think it’s a great thing because it expands the value the advisor is providing.”
This focus on “an honest day’s work and an honest wage” justifies fees paid for appropriate service, according to Weir.
“It used to be that advisors were paid a lot under the commission-based system for relatively little work,” Weir said. “We’re much happier with the current system where you get paid a reasonable fee for adding a lot of value.”
Service, Education Key to Protecting Advisors
To protect themselves from lawsuits, advisors should focus on providing the level of service that participants are paying for, and consistently communicate with sponsors and participants to make sure they understand what they’re paying and why, Weir said.
Communicating with sponsors is easier, Weir said, because it’s obviously a smaller group. Quarterly plan reviews should address fees as well as investment performance and other issues.
Retirement Benefits Group hired a third-party to benchmark their fees against the rest of the industry, something Weir recommends other advisors do as well.
“We think that’s particularly critical because it’s the sponsor's fiduciary responsibility to make sure the fees they're paying are reasonable, and what context do they have for that without having a third party?” he said. “Otherwise they’re depending on us to review our fees, which is a conflict of interest.”
Analyzing fees is difficult because fees may be higher than similarly sized plans if they’re serviced differently.
“What is the average advisor fee on a $20 million plan? Without the context of the service provided, that’s not going to be very accurate because there’s huge variation in the services that advisors provide,” Weir said.
Communicating fees to participants is considerably more difficult, Weir said. “You have a diffuse group of individuals that you’re trying to educate. You have no idea of their level of understanding, and you don’t have a lot of opportunity to speak to them directly.”
Another headwind advisors are up against is participants’ mistaken belief that their 401(k) plan is free. Some advisors may be concerned that in addition to making their plan look bad, participants might be dissuaded from contributing as much or signing up at all, Weir said. “It’s not necessarily an underhanded thing,” he said. “If worrying about 80 basis points in fees is going to get in the way” of participants saving for retirement, “that’s an issue.”
RBG works to overcome that through education, Weir said. Written fee disclosures, which are required by law, don’t always have the effect they’re meant to because “participants don’t always read it.”
Educational sessions, either in a group setting or a webinar, can help get past that, he suggested. “We focus heavily on participant education. We see that as a huge value add.”
One-on-one education takes more work, but is also effective, especially for plans with fewer than 500 participants, Weir said. “That really gives you the opportunity to explain those fees.”
The fiduciary rule requires that advisors act as would a reasonable person with knowledge of the subject matter, Weir said. “Obviously the plan sponsor’s business is to run their core business. They hire somebody to be their advocate and sit on their side of the table who is knowledgeable about this business. Therefore they need to act as that advocate, look out for the best interest of the plan sponsor and the participants.”
--- Read Does DOL Fiduciary Rule Create a New Right to Sue? on ThinkAdvisor.