401(k) industry flummoxed over Yale professor's 6,000 'threatening' letters to plan sponsors
The eclectic academic says he'll go public targeting alleged 'high-cost plans' as sponsors flood phone lines of advisors and recordkeepers and Brightscope is drawn into the fray
Industry leaders are furious at a Yale law professor who’s mailed 6,000 letters to plan sponsors warning them they are paying too much for their 401(k) plans and encouraging them to make changes — or else. See: Why the industry needs to accept some blame for 'flaws’ in PBS Frontline’s 'Retirement Gamble’.
In the letters, Prof. Ian Ayres writes: “Using data from the form 5500 your company filed with the Dept. of Labor in 2009 and BrightScope Inc. I have identified your plan as a potential high cost plan. We recommend that you improve your plan menu offerings, including adding lower fee options, both at the plan and fund level, and consider eliminating high-fee funds that do not meaningfully contribute to investor diversification.” See: Why the 'naked fear’ from a Yale law professor’s letters to 401(k) plan sponsors is still present.
The letter, which plan sponsors started receiving at the end of June, links to a draft of a white paper written by Ayres and Prof. Quinn Curtis, an associate professor of law at the University of Virginia School of Law, entitled: “Measuring Fiduciary and Investor Losses in 401(k) Plans.” See: 9 things advisors to 401(k) plans must do to keep clients out of hot water.
Advisors and 401(k) leaders alike feel Ayres’ letters have a threatening tone, particularly a section in which he tells plan sponsors he would mention names of these specific “high cost plan” companies and their hashtags on Twitter in the spring of 2014. The missives have prompted confused plan sponsors to flood the phone lines of their advisors and recordkeepers. See: Obfuscation Nation: 401(k) fee disclosure laws still don’t give the true cost of plans and may well cause more agita for would-be retirees.
Good reason to worry
This brouhaha won’t end anytime soon and will likely result in more 401(k) lawsuits and possible congressional hearings, says Fred Reish, an attorney with Drinker Biddle & Reath LLP. Reish says his firm intends to draft a formal response to Ayres in the next two weeks. See: What a wave of 401(k) lawsuits tell us about what RIAs really need to worry about.
“The industry is very sensitive to bad publicity — particularly when they’re doing a pretty good job,” Reish says. “To get hit with this, it’s like someone is throwing mud at them. This has legs. It is being discussed on bulletin boards online. It is compounding. This is going to be a big topic at the fall conferences. It is already growing — there is no doubt about it. If I were a plaintiffs’ attorney, I would certainly have my eye on this. See: The PBS 'Frontline’ 401(k) documentary names suspects but leaves out major culprits of the theft of the American retirement.
Advisors and those in the 401(k) industry are already defending themselves via blog posts and LinkedIn messages.
Brian Graff, CEO and executive director of American Society of Pension Professionals and Actuaries and the National Association of Plan Advisors, wrote a blog post on the topic earlier this week that he dubbed, “Love Letters from Yale.” He says his agency has received more than 100 calls and e-mails from angry plan sponsors.
“This is an harassment letter,” he says. “It’s certainly threatening. These are companies that are on a voluntary basis providing retirement plans.”
Graff says his agency is exploring a number of actions including a lawsuit. He says he has reached out to Prof. Ayres, but has not been able to speak with him.
It appears Ayres sent out many different copies of his letter and they were sent through the U.S. Postal Service. “All of the major recordkeepers are getting phone calls. That’s a lot of postage to send out,” says Reish. “That’s a lot of wasted postage. I’d like to think that with all of these issues facing the country that Yale University could find better use for its money.” See: The Yale endowment model of investing is not dead.
Fidelity spokesman Mike Shamrell confirms that his company has received a “small number” of phone calls from plan sponsors.
“The questions have been general in nature,” he says, with plan sponsors asking if the letter was legitimate and whether they should take any action.
Shamrell says his firm explains to plan sponsors that Fidelity wasn’t a part of this study and encourages plan sponsors to speak with their advisor or Fidelity rep. to talk more about their plan costs. See: Fidelity brings its 401(k) muscle to RIAs with new product.
RIABiz e-mailed Ayres multiple times seeking comment. Ayres’ voicemail was full and could not receive new messages.
However, Jan Conroy, director of communications with Yale Law School, e-mailed this response: “Prof. Ayres sent some letters to retirement plan fiduciaries as part of his research on the impact and regulation of costs in retirement plans. The letter was motivated by a desire to inform the recipient about the results of his scholarship and analysis of historical data regarding these plans.”
She also confirmed that no additional letters are being sent out by Ayres.
While there are different versions of Ayres’ letter, his central message is the same. RIABiz has seen five different versions of Ayres’ letter and some industry leaders say they’ve seen more than a dozen versions.
In each version, Ayres identifies himself as the William K. Townsend Professor at Yale Law School. He explains that he is currently engaged in a study of the financial impact of investment and administrative fees in retirement fees and recently began a study with Prof. Curtis, which aims to measure the relative costs to 401(k) plan participants’ menu limitations, excess fees and investor allocation mistakes.
It appears he only sent letters to plan sponsors that he identified as high-plan costs. He explains that he has analyzed the costs of 46,875 plans and tells each employer where their plan stood in that ranking for its fees. In other words, he lets plan sponsors know that they were among the higher-cost plans.
In one version Ayres wrote: “Your plan ranked 29,337 out of 46,875 plans in total plan costs. Among plans of comparable size, (measured by total net assets), your plan ranked worse than 78% of plans.”
In some versions of the letter, he tells plan sponsors about his intent to publicize the news.
“We will make our results available to newspapers (including the New York Times and Wall Street Journal), as well as disseminate the results via Twitter with a separate hashtag for your company. See: 9 things to know about the 'truth’ concerning RIA use of social media.
In most versions, Ayres also urges plan sponsors to remember their fiduciary duties and, in some cases, encourages them to improve their plan options adding, “lower fee options, both at the plan and fund level.”
Brightscope on the spot
Although BrightScope, Inc. is referenced multiple times in the letters, co-founder Mike Alfred says his firm was not involved in this analysis. Two years ago, Alfred says, Ayres called asking for data to aid in his research. See: How BrightScope plans to publicize RIA advisory fees fairly amid all those onion layers.
“Generally, if it’s Harvard, Yale, the Department of Labor or someone with legitimacy, we feel we’re public servants and we’re happy to help with these requests and do usually approve them. Obviously, going forward, we need to be more careful because there could be a rogue actor out there,” says Alfred.
BrightScope’s attorney spoke with Ayres last Friday and asked him to stop sending out these letters, Alfred says. The attorney also asked Ayres to stop using BrightScope’s name in the letters. Alfred says Ayres told his attorney he would stop sending letters. See: How BrightScope plans to publicize RIA advisory fees fairly amid all those onion layers.
Alfred says he has seen a handful of different versions of the letter Ayres sent out.
This is only a test
“I think he was trying to test plan sponsors’ reactions,” Alfred says. “Some are aggressive as saying 'we’re going to go public on this in The Wall Street Journal and tweet about it.’ We draw the line there and say that’s too much. You don’t need to poke at people. It was pretty unanimous across the board and people felt the language used was irresponsible. I think it’s hard to disagree with that.” See: BrightScope debate has familiar feel of an industry being dragged kicking and screaming into the new world.
While others think this issue will continue to blow up in the retirement space, Alfred feels it will die out in a week or two. “There isn’t a whole lot of underlying validity to this,” Alfred says. “It’s the middle of summer and a lot of people are on vacation. They’ll come back and probably never see this.”
Alfred also says he feels that Ayres didn’t have bad intentions. “I think he probably had good intentions. The approach offended a lot of people and in my mind, crossed a line. I’m sure the vast majority of his work is very credible. None of my comments are an attack on him. It’s just not liking the approach that was taken and not liking our name being attached to this.”
Reish disagrees with Alfred and feels this could have a long-term impact. He fears that employers, and ultimately their advisors, could face huge backlash if the material from the study gets posted on Twitter. “Can you imagine the response if this is posted on Twitter and it says your company is in the bottom 99% with a hashtag of your company. If I were a plaintiffs attorney, I’d be all over this.”
Reish also fears this will mean more litigation to 401(k) plans and could result in congressional hearings.
Industry leaders claim the data that Ayres used is misleading and is that some of his premises are based on incorrect assumptions. The data is old — from 2009 — they point out. In addition, Graff and Reish say that Ayres focused his analysis solely on the cost of plans and did not consider other factors such as the types of services some of these 401(k) plans provide to participants. See: Which three of DOL’s new 401(k) rules represent the biggest land mines for financial advisors and plan sponsors.
“The professor is treating the retirement services industry like a commodity,” Graff says. “He’s treating it like you’re buying a gallon of gasoline. It’s very amateur hour. We asked to talk to him, but he said he was swamped. He has time to send out 6,000 letters but not the time to make a phone call.”
Graff and Reish both point out that Ayres’ data comes from Form 5500 data, which many plan sponsors fill out themselves. Reish says this data is often inaccurate because plan sponsors don’t understand the exact questions and may fill it out inaccurately.
Reish also takes issue with Ayres’ assumption that cheap is better. For instance, Ayres’ baseline analysis is evaluating Vanguard’s index-only funds. See: What led to Vanguard allowing its 401(k) plan sponsors to shop around for non-Vanguard target-date funds.
“The only employers who use index-only funds provide virtually no other additional services to participants,” Reish says. “Those plans are going to come out very good in this study but it makes no sense. It defies logic,”
Graff says the data doesn’t account for fees paid directly by the plan sponsors and doesn’t include a complete assessment of the reasonableness of aggregate fees.
Ayres’ data does not take into account the complexity of plan design and doesn’t factor in levels of service or performance, according to Reish says. For instance, if a plan advisor provides additional services to participants that would not be factored into Ayres’ data.
Reish also found a number of problems with Ayres’ report. He says one of the biggest concerns was that the study did not account for the fact that by law, plan sponsors are supposed to evaluate their fees based on the services they are receiving.
“The law is clear that you can pay additional money for additional services,” Reish says. “The study seems to take the position that if you are paying a higher percentage of fees you could be in trouble and that’s just not true. The analysis is inconsistent with the law and common practices.”
He continues: “For a lot of people, the integrity of the data relies on the answers to form 5500 questions and it is commonly believed that many plan sponsors don’t understand the questions and answer them inaccurately. There’s the issue of garbage in and garbage out.”
Reish also questions Ayres’ approach about posting employers’ hashtags on Twitter. “I think some plan sponsors have the right to say, 'who are you to do this to me. You haven’t looked at the quality of my plan and its services and you are publicizing that I’m in a bottom percentile.’”
Prof. Ayres’ range of interests appear to have an eclectic bent. In addition to his work in the financial sphere, Ayres has written books on the topics of self-help, gay rights and dieting. Ayres received his Bachelor’s Degree from Yale in 1981, his law degree from Yale in 1986 and his Ph.D. from MIT in 1988.
Ayres has been a columnist for Forbes magazine, a commentator on public radio’s Marketplace and a contributor to The New York Times’ Freakonomics blog. Ayres has published 11 books and more than 100 articles on a wide range of topics. His latest book is “Carrots and Sticks: Unlock the Power of Incentives to Get Things Done.” In 2011, he published “The $500 Diet: Weight Loss for People Who are Committed to Change.” In 2010, he published “Lifecyle Investing” (with Barry Nalebuff). He is also author of “Straightforward: How to Mobilize Heterosexual Support for Gay Rights (Princeton University Press 2005 with Jennifer Gerarda Brown). He also published “How to Use Everyday Ingenuity to Solve Problems Big and Small” (Harvard Business School Press 2003) (with Barry Nalebuff).
Ayres’ official website states that he helped convince a court to vacate his client’s death sentence In an Illinois post-conviction proceeding.
Randy Long, of SageView Advisory Group, LLC, whose firm has close to $24 billion in mostly 401(k) assets, says a handful of his clients have gotten the letters and were initially confused about why they were receiving the letter and also wanted a reminder of how their fees compare with others in the industry.
Long says his firm provides benchmarking metrics for its clients and has given heightened attention to fees. He feels all RIAs should offer this insight to plan sponsor clients.
Long says the industry is feeling defensive about its fees while pointing out that these services can’t be free. He says he didn’t lose any clients over this debacle but feels Ayres’ took a great deal of liberty in his interpretation of price of a plan.
“I think if he really looked into the situation, he would realize that things aren’t as overpriced as they may seem. It is true some plans are still overpriced, but with the full transparency that’s taken plan in the industry, people are taking offense by this. They’re feeling offended because every service provider does need to be paid. It almost feels like the industry is under attack.”
A life of its own
James Holland, with Millennium Investment and Retirement Advisors LLC, oversees fiduciary aspects for about 300 plan sponsors. His firm works with about 30 advisors providing fiduciary oversight for plans ranging from startups to $200 million in assets.
He learned about this issue in a LinkedIn group.
“We did tell advisors about it so they’d be aware,” Holland says. “This has obviously taken on a life of its own.”
SageView Advisory Group, LLC
401k Plan Consultant, Advisory Firm
Top Executive: Randy Long
I suggest there is plenty of praise as well as blame to be passed around the 401k industry including plan sponsors. However, there is a preponderance of fraudulent 401k marketing materials based upon which plan sponsors are making imprudent decisions, or unknowingly letting their service providers make conflicted decisions detrimental to participants.
As evidence of my claim, read almost anything I have written: The Moral Hazard of UNinformed Consent; The Wizard of Oz, Retirement Plans & You; and Caveat Emptor for 401k Plan Sponsors, to name a few which you can find on my website (PrudentChampion dot com under Resources) or LinkedIn profile. I’ve tried to footnote my arguments as much as possible and welcome any rebuttal either offline or on.
Elmer, I must respectfully disagree with your statement, “The main inaccuracies come from delays in data publication – not misinformation.” No doubt this is true of some, or even many, inaccuracies.However, there are still many 401k products out there fraught with hidden or hard-to-find fees & compensation. I spoke to the Alfred brothers several years ago about Brightscope giving an “average fee” rating to a certain group annuity 401k product on which I personally had done an assessment. Their response was that they could only base their Brightscope rating on data found on the 5500, and they had no way to access the hidden and hard-to-find fees buried within disclosures.
Some believe the amended 408(b)(2) is the panacea, but it is so full of loopholes, it has done little to fix this problem, and actually, according to several class action attorneys, has made plan sponsors more vulnerable. Please see “Rule 408(b)(2): The New Fiduciary Paradox” for a more thorough examination on this.
Elmer Rich III
We don’t respond to abusive personal attacks or other dishonest and unprofessional behavior.
Elmer Rich III
Blaming, venting, finger-pointing and criticism without evidence just blocks problem-analysis and problem-solving – but is a common fear response. Human nature.
If there is data and evidence, let’s see it. It’s going to “take a village” to even start to discuss these issues.
401k plans are an historically new retirement component. This is the first generation of retirees to retire using them.
There are massive demographic and structural problems with the first generation in human history living longer than the period they worked, being healthy and affluent and expecting to fund this unprecedented period of retirement.
Claiming “bad guys” is simplistic. If blame is the tactic – how about blaming retirees for spending too much when they worked and not saving enough? There is good research that 20 year old should not buy a car, house or start a family and save everything they make to realistically have a chance of meeting retirement income needs at the end of their life.
These are brand new and very complex and hard problems.
If anyone has a simple set of answers or a silver bullet – bring it on. Every government in the world wants to know how to fund it’s aging population’s retirement.
Every article, policy, law, piece of research is limited. Why critize one article for not being something it does not claim to be? This article does a good job of reporting a single matter – a dishonest threatening of plan sponsors using bad data. That’s a start. No one is claiming more. Let the wider discussion begin…
BTW, the 4% withdrawal rate is likely too conservative based on retirees’ current expenses and wants and medical care inflation.
Elmer Rich III
“ This is not a personal attack, but based upon the ignorance and/or absurdity of your comments:” Another false statement. How many others are there?
We never refer to individuals or make personal comments it is unprofessional and a dishonest argument tactic.
It is called abusive ad hominem and is a logical fallacy and unethical. “The most common and well-known version of the ad hominem fallacy is just a simple insult, and is called the abusive ad hominem. It occurs whenever a person has given up attempting to persuade a person or an audience about the reasonableness of a position and is now resorting to mere personal attacks.”
Arguments from credentials are called “arguments from authority” and also false.
Let’s keep it simple. Where can we publicly find the cost & fee data analysis that supports claims of fraud, dishonesty and bad actions – by any parties? If this is such a glaring problem then the data should be easy to share.
BTW, why would a “trained ethicist” depend so much on abusive personal attacks in a professional forum? Starting with an intemperate dishonest statement at the beginning of a comment. That fits most definitions of unethical behavior.
Conflicts of interest and the absence of transparency which are counter to fiduciary duty and the consumer’s best intererst are not debatable unless you are for conflicts and obsfucation.
The Yale/UVa research is just the beginning of accountability and will not be going away anytime soon. I hope we will see more of it, especially in a fiduciary construct.
Was there something constructive you wanted to say, other than the intial research iteration was not as current as you would like? I assume you are for transparency and full disclosure and the good work Bright Scope and others advance that accelerate accountability, innovation, and consumer protection/awareness.
Elmer Rich III
The Drinker Biddle law firm does a good and quick marketing job. They have some position papers out already.
Let’s start with the basics: The old 5500 data problem, which , naturally Bscope choses to ignore, then cost vs. services rendered:
“For example, the professor’s analysis is based on dated information from 2009. It uses information from the annual 5500 forms that is likely incomplete and in many instances is not reflective of a plan’s true costs.<sup class="footnote"><a href="#fn69677ba1-01fc-44be-a5c6-2abff30a0150" rel="nofollow">1</a></sup> It fails to consider relevant factors about the services being obtained for the indicated costs, the structure of the plans and the extent to which the costs are attributable to plan services that justify the cost because, for example, they help participants to achieve favorable outcomes.”
Our time is better spent on real problems – not ones manufactured for attention grabbing and commercial benefit alone.
Fear and threat mongering Chicken Little and Crying Wolf strategies are so frequent because they work – short-term. If they aren’t based in facts they border on false promotion.
You may not have been paying attention, but cost is an important consideration in one working in an advisory capacity with retirement assets as required by statute. Of course cost is not a considerastion for brokers selling adsvice products under a suitability standard.
Either you are completely misinformed or don’t wish to be informed.
You consistently make the same error that everyone acts as as a broker which is unacceptable in rendering advice to retirement assets governed by ERISA.
Changing the topic to inadequate retirement planning, does not resolve the issue of fiduciary duty pertaining to managing cost as a prudent expert in the consumer’s best interest.
Elmer Rich III
Excerpted from WSJ article:
“...Prof. Ayres, he describes research posted online by him as “a study of the financial impact of investment and administrative fees in retirement plans.”
He and his research partner, Quinn Curtis, an associate professor at University of Virginia School of Law, used data from Department of Labor filings made in 2009 and BrightScope Inc., the letter said. BrightScope is a San Diego financial-information firm that rates 401(k) plans.
Some 401(k) consultants and lobbyists have taken issue with using 2009 data, saying many plans have started disclosing more-detailed, complete fee data since then.
The larger criticism of the study is that it focuses on fees, which range widely. The average amount sponsors of small plans reported paying for record-keeping and administrative services was 1.33% of assets annually, compared with 0.15% for large plans, according to an April 2012 study by the Government Accountability Office.”
Elmer Rich III
Right, the point about, pretty much, total inadequacy of any retirement funding program – globally – highlights the immense, and growing, challenges. Given these challenges we suggest again crying “wolf” about fee disclosures – without the facts to support the claims — is a pointless waste of time.
By definition, any discussion of fees must be one of facts.
If there is hard, independent data clearly demonstrating a problem and claims like “theft”, “fraud” “fight(ing) fee transparency” then we will have a fact basis for problem-solving and not a “witch hunt” – which is all the calls are now for.
BTW, “Freedman has conducted dozens of 408(b)(2) fee assessments and comments” is not a fact basis. This is called anecdotal evidence and not professionally useful.
Finally, given the highly competitive and open market nature of 401k services, how is it at all realistic to state that fees are not examined completely? No doubt the fees have been micro-examined by sponsor attorneys, accounts, current vendors and competitive vendor sales people.
Common sense and lack of real evidence and data suggests the fee “problem” may be a media illusion — again, a witch hunt for selfish advantage.
However, retirement funding inadequacy is a proven global threat. Lot harder to talk about that though!
Elmer Rich III
Here are a few things we can agree on:
- The question of fees is based on numbers and thus facts. Fees are either accurate to current charges or not. They are higher and lower than average, etc. These are not questions of belief, opinion, values etc.. The numbers are what they are.
- We can’t have an intelligent and useful discussion without accurate numbers.
- There is no source of accurate fee data
- It would be complicated and very expensive to gather this data. Technically, there are many “cells” in the sampling and data collection. It would have to be a multi-dimensional table by: firm offerings, size, client types, geography, labor costs, etc. Very expensive.
Now, my professional opinion – we will never have adequate data to assess fees comparatively by plan sponsor and provider. Maybe a massive plan participant study could be done by the government or some non-profit entity where statements are recorded. Also, very expensive.
Again, any and all decent ideas are welcome.
Finally, “valid points about steep fees – that have plagued this industry for years” – how do we know this is true? Isn’t it as likely using the cheapest bidder in managing one’s life savings could be harmful? Who wants to use the cheapest doctor?
Elmer Rich III
Disagreements are best for problem-solving.
How do we know if fees are high? Isn’t it to everyone’s benefit to have this be a fact-based statement that has been studied? Thus, the professor’s statements about fees are not based on facts but personal opinion therefore are false. They are also libelous. Warning that his non-factual and thus dishonest claims will be broadcast publicly is a threat.
If there are reams of data please give one citation of a peer-reviewed academic study – that should be easy. How would this ever be objectively determined? Over what period of time? For what services? By whom?
No, it is a fact that the 5500 information is old, incomplete and not representative of true fees charged customers. This has been known for decades.
This is very simple and a matter of basic accounting – what level of savings is needed to support what period of time in retirement. The math on this has already been done and a Google search will turn up the data.
The challenge to savings for 20 year old is also simple math.
Isn’t the question of “hidden fees” a hypothetical one until the data and evidence proves it out?
There can be no accurate or fact-based discussion of fees using 5500 data. That data is fatally flawed. The only reason it is used is because it is cheap to publish – i.e., free. The professor is deeply ignorant of this basic fact.
The error of your thesis is it is totally contray to the best interst of the investing public. Today our largest institutions are loosing the public’s trust and confidence in their doing the right thing in serving the consumer’s best interest.
This is all about ethical business practices. Dodd-Frank is all about making what is unethical, illegal. The industry’s abusive self interest is self defeating as it has destroyed public trust and confidence.
As an industry aplogist you prefer to turn a blind eye to conflicts and abusive practices deemed customary business practices—when IN FACT—for all investors other than “retail Investors” these practices are prohibited.
When it comes to equal protection under the law guaranteed by the Constitution—the “retail investor” is sadly an exception largely because of a very powerful brokerage industry lobby. Note that the highly respected Judd Gregg now heads the SIFMA with the sole responsibility to influence Congress. Again the consumer’s best interest is demonstrably not even secondary to that of the industry. Thus a self inflicting wound.
What is so egregious about you commentary is you have no compunction in finding fault with fiduciary principles in the consumer’s best interest—yet profess support for fiduciry duty—the height of hypocracy. You give the investing public good reason to lose their trust and confidence in the industry’s ability to do the right thing. The same consumer protections afforded to all other investors should be afforded to retail consumers, who need the most assistance.
You are consistently counter to the consumer, the best interst of the investing public, the professional standing of brokers and ethical practices. Yet suggest unethical behavior on the part of investor advocates. Really !!!!
Thus, do not be surprised when your commentary rings hollow on the ears of advisors who have had to fight the good fight to counter to industry interests to advance the best interest of the investing public.
Cost, my friend, is a seminal issue in this debate as it directly poses the question of ethical practices. Advisors are compensated by fees and are required to minimize cost as a prudent expert in the best interest of the investing public, brokers are compensated by commissions, have no accountability or ongoing responsibility for their recommendations, and seek to maximize their compensation in their best interest.
I hope you see the difference. Advisors advocate for the consumer, you and brokers advocate for themselves at the expense of the consumer.
Elmer Rich III
The profs actions are a “symptom” – not the problem. The problem is patently false data – publicly available and promoted.
Bad data is going to cause problems. This cat is out of the bag. Time to call the lawyers. Suspect any, even implicit, suggestion about inappropriate fees on any public website is libelous or certainly a cause for action and likely class action.
If the data were not being promoted – these problems wouldn’t arise. GIGO.
This is the latest use of fear and threats to get money from plan sponsors. Many businesses use the threat – “Your data from the 5500 shows you are deficient/etc..”
Without an ethical underpinning governing commerce it devolves into the chaos we have today in the “retail Investor” marketplace that does not enjoy the same consumer protections of other investors. There is good reason for the loss of trust and confidence of the investing public in the financial services industry. Can it ever be an acceptable excuse that the industry has self-selected not to support ther best interest of the investing public? Why has the broker been religated to only “doing the best that they can” when a far higher level of counsel is available at a lower cost?
Hopfully, working counter to the best interest of the investing puiblic may be a generational thing. Clearly a younger generation of advisors eschews the conflicted brokerage format. Indeed as the average broker approaches 55 years of age, there is a good reason why younger top RIAs are exponentially growing their businesses. There is more demand for unconflicted expert fiduciary counsel than there are advisors.
To characterize the introduction of modernity, ethical practices, transparency in the consumer’s best interest and broker accountability and responsibility for recommendations as fear mongeringis simply confirms today’s brokerage business mode is insular to the best interest of the investing public. Why are unethical business poctices which are prohibited transactions for other investors acceptable for “retail investor?.”
Elmer is a classic case for industry apologists—who oppose anything beyond todays suitability standard at the expense of the expense of the best interest of the investing public.
Mitchell F Keil
I stepped away form the this thread yesterday and was surprised this morning to see it still has life. Why are any of us still arguing with Elmer? The exercise is pointless from a communication perspective. Most of the commenting advisors seem reasonably able to advance reasonable arguments about whether 401(k) providers have some responsibility to the sponsor and hence ultimately to the employee/participant for full transparent disclosure of the fees embedded in plans. And most of the comments carry factual references or citations regarding this issue. Elmer seems bereft of this ability and inured to it.
Let’s just move on at this point satisfied that most of us understand the need for disclosure and transparency and that this relates to a fiduciary responsibility, something which most providers want to avoid. Some plans are well managed for cost containment while many are not and that this has literally nothing to do with the actual services provided or their actual costs.
Move along — nothing to see here.
Elmer Rich III
So there is no solid data or credibility for the “Chicken Little” claims as we supposed. So the “sky” is not really “falling.” As usual.
Time is better spent on real problems The rest is just self-serving posturing.
Elmer Rich III
It’s hard to see how any actions based on bad information is anything other than harmful and a waste of precious resources needed to address real problems.
What we have is people new to the industry naively falling for the old mistake of thinking the 5500 data has much information value. Since it’s inception, it has not.
Indeed, spending time arguing about “facts” that don’t exist is false, likely unethical but common practice in the media and among most commentators. “If it bleeds it leads.” Even if it is fake blood.
Elmer Rich III
Empty platitudes and demonizing of plan sponsors. Good luck with that. It is dishonest.
Elmer Rich III
Costs and fees are a matter of numbers, facts and data, first. The opinions can come after we have some fact-base.
What we have from the angry commentators so far is called “hand waving” in scientific, engineering, medical and professional circles. So far there is nothing of any business, ethical or legal substance.
Charles Stevens, Jr.
I hope to live long enough to see a group of 401(k) participants who follow this “experts” advice regarding low cost funds come up short in amassing their funds for retirement and bring legal action against him for his erroneous advise.
His letter is another prime example of why anyone who offers any kind of investment advice aside from journalists in their normal course of business should be forced to become FINRA registered and complete continuing education to keep them current on industry trends and changes.
Mitchell F Keil
Nice one sided article.
To be sure there are two sides to this ongoing issue in the retirement plan arena. And to be sure, one would expect that the industry and its supporters, lawyers and camp followers would take umbrage from being called out. But to publish an article on this issue without giving any weight or interview time to those who might support Ayres’ research and comments really only compounds the problem of getting at some semblance of the truth in these complicated matters. Please provide his arguments as well as those of the “maligned” industry. And if you can’t find someone of stature to share his perspective (highly unlikely), then don’t publish until you can.
I am not asking for “he said, she said” journalism, just some good investigative reportage which this article lacks in the extreme. The incredibly self-serving nature of some of the quotes really do get under my skin. And that no one raised an issue with incorrectly completed IRS 5500 forms defies belief. That’s a fraud if true but blithely glossed over in the article.
How about solid data like statute, case law, regulatory opinion letters, an act of Congess (Dodd-Frank), the US Constitution, the Department of Labor, the Security and Exchange Commission, and 800 years of Common Law. Not to mention a very basic understanding of etical behavior.
Pretty good data points. And what are your data points?
Oh, there aren’t any !
So you are against transparency and the best interest of the investing public as required for fiduciary standing?
How is that a platitude?
Isn’t transparency in the best interrest of the investing public, protecting plan sponsors from fiduciary liability. Thus your opposing fiduciary duty is the demonizing of plan sponsors?
Just want to make sure you understand what you are saying.
Elmer Rich III
Claims like “fraud” needs data for support. Please share with the group.
The 5500 data is simply inaccurate and cannot be technically justified as any representation of anything. The main inaccuracies come from delays in data publication – not misinformation. Then there is the indefinable request for a “fee.” How would this be accurately calculated, let alone collected nationally?
Hey guys, lots of great insight. Hey Mitchell, I’ll take your criticism and tell you to stay tuned. We’ll have more things coming on this issue. There’s no question that Prof. Ayres’ brings up valid points about steep fees – that have plagued this industry for years. Obviously, the man who has the most insight – is so far – not talking. But those of you who have any additional insights or perspectives, please post here or send me an e-mail directly at: email@example.com or firstname.lastname@example.org
“Common sense and lack of real evidence and data suggests the fee “problem” may be a media illusion — again, a witch hunt for selfish advantage.”
“Finally, given the highly competitive and open market nature of 401k services, how is it at all realistic to state that fees are not examined completely? No doubt the fees have been micro-examined by sponsor attorneys, accounts, current vendors and competitive vendor sales people.”
“BTW, “Freedman has conducted dozens of 408(b)(2) fee assessments and comments” is not a fact basis. This is called anecdotal evidence and not professionally useful.”
The articles I mentioned earlier, contain many footnotes linking to the “real evidence” which substantiate most, if not all of the claims I’ve made. If multiple GAO studies, for example, aren’t “real evidence” but only a media illusion, then what constitutes real evidence? If GAO studies are real evidence, then your comments indicate that you are not willing to entertain a differing position, let alone change your own, in light of independent facts. Or you are willfully deciding to ignore a source of evidence which contradicts your position.
Your belief that 401k services are highly competitive and open in nature, and that fees have been micro-examined is blatantly false. While this is true for some of the industry, it’s far from even 50% accurate. On my website you will find just one of the several presentations I have done for the AICPA at the national and state level specifically addressing fee issues. Auditors have never been responsible for auditing fees, and having spoken to hundreds of them, very few were aware of the hidden fee issues I address.
At last year’s AICPA national conference Ian Dingwall, Chief Accountant of the EBSA said that auditors have a major role in enforcing 408(b)(2). Given what I’ve mentioned above regarding auditors and fees, I discussed Dingwall’s statement with the senior partners of a national auditing firm and an east coast regional firm receiving identical responses from both: Auditors can only audit according to established standards of accounting. Not only are there no standards for auditing 401k fees, even if there were, the learning curve for auditors to gain competency in finding fees would be overwhelming. They had both made specific reference to discovering fees in group annuity 401k products.
I’ve raised my “fee awareness” argument with many attorneys including a former general counsel of the SEC and current law professor. While these attorneys are experts regarding the law, they are not experts on what happens in the trenches. In fact, the only attorneys who were, were 401k class action attorneys! As a very specific first hand, albeit anecdotal, example, not long after Tibble v, Edison I had a discussion with the senior ERISA attorney of a law firm. He was the chairman of his firm’s $100 million 401k investment committee which held R4 shares. He thought that these were the cheapest shares available and even shared a subsequent email he had with his service provider stating that his plan did have the cheapest shares available. The fund prospectuses, which he had never reviewed, proved otherwise.Moreover, I address your “open and competitive” claim in the Moral Hazard of Uninformed Consent where I examine the characteristics of an ethical sales transaction. The characteristics of competitive and ethical are similar in that fairness applies to both. In order to have fairness you necessarily have to have transparency which means that all of the material facts applicable to a decision must be understood, not merely disclosed within hundreds of pages of legalese. My articles contain footnotes linking to many examples of 401k marketing materials which are deceptive, withhold material facts or are blatant examples of fraud – This is my personal opinion as a trained ethicist; since I’m not an attorney I make no claim about legality only ethicality.
Lastly, your condescending comment regarding anecdotal evidence relative to my education and what I did for a living prior to working in financial services, made me laugh. (I think my bio is included on all my articles, and definitely the 401k Ethicist articles – which obviously you didn’t bother to read.) Assuming you are the only Elmer Rich on LinkedIn, I laughed harder when I read what you do, “Our work is confidential”
Mitchell’s comment immediately above is spot-on. So much for taking you seriously; time to move on.
Why don’t you challenge professor Ayers in a court of law?
There you go again.
Mark Mensack is offering informed counsel based on decades of VERY high level experience.
Please do not advance arguements for argument sake as you usually do, without any basis in fact. Your absurd rationale of “not knowing water is hot even when you put you hands in it”, pertaining to Mike Alfred, has forever established the pointless nature of your commentary.
Since Professor Ayres seems to be concerned about the costs of 401k plans as published from the 2009 Form 5500 without any consideration to the benefits provided by the 401k community, perhaps a better response would be for all affected plan sponsors and advisers to send a letter to Yale University stating they would no longer be providing any financial contributions to the university and discouraging all clients from doing the same.
Here’s a link to The Moral Hazard of Too Big to Jail which elaborates on the unethical and dishonest behavior we/re discussing:www.prudentchampion DOT com/wp-content/uploads/2013/07/Too-Big-Jail-Mensack.pdf
Article starts on page 42.
Elmer Rich III
“The interest I have in believing in something is not a proof that the something exists.”
Mitchell F Keil
The inaccuracies you cite were not identified in the article. I really don’t understand the last two sentences of your comment.
The thrust of my comments had almost entirely to do with the one sided nature of this article.
I will go slow so you will understand how absurd you arguement is.
Ethical behavior is indeed the focus here.
To cite your contention, you belive it is “logical fallacy and an unethical practice” to even consider cost as an important consideration in advisory services, despite massive evidence that does not support that contention and the statutory requirement to do so. This is the view of brokerage industry under a suitability standard and is specifically contray the to the statutory duties of advisors (in the consumer’s best interest) cited by Mark Mensack. This is not conjecture, you just will not acknowledge as a broker you have no obligation to manage cost on behalf of your clients in the client’s best interest. Again confirming as a long supporter of fiduciary duty as you claim, you have no clue as to what fiduciary duty entails. Unethical misrepresentation indeed.
For you to dismiss the brokerage industry’s practice of ignoring cost as a consideration in investing belies your feined interest in advisory services. You are only interested in your best interest rather than that of the consumer.
I think you have it exactly backward, it is you and cetainly not Mark Mensack that is perpetuating a logical fallacy which is terribly unethical as you purport to speak in the consumers best interest yet behave totally differently.
We are just calling you on your consistently disingeneous commentary in RIABIZ. Unprincipled and assuming you believe what you say, unethical.
Glad to engage you on any topic or consideration associated with advisory services. You will agree in principle but will execute in a totally contradictory fashion.
When definitive research entailing cost and services is offered you dismiss it. Even industry interests recognize the problem of excessive cost being incurred without correspondinng service.
Back to the same old absurd rationale of your not knowing water is hot even when you put you hands in it.
How about you meeting the same standard of proof you require?
I could not agree more,. The issue here is whether cost is an important consideration as expresed by Mark, citing statute. While there are excuses for why brokers are” just doing the best they can,” is that ever acceptable when it is not in the investors best interest, This is second rate and cetainly an inferior market position for brokers are paying 60% or more of their gross revenues for world class support.
Hopefully we all can agree that by statute we owe the consumer the ongoing fiduciary duty to act as a prudent expert on behalf of the consumer in the consumer’s best interest?
How can one in an advisory site ignore on going fiduciary duty, as if it does nort exist.? Saying one thing and doing another is an ethical breach for retail investors and a prohibited transaction for all other investors.
Elmer is confused about the difference between brokers and advisors. His willingness to dismiss the consumer protection afforded by advisors to consumers is troubling.
Elmer Rich III
If I had the money, I would. Way to give back.
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You know you all could be right…the industry needs a kick in the pants from time to time but is certainly much better priced than years past.
But the issue started out to be whether or not the letter from the Yale professor was a good or a bad thing. It could be argued its a good thing if it helps plan sponsors recognize thier fiduciary duty but its a bad thing when he identifies plans as high cost when they are not.
Like in Dave’s case, the letters my client received (as potential high cost plans) were simply wrong because the BrightScope information was wrong. In one case Brightscope suggested that this plan had an .85% overall asset based “wrap fee” when it is actually on .04%. That’s a big error on a $25mil plan.
Even if Professor Ayres data was correct I would still not like the letter, but using a flawed data source for this effort can’t be defended even by the above writers Stephen & Mark…..It is a fact guys…the data is wrong….period. Also, even if all of these actual “high cost plans” get the message, there will always be plans in the bottom half of the pricing universe.
Let’s all try to work to move all employers to do a better job …...but let’s do it fairly.
It seems the industry wants to counter attack rather than reflect on its real problems. I have no opinion on the letter Ayers sent, but I find it extremely insightful how people in this industry seem surprised at all the anger out there. It is true that many 401(k) plans are loaded up with fees that no one can defend. Especially those offered and managed by insurance companies. But the entire industry has blown the public’s trust with one scam after another, with Wall Street firms producing products that are pure junk and designed to steal from retiree’s and with the attitude by far too many advisers and brokers acting like nothing bad has really happened in the past decade. We deserve every bad joke, comment and letter because we have let the public down time and time again. That is why this is not a profession and likely never will be. Public trust is way down the list of issues we consider important compared to getting assets under management and more and more fees that leave the client with little left of his or her 4% safe withdrawal amount. It can’t be real great service if the costs leave the client with a fraction of what they make.
Underfying the premise of Dodd-Frank is professional standing and technical competency in advisory services which is crippled by the industry’s inability to acknowledge or support expert advice. This is further complicated by the SEC’s own limitations in technical competency as it does not see clear conflicts in Dodd-Frank and how they can be easily resolved in the consumer’s best interest.
The DOL is on the right path. accountability and transparency afforded by BrightScope and others are taking ther industry in a positrive direction.
None of this is terribly complex, the complexity is easily managed in the consumer’s best interest. Yet that is the problem, the industry will not subordinate its best interest to the consumer’s. It is not complex for anyone but the industry when required to do the right thing.
We at last agree on unethical and dishonest behavior.
Your advisory commentary always leaves one wondering about the factual basis of your assessments.
Therefore you can not detemine that water is hot even when you put your hands in it , right.
Even Volaire, especially Voltaire, would find your reasoning absurd !
Elmer Rich III
How can any discussion, or judgements, of fees be useful without some numbers on costs of delivering the services?
Imagine if the professor had sent a totally different email about collaboratively studying the cost of plan delivery – for all parties. That would be a useful piece of research.
However, many the contracts that pertains to those partitions are tacit contracts based on conference. As an illustration, if you’d like to develop across the structure specially when there is a man or woman dwelling on the other hand, you might have to inform them informally, and send a suitable notice for them stating your intentions.
Dave (plan adviser)
I have a plan that was sent one of these letters and its was very threatening and has caused a lot of time and effort on my part to review the plan again and prove that Brightscopes data is inaccurate and they simply don’t even have the technology and know how to make it accurate. Dan Weeks of Brightscope actually told me that on the phone when I spoke to him about my plan when it was first published on Brightscope with high fees. On my plan they lumped in fees that were voluntary for aditional sevices and Dan weeks admitted those aren’t the kind of fees they are intending to measure. Then he admitted he had no way of determining mandatory fees and voluntary fees. The plan was about 2.5 million and on the front page they were comparing it to “all plans” that could be 100 million dollar plans which makes no since what so ever with fund revenue sharing being a major factor in plan costs. When you click on “compare plans to similar size” it dropped from Highest to just High When compared to plans from one to ten million. I asked him if he could give me an analysis of the plan with only mandatory fees and comapred to plans between a million and 3 million. Dan said he couldn’t do that, he admitted he couldn’t actually do an apples to apples fees comparison for the plan.
He did admit that the plan would probably be at least fair if not better than average for the services they were getting. But when a participant looks them up on Brightscope they will see a chart showing a bar Graph in RED showing fees as HIGHEST.
Anyone with knowledge of pricing of 401k’s knows that you have to compare them on a tight economy of scale for one. Revenue is generated on the funds so that revenue is used to help pay down fees. Index funds normally pay out less revenue so plan participants would be left with paying more varaialbe asset charge to make up for that so the fund expense ratio is more complicated than “Index funds have low expenses so they are better” argument that Brightscope and Ayres are hooked on. Plus all these “ studies “ are leaving off the most important factor “net result”.
I offer an index fund with low expenses in Large Mid Small International and bond so if a participant wants to go the low fee route then they can. I’m an independent adviser not getting paid by funds and I pick the managed funds by performance. For instance I use Yaffx at 1.26 % as a managed fund in many of my 401ks and I have the Schwab S&P 500 fund at .20 % expense. Over the last 5 yrs with the downturn and then recovery the YAFFX fund has outperformed the S&P 500 fund after the expeses are taken out. But Brightscope and their one sided over simplistic analysis would tell us the the index fund was better for participants. Yaffx would have made them more money and that is why they are saving.
I like the Robinhood idea of Brightscope but unfortunately theough all of their analysis and their positioning of data they are falling way short and are simply another firm in the Wall street greed gutter.
I tried to explain to my little 7 yr old twins what “the pot calling the Kettle black” meant. Brightscope is not the pot calling the Kettle black they are the ASHES calling the Kettle black. And they will remain only the useless ashes until they are held to the same oversight and standards that everyone else in the industry is held to. They are good at one thing “Self Promotion”.
How in the wolrd is any of this even news and how can we take these fund laws serious when there are still proprietary fund line ups like Fidelity out there?
Its all a joke that is simply scaring more participants from using their 401ks.
Mitchell F Keil
“This article does a good job of reporting a single matter – a dishonest threatening of plan sponsors using bad data.” Really?
“dishonest” — prove it.
“threatening” — a matter of interpretation. I would agree that if the quoted excerpts are accurate then Ayres needs a lesson in how to write. But “threatening” is a grab for sympathy for the poor sponsor who doesn’t spend much time paying attention to the plan he bought from a 401(k) “salesperson”. The sponsor is a fiduciary for his employees. Maybe the sponsor needs a kick in the pants to wake him up to his ongoing responsibilities as one. A letter like this might just serve such a purpose.
“bad data” — you have no factual basis for this comment, whatsoever. In fact, there are reams of data that would support Ayres on the issue of high cost structures in 401(k) plans, especially those managed and installed by insurance companies.
And what most boggles the mind is blaming pre-retirees for spending too much or not saving enough or for young people starting a life. They are to blame for the problems in 401(k) plans? Wow! If I were a 401(k) insurance company, I would want you on my payroll as a lobbyist.
Improving investor understanding of fees and costs associated with investment products and services should be a priority, especially for 401(k) plans where small differences can have large cost impacts over the several decades people may hold them. Transparency should be the objective. The SEC has recently (April 2013) adopted such a recommendation for Target Date Funds.
But cost alone is not the only issue. The risk of such products, and their return characteristics, should also determine which product is most appropriate and desirable.
Dave (plan adviser)
Was that supposed to be sarcastic? Haha….....Are we talking about the same SEC that was given ample warning practically hit in the face with a 2 × 4 warning about Bernie Madoff for years and couldn’t uncover a basic Ponzi scheme…....when they were told it could only be a Ponzi Scheme or one other issue.
Ethical Behavior? Is someone with an impressive sounding resume threatening companies and Sponsors with their fiduciaries duties, based off of data they haven’t researched or understand, when they or the company they are using have no oversight of standards for their information, Ethical? I THINK NOT.
Ayers and Brightscope are nothing more than the “Ashes calling the Kettle black” and at this point the letter and Brightscope’s reputation, not to mention a little piece of Yale Law School’s Reputation, need to be cast out like the ashes and given a chance to regenerate into something worth noticing, unlike what they are today.
I would love to see an unbiased and reasonably accurate 401k rating system. Brightscope is undoubtedly no where close. I would love for all of these opinionated Investment specialist to design the ideal 401k. But like in the case with lawyers, no one makes money when we fix things…..except the common man who we are supposed to be fighting for.
I fight high fee plans all the time, I try to be the most objective investment adviser I can and I laugh at all the corruption and misguided practices in the industry today. Like how is “making since of Investing” charging 5% to put all your clients in the same bloated mutual fund family with less than index performance? How is being the largest 401k provider in the country and running most of your plans with your own company’s funds? Ethical? All blatant and laughable in the industry that claims to have such oversight.
Just a thought,
Elmer Rich III
“...the need for disclosure and transparency…which most providers want to avoid.”
Without evidence to support this statement, it is professionally irresponsible and self-indulgent.
Professionals discuss facts — not their personal feelings or opinions.
Elmer Rich III
Well said. In fairness, the 550 hundred data has always been flawed and of very little use – mainly for sales purposes.
Fear-mongering is always the main media and sales strategy for getting attention. Human nature.
Sadly the fear mongering does just make it more uncertain and aversive for everyone trying t do the best they can with new and imperfect tools and resources.
Arguing about the reasonableness of fees from a 50,000 foot level is a pointless argument, in my opinion, for the reasons several have stated above. It’s a case by case, service by service evaluation.
However, please consider a more fundamental argument, which in my opinion is the biggest problem facing the 401k industry – Is the plan sponsor aware of all of the fees (and compensation?) This approach might fall under the Professors’ “Reducing fiduciary losses could be a productive point of focus for policy makers…” comment.
If a service provider makes it difficult to even discover all of the fees and compensation, then I suggest those fees are inherently unreasonable:
By the letter of the law (ERISA 406(a)(1)(c)) it is a prohibited transaction for plan assets to be used to pay ANY party in interest for ANYTHING! At first blush, all fees constitute a prohibited transaction.
I realize that everyone in this comment exchange is aware of the following, but just in case:
ERISA §408(b)(2) provides a prohibited transaction exemption only if three criteria are met:
1.The services must be necessary for the operation of the plan;
2.The services must be furnished under a contract or arrangement which is reasonable and;
3.No more than reasonable compensation is paid for the service.
Under the amended 408(b)(2), not being aware is a PT, However, this exchange and the Professors’ comments, I believe, focus on #3 which is a very grey continuum given the variety of services potentially provided to any given plan. I suggest that the more fundamental, and actionable argument, is to focus on #2 using the premise:
A contract or arrangement is inherently unreasonable if the plan sponsor is not aware of all fees being charged, directly and indirectly, to the plan. (Not aware presumes that the plan sponsor has made a reasonable effort.)
“Is not aware” is the gist here and in several of my articles and presentations I give specific examples, particularly Caveat Emptor and the New Fiduciary Paradox, plus the Professional Ethics presentation. These cover both pre & post 408(b)(2) examples where it’s clear that the service provider has intentionally made it difficult, if not impossible, for the plan sponsor to discover all of the fees and compensation.Here is an excerpt from my next 401k Ethicist column regarding service providers intentionally thwarting the plan sponsor’s efforts. This column was published last week in the Journal of Comp & Benefits and I’ll post it on my website as soon as I receive my copy:
“Freedman has conducted dozens of 408(b)(2) fee assessments and comments “many vendors are going to go down kicking and screaming before succumbing to full transparency.” 10 Full transparency ought to equate to symmetry of information; however, Freedman observes “it is amazing how much effort and creativity has been put into the creation of many fee disclosures making it extremely difficult and in some cases impossible to understand what the fees are, even for someone like myself who knows what to look for.” 11
Apparently the efforts of some 401k vendors to fight fee transparency are working. Freedman has observed that the “frustration levels have risen to the extent that some plan sponsors have relied on their service providers to comply with the regulations rather than conducting their own independent evaluation as required by the regulations and many have abandon any real effort to comply altogether.” So much for eliminating the moral hazard! 12”
Arguing about the reasonableness of fees is quagmire. Arguing about the awareness of fees, and much of the industry’s efforts to keep them hidden or incomprehensible, is a much more productive discussion. Which leads to another discussion about FINRA’s utter and complete failure to enforce any of the ethics rules on larger 401k service providers and the brokerage firms that sell these sorts of products; ethics rules being “high standards of commercial honor and fair dealing” which FINRA enforces on rank and file brokers regularly and for much more minor offenses – Bill Singer covers this often.
A final thought: What word describes, someone taking money from you without your knowledge? Some may think stealing is too harsh here, but pilfering, to steal in small amounts so as to go unnoticed, seems to fit the bill.
So, Ann Smith, just because the majority of people do not have 401(k)s, then somehow laws that govern commercial activity and public trust, are irrelevent ????