ERISA lawyers: Professor’s take on 401(k)s is bunk

A trio of ERISA attorneys has picked apart a controversial study by a Yale Law professor on 401(k) fees, concluding that plan sponsors shouldn’t give it much credence.

Drinker Biddle & Reath LLP attorneys Bruce Ashton, Fred Reish and Joshua Waldbeser penned an open letter to the 401(k) community in response to letters sent recently by Yale Law School professor Ian Ayres to 6,000 plan sponsors claiming that their plans were too expensive.

In addition, the letters said that the professor had been working on a research study aiming to measure “the relative costs to 401(k) participants of menu limitations, excess fees and investor allocation mistakes.”

Blood and thunder

After much blood and thunder from the retirement plan industry, the three Drinker Biddle attorneys fired off a response July 29 that debunked the findings.

“Based on our work for plan sponsors, as well as record keepers and other service providers, our conclusion is that plan sponsors should not rely on his letters and study,” the attorneys wrote. “Instead, they should engage in a prudent process to evaluate the services to their plans and participants, the compensation of service providers and the costs of those services, as well as the costs of the plans’ investments.”

In the 12-page memorandum, Mr. Reish and his colleagues break down their key issues with Mr. Ayres’ findings. For instance, the study failed to consider the fact that fees are but one factor in determining whether the plan’s fiduciaries have breached their duties.

“Any suggestion that the fiduciaries of a plan with fund fees above the 50th percentile are breaching their duties under the [Employee Retirement Income Security Act of 1974] is incorrect,” the lawyers wrote, “in the same sense that it would be incorrect to suggest that out of 1,000 Yale professors, many of whom are respected scholars, 500 are “below average.’”

Mr. Ayres’ study also failed to consider plan design, services and the role of revenue sharing, the lawyers said.

“A plan that offers inexpensive index funds exclusively and thus fares well in the study may provide no supporting services (or few services) to plan participants,” Mr. Reish and his colleagues wrote.

Adopting index funds may be cheaper compared with keeping offerings that have higher expense ratios and pay significant revenue sharing, but that could have unintended consequences, according to the lawyers.

That can shake out in two ways. A plan and its provider could agree to drop certain services to make up for the loss in revenue sharing. Alternatively, a provider could make up for the loss of revenue by charging administrative costs to the plan and allocating those expenses to workers’ accounts, which would just shift the manner in which fees were paid, according to the lawyers.

Finally, the lawyers pointed out that Mr. Ayres’ study used four-year-old data from plan sponsors’ Form 5500 filings with the Labor Department. Retirement plan service providers started complying with disclosure requirements only in July 2012, and amid that, they’ve been taking steps to cut fees.

“In our view, reliance on data from 2009 in a report completed in 2013 (and apparently to be published in the spring of 2014) makes the study less than reliable, and therefore, its use as a tool for determining fiduciary compliance is inappropriate,” the attorneys wrote.

Kaitlin Thomas, a spokeswoman with Yale Law, did not immediately return a call for comment.