Starting in late June, plan sponsors began receiving ominous letters from Ian Ayres, a professor at Yale Law School. Their retirement plan’s fees are too high, the recipients were told, and the writer reminded them that “fiduciary duties are the most stringent imposed by the law.” Apparently about 6,000 letters were sent, though in somewhat different versions.
One version told the recipient Ayres intended to “publicize the results of our study in the spring of 2014” and to “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.”
“The tone of the letter seems almost threatening, but I’m not sure that’s what he intended,” said Fred Reish, chair of the Financial Services ERISA team, at Drinker, Biddle & Reath.
Jim Sampson, managing principal at Cornerstone Retirement Advisors, told PLANSPONSOR he thought Ayres’ letter was “a very typical example of someone who gets a little bit of information and thinks they can change the world, and is going to cause more grief than help.” And the comments that are swirling around online are “pretty typical of what we’ve seen over the years,” Sampson said. “Someone using outdated information, completely out of date—four years out of date—and completely wrong.”Brian Graff, chief executive and executive director of the American Society of Pension Professionals and Actuaries (ASPPA), called the tone of the letter shocking in his blog. “Here we have employers offering retirement benefits to their workers, which is entirely voluntary, by the way, and this Yale Law School professor is essentially threatening them. And the threat is based on some study that is based on inherently flawed data.”
Plan Expenses Need Context
“Here’s the problem: You can’t take a look at a plan’s expenses in isolation,” Roger Levy, managing director at Cambridge Fiduciary Services, told PLANSPONSOR. “ERISA doesn’t require you to have the cheapest fees, and sometimes it is justifiable to pick particular funds and pick particular share classes.”
If Ayres has approached employers on the basis that the numbers automatically vilify you because they’re higher than some calculations, Levy said, “it sounds like an ill-informed argument to me.” He agreed that Ayres’ calculations are based on data that is out of date and do not factor in the 408(b)2 regulations. “A lot has changed since 2009,” he said. “Ayres is focusing solely on expenses without any of the other criteria that Brightscope uses.”
Reish said his firm is working on an analysis they’ll release soon, pointing out deficiencies of the study and its conclusions, and some of the problems with the letters themselves. “That will provide a basis for plan sponsors to understand that they shouldn’t rely on the letter or the study,” Reish told PLANSPONSOR. “They are off-basis, and the study has significant deficiencies.”
The letters could be seen as a wakeup call, Reish said, even though its tone is threatening. "The professor is correct in saying they have a fiduciary responsibility." Citing President Obama’s “teachable moments,” Reish said he views the letters as a teachable moment, and says that plan sponsors can use these “lemons” to make lemonade. “The positive thing could be that plan sponsors gain a better understanding of their fiduciary responsibility and negotiate for lower fees where appropriate.” In the end, he said, this might even prove to be helpful even though it was very disruptive.
“Anything that forces plan sponsors to test whether they conform to prudent investment practices is a good thing even if it is in response to something like this,” Levy said.
Issues With Accuracy
Some LPL-affiliated advisories are considering sending a letter approved by LPL Financial that addresses plan sponsors and looks to assure them that their firm is committed to providing the due diligence to ensure their plan fees are reasonable. The letter points out, as others have, the “numerous issues regarding the accuracy” of the information and the methodology Ayres used.
“The study used plan-level data that was pulled from the 2009 plan year, near the bottom of the recent recession, and may not be an accurate picture of the plan’s current condition in 2013,” LPL's letter says. “Characteristics of other plans likely do not provide an accurate comparison or depiction of the reasonableness of your plan’s fees. Even if net assets are the same in other plans, the number of participants, complexity of the plan or services provided could vary dramatically from plan to plan, skewing the results of the comparison.”
There’s such a hypersensitivity around fees, Tim J. Minard, senior vice president of distribution at The Principal Financial Group, told PLANSPONSOR. Five years ago, fees were not front and center, but these days, it can be a lightening rod. “As a service provider we spend a tremendous amount of time articulating our fees.”
Since Ayres is unfamiliar with how fee structures are calculated, Minard said, he could not have been accurate. “He took some generalities from the study and applied those to providers like us, where we price each plan based on their service package and independently," he explained. “He could have been been directionally correct, but he wouldn’t have been accurate.”
LPL also said in its letter they had spoken to representatives at BrightScope, which did not sponsor or approve of the mailings, and was “disappointed at being associated with the study given the use of old data taken out of context, and compounded by use of inflammatory language.” Professor Ayres apparently has told BrightScope that there will be no more letters.
“I think I can clearly say it’s inappropriate. It’s too hard to tell if he meant to be threatening or intimidating, but it clearly doesn’t have the scholarly tone you’d expect a law professor at a highly regarded, or even any, law school to have,” Reish said. “It’s really upset a lot of people.”