Letters to 401(k) sponsors cause adviser headaches

Jul 21, 2013 @ 12:01 am

By Darla Mercado

Financial advisers are rushing to do damage control with plan sponsor clients who received letters from a professor at Yale Law School claiming that their 401(k) plans are too expensive.

The letters were sent by Professor Ian Ayres to employers in recent weeks, raising concerns among plan sponsors.

InvestmentNews obtained three of the letters, each of which is slightly different.

Each states, however, that Mr. Ayres had been working on a research study that purports to measure “the relative costs to 401(k) participants of menu limitations, excess fees and investor allocation mistakes.”

Criticizing expenses

The letters tell recipients that not only are their fees too high but that “fiduciary duties are the most stringent imposed by the law.”

One of the letters says the researcher intends “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.”

Yale didn't make Mr. Ayres available for comment but released a statement saying that he “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,” the statement continued.

The letters claim that Mr. Ayres is using data from Form 5500s filed by the companies with the Labor Department in 2009 and information from BrightScope Inc.

“Professor Ayres is not affiliated with BrightScope Inc. and has received no research funding or any other compensation from them. His research simply makes use of some of their data,” according to a statement from BrightScope.

BrightScope officials informed the American Society of Pension Professionals and Actuaries that they had asked the professor to stop using their data in this manner and stressed that they weren't involved with the professor's use of their data, according to Brian Graff, chief executive of the ASPPA.

“BrightScope reached out to us and told us they had nothing to do with it; I think they've been responsive in that regard,” he said. “[Mr. Ayres] has already sent 6,000 letters, and the damage is already somewhat done.”

The ASPPA hasn't decided how to proceed, but it is considering its options, Mr. Graff said.

Executives at BrightScope weren't available for comment.

On the Yale Law School website, Mr. Ayres is listed as a lawyer and economist who is the William K. Townsend professor of law.

Meanwhile, advisers working with the plans that have received the letters have a huge mess on their hands.

David Halseth, owner of Strategies LLC, a firm that oversees some $3 billion in retirement plan assets, had to reassure one of his clients that not only was the letter using old information, but it also made no reference to the service he provides the plan.

“In our latest total-cost analysis, this plan was 33% below the average for like-sized plans in the industry,” he said.

“The Yale letter said that this plan was in the bottom 84% of plans and identified it as a high-cost plan,” Mr. Halseth said. “That's absolutely false.”

Total-cost analysis

Mr. Halseth reviewed with the client the total-cost analysis, spelling out all of the fees involved in the plan and produced benchmark results to show how it stood up against other plans within the industry.

Mr. Halseth said that his attempts to contact Mr. Ayres were fruitless.

“In my mind, that's a horrible and egregiously wrong thing to do,” Mr. Halseth said of the letter. “They're scaring people; they're jeopardizing the relationship with the client.”

Even if the letters are no longer going out to plan sponsors, there likely will be a long-lasting impact on the retirement plan industry. Indeed, the industry is still smarting from the latest high-profile attack on 401(k)s: a PBS “Frontline” documentary in April called “The Retirement Gamble,” which called attention to the hazards of high-cost investments in retirement plans.

“Because of [plan fee disclosure mandates] and evaluations of advisers and providers, the industry is sensitive to any suggestion that it's overpriced,” said Fred Reish, a partner with Drinker Biddle & Reath LLP's employee benefits and executive compensation group. “This rubs salt in the wound.”

Plaintiffs' attorneys

The kerfuffle around the letters likely will attract the attention of plaintiff's attorneys, Mr. Reish said.

It is important that advisers whose clients have received the letters contact those clients in case the letter comes up in a Labor Department audit, said Marcia Wagner, managing director at The Wagner Law Group.

“If you're protecting the plan sponsor and they get a letter like this, you have to have something in your file that says you have addressed it,” she said. “If there's an audit and the DOL finds it and sees that nothing has been done, then that's negligence.”

News of the letters was first reported by 401kWire.

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