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.”