By now, you’re probably aware of all the hubbub surrounding Yale law professor Ian Ayres’ letter to more than 6,000 retirement plan sponsors, suggesting that they may be violating their fiduciary duty by overcharging their participants (See Melanie Waddell of ThinkAdvisor’s news article, “Yale Professor’s Fiduciary Threat Has Retirement Execs Fuming”).
My first thought upon reading Melanie’s story (and a sampling of the myriad others which fill many Google search pages) was to wonder whether the good professor can get away with it. That’s particularly an issue considering that Professor Ayres’ research report, which backs up his claims, won’t even be released until next spring. The retirement plan industry is calling the move “harassment,” and it sounds kind of libelous to me. But he is a law professor, so let’s assume he knows the law in situations like this.
My second thought is: What a brilliant PR move! And it couldn’t have come at a better time. Currently, Phyllis Borzi and the DOL are meeting their stiffest resistance yet to expanding advisors’ fiduciary responsibilities to participants in retirement plans: Two new SEC commissioners, two new bills that could slow down or derail the DOL, and troubling new cost benefit data to consider (see Melanie Waddell’s August Investment Advisor column, “Fiduciary Stumbling Blocks Surface”).
Just when things at the DOL seem to have reached a turning point, along comes Professor Ayres—and suddenly the conversation in the media has shifted to “Why are 401(k) plans overcharging their participants?” It’s the kind of publicity that politicians can’t ignore, and may even contain a head’s up for many RIAs.
A quick look down the Google list shows most major media outlets are covering the story, including: CBS, ABC, CNN, NPR, USA Today, Forbes, Money, The Wall Street Journal, The New York Times, Kiplinger, and MarketWatch, to name a few. More importantly, the Ayres story has drawn renewed attention to a number of “watchdog groups” that have been trying to blow the whistle on 401(k) fees for years, without much traction.
From mountains of collected data, there seems to be two stories that the “sound bite” media have focused on. The first is that most all 401(k)s offer a menu of mutual funds with expense ratios of 127% (the reported 401(k) average), while index ETFs historically deliver about the same performance for 5 to 10 bps. Not surprisingly, the nuances of the decades-long debate over managed vs. indexed portfolios have escaped the media’s attention.
Of more substance is the data that seems to have originated with a research group called Demos, which tallied up the various costs associated with 401(k)s (including administrative fees, 12(b)1 fees, mutual fund management and expense fees, transaction costs, wrap fees, consulting services and revenue sharing). According to the group, the combined costs over decades can reduce portfolio returns by up to a third, or some “$278,000 over the working lifetime of ‘higher-income’ earners.”