SURVEY SAYS: Is Litigation Prompting Plan Design Changes?

October 27, 2011 ( - An article in the Wall Street Journal yesterday intimated that revenue-sharing litigation was “prompting” plan sponsors to make plan design changes. 

Among those changes, according to the article, were things like adding more funds (index funds specifically), and self-directed brokerage accounts. 

This week I asked readers if they thought that was so – and if their firm had made any changes in response.  The responses were interesting – and somewhat “contradictory”.

First off, when it comes to whether plan sponsors generally had been prompted to make changes, a plurality (29.3%) said “probably some”, while another 15.9% said “yes.” 

On the other hand, 13.4% thought it was “doubtful”, another one-in-ten (9.8%) said simply “no”, and 11% noted those changes were “not directly in response.” 

Of course, that means that the remaining one-in-five said they were “not sure.”

And, after all – what do any of us know about “other people’s” motives?


So I asked readers if THEY (or their firm) had made any changes in response to litigation (or the prospects thereof) – and the responses were quite different.

Consider that more than half – 53.8% - said they had not done so, while another 17.5% said that while they had made changes, those were “not directly in response” to the litigation.

Just one-in-ten said they had done so, while 7.5% said “probably some” changes had been done in response. 

Even here, however, 10% were “not sure.”

There were, of course, some interesting comments:


Comments on Litigation.  Have found it helps some with more knowledge to make changes but for those that do not have financial knowledge it just makes the investment choice all that much harder.

We happen to be changing providers and going from a group annuity contract to a registered mutual fund product. Admin fees went from being lumped into the overall expense ratios to now explicitly listed as an asset charge that participants will see. While the total weighted cost of the plan went down about 45 bps, participants now think they're getting charged more when in reality they are saving a ton. Thanks for these regs and headaches sure to follow.

The courts have been correct to throw these suits out, as they will produce nothing but legal fees for lawyers at the expense of the workers in the class of plaintiffs.  However, fiduciaries do need to wake up and review their fees, and the press attention has helped with that.  I think the unfortunate outcome on the side will be wider use of brokerage windows, an option most participants (including myself) are not qualified to use.

Moving away from revenue sharing will decrease costs for investors, however missing from the conversation is the idea that many investors benefit from guidance.  The guidance could be in selecting a limited number of investment options, determining what the appropriate mix is based on age/risk tolerance/goals, and explaining complicated products such as ETFs,  Overall, the move to ETFs and self-directed brokerage has the potential to do more harm than good. 

I feel if you run your plan to the best of your ability and keep up with the regs and best practices, you'll be okay.  Of course anyone can sue. Keep your participants engaged in the process and well educated and you're doing fine.

Full Fee disclosure is the only way to go.  Don't "taint" your decisions about what funds to offer with shared compensation or kickbacks. 

We have made changes to our plan investments but not in response to litigation.  We make changes periodically to stay current and make certain our offerings are the best in class at that point in time.

There is an academic debate on index funds.  In particular there are those that believe there is value in active management and those that believe it is a 50:50 shot to bet the index.  I'm personally appalled by policy makers in general who look at a mathematical truism (such as 50% is above the median and 50% is below the median) and seek to mandate policy on that basis to try to require index funds.  Don't get me wrong, I believe that participants should have choice, and if low fees and locking in mediocrity is the participant's choice, they should be allowed to do so.  It shouldn't be mandated, though with mathematically illiterate arguments.  I, for one, believe an active manager can add alpha over time and decrease volatility relative to an index.  Those that live by the high flyer will die by the high flyer, but modest alpha, and reduced beta is possible in the long run.


Many cases are ridiculous; glad I don't know any of those trial attorneys.

But this week’s Editor’s Choice goes to the reader who noted, “We haven't "knee-jerked" at anything but damn this twitching sensation I've noticed.”

Thanks to everyone who participated in our survey!