A Professor Puts the Scare in Plan Sponsors

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A Professor Puts the Scare in Plan Sponsors

Postby gkaplan » Mon Jul 22, 2013 1:12 pm

Ian Ayres of Yale University has the 401(k) marketplace fuming.

Using data provided to him by a firm that collects information on 401(k) plans, Brightscope, Professor Ayres has calculated the fees paid to plan providers by 46,875 (!) companies. The professor sorted the companies by the assets of their funds into various size buckets and then ranked the companies in each bucket from top to bottom according to how much they paid.

Soon, he says, he will name names. Apparently, he has mailed letters to several thousand plan sponsors that have above-average costs in his study, warning them that he will publish this data in spring 2014....."

http://news.morningstar.com/articlenet/article.aspx?id=603555
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Re: A Professor Puts the Scare in Plan Sponsors

Postby RadAudit » Mon Jul 22, 2013 1:22 pm

Thanks for the post.

I'm looking forward to seeing the data published.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby ruralavalon » Mon Jul 22, 2013 1:34 pm

Another study noted in the Morningtar article:
Demos (2012) wrote:•The median expense ratio of mutual funds in 401(k) plans was 1.27 percent in 2010.
•Trading costs vary from year to year, but have been estimated to average approximately 1.2 percent a year as well.
•In the long run, the average mutual fund earns a 7 percent return, before fees, matching the average return of the overall stock market. However, the post-fee returns average only 4.5 percent, meaning that, on average, fees eat up over a third of the total returns earned by mutual funds.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby gwrvmd » Mon Jul 22, 2013 1:38 pm

Great Post! I have been on that bandwagon for years as evidenced by many of my posts here but I don't bring anywhere near the firepower to the game that Yale Professor Ayres does...Gordon
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Re: A Professor Puts the Scare in Plan Sponsors

Postby pkcrafter » Mon Jul 22, 2013 1:59 pm

Pretty bad.

4.5 percent, meaning that, on average, fees eat up over a third of the total returns earned by mutual funds


And that 4.5% isn't investor returns, which will be even lower after they tinker around with out-performing-the-the-market strategies.

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Re: A Professor Puts the Scare in Plan Sponsors

Postby grok87 » Mon Jul 22, 2013 11:10 pm

RadAudit wrote:Thanks for the post.

I'm looking forward to seeing the data published.

+1
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Re: A Professor Puts the Scare in Plan Sponsors

Postby Jeff7 » Tue Jul 23, 2013 10:08 am

If this report does indeed ever see the light of day, I'm sure the fund companies' marketing departments will find a way to spin this around, or try to dismiss it outright - unless of course they do simply exercise some of their considerable financial muscle to make sure it doesn't get released.

"But see, we've got a system one than the companies cited in this study!"
Last edited by Jeff7 on Sun Jul 28, 2013 10:36 am, edited 1 time in total.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby Sheepdog » Tue Jul 23, 2013 10:34 am

Jeff7 wrote:If this report does indeed ever see the light of day, I'm sure the fund companies' marketing departments will find a way to spin this around, or try to dismiss it.


"But see, we've got a better system than the companies cited in this study!"


You know, the sad part is that the majority of the 401k participants, the workers putting their money into these plans, will not read this. They do not research their 401k funds offered. The majority seem not to understand fees. They pick a fund or group of funds, maybe by past earnings history, maybe not even that, and perhaps will look at their quarterly or annual reports and continue on not knowing what they are throwing away.

I know, I was there, maybe not in 401k investing, but in mutual fund investing in general. At least I read and learned later, but the majority will not. They just will not. Sad....

Jim.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby manwithnoname » Tue Jul 23, 2013 11:17 am

Just because a study uses metrics from 46,000 plans does not mean it accurately depicts what plan participants actually pay. About 1/3 of 401k plans offer brokerage windows which are investments in actively managed funds and exotic investment such as commodities, RE, emerging markets, forex,variable annuities, closed end funds, UITs, tax liens, etc which have higher fees than the core funds of the plan but which few participants actually select as an investment. For example, the Deere Co 401k plan offers 20 mutual funds with fees between .07 to 1.0% plus a brokerage window of 2500 additional funds with fees up to 5.0%. 2/3 of plan assets are in the core funds. Bundling the core and brokerage window funds together to determine the average fee will overstate the amounts actually paid by the participants who invest only in the core funds.

Several commentators have observed that bight Scopes Data can overstate fees paid by participants in a particular plan , e.g., using the retail fee found in the fund prospectus instead of a lower rate negotiated by the plan.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby staythecourse » Tue Jul 23, 2013 1:05 pm

Sheepdog wrote:You know, the sad part is that the majority of the 401k participants, the workers putting their money into these plans, will not read this. They do not research their 401k funds offered. The majority seem not to understand fees. They pick a fund or group of funds, maybe by past earnings history, maybe not even that, and perhaps will look at their quarterly or annual reports and continue on not knowing what they are throwing away.

I know, I was there, maybe not in 401k investing, but in mutual fund investing in general. At least I read and learned later, but the majority will not. They just will not. Sad....

Jim.


I agree, but that is the reason these HR guys and folks sitting on pension boards should be held liable. It is their DUTY to do what is in the best interest of their employees. There is CLEAR cut data supporting lower fees AND that active management is a losers game. So, if one sits on those boards and do the OPPOSITE (hight cost active funds) then they should be held liable. A couple of lawsuits will be the only thing that cause change. Otherwise, the "business lunches" these custodians and managers court are not hard to resist.

Good luck.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby prudent » Tue Jul 23, 2013 1:33 pm

manwithnoname wrote:Just because a study uses metrics from 46,000 plans does not mean it accurately depicts what plan participants actually pay. About 1/3 of 401k plans offer brokerage windows which are investments in actively managed funds and exotic investment such as commodities, RE, emerging markets, forex,variable annuities, closed end funds, UITs, tax liens, etc which have higher fees than the core funds of the plan but which few participants actually select as an investment. For example, the Deere Co 401k plan offers 20 mutual funds with fees between .07 to 1.0% plus a brokerage window of 2500 additional funds with fees up to 5.0%. 2/3 of plan assets are in the core funds. Bundling the core and brokerage window funds together to determine the average fee will overstate the amounts actually paid by the participants who invest only in the core funds.

Several commentators have observed that bight Scopes Data can overstate fees paid by participants in a particular plan , e.g., using the retail fee found in the fund prospectus instead of a lower rate negotiated by the plan.


True, our 401k shows many funds that are load funds. If you look up the ticker symbols from the list of available funds, you'll find some have front-end loads. Our 401k materials do not explicitly state that we do not pay the load, although I know for a fact that is the case. So it could be very misleading.

On the other side of the coin, we have a brokerage window also, but it allows me to get my 401k money from comparatively high cost funds to Vanguard funds.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby Easy Rhino » Tue Jul 23, 2013 1:48 pm

seems like brightscope could have published this list a long time ago. in fact, maybe they did somewhere.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby Jeff7 » Tue Jul 23, 2013 2:48 pm

Sheepdog wrote:
Jeff7 wrote:If this report does indeed ever see the light of day, I'm sure the fund companies' marketing departments will find a way to spin this around, or try to dismiss it.


"But see, we've got a better system than the companies cited in this study!"
You know, the sad part is that the majority of the 401k participants, the workers putting their money into these plans, will not read this. They do not research their 401k funds offered. The majority seem not to understand fees. They pick a fund or group of funds, maybe by past earnings history, maybe not even that, and perhaps will look at their quarterly or annual reports and continue on not knowing what they are throwing away.

I know, I was there, maybe not in 401k investing, but in mutual fund investing in general. At least I read and learned later, but the majority will not. They just will not. Sad....

Jim.
"But it's only 1%! That's almost nothing. And they say that their performance in the past has been excellent, so that's good too, right?"

A year or two ago, I looked at the SEC Yield figures on the 401k fund options, and didn't know what it meant. The numbers were all over the place though, so that told me that it might not be too reliable. Then I looked at the 1-year, 5-year, and 10-year performance tables. They were also all over the place. I also knew what "expense" meant, but not "expense ratio." But it sounded like higher expenses would be bad, so I did at least look for the low-cost options, even when I didn't know what I was doing. I also knew that, long-term, stocks tend to return more than bonds.
And often the only person around who's willing to help is the one who sold the plan in the first place, the one who's profiting off the whole arrangement.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby meowcat » Tue Jul 23, 2013 2:51 pm

This will fall on deaf ears, just like ERISA full disclosure. There are many, many plans wrapped up in annuity contracts that have fees that Bright Scope or the DOL will NEVER, EVER find!! Heck, Bright Scope lists John Hancock as a low fee provider. :oops: So because of this scrutiny, your high fee 401k provider lowers its fees. What they won't tell you is that these are the fees that are published and visible to the investor. Rest assured, they will raise other costs that are completely hidden from everyone. I don't really see anything changing. 401k providers are getting pretty creative at stealing money.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby grok87 » Tue Jul 23, 2013 9:22 pm

meowcat wrote:This will fall on deaf ears, just like ERISA full disclosure. There are many, many plans wrapped up in annuity contracts that have fees that Bright Scope or the DOL will NEVER, EVER find!! Heck, Bright Scope lists John Hancock as a low fee provider. :oops: So because of this scrutiny, your high fee 401k provider lowers its fees. What they won't tell you is that these are the fees that are published and visible to the investor. Rest assured, they will raise other costs that are completely hidden from everyone. I don't really see anything changing. 401k providers are getting pretty creative at stealing money.

thanks- i was unaware of that.
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The Professor is not identifying companies

Postby manwithnoname » Thu Jul 25, 2013 1:18 pm

According to the WSJ the professor is now back peddling and will not release any company specific data based on 2009 data.

"Letter about 401ks stirs tempest" 7/25/13.

Also he is not responding to any inquiries-all questions are being referred to Yale spokespersons. Yale recognizes its reputational risk.

One flaw in the professor's analysis that has been pointed out is that he did not take into account services which add value and improve returns such as auto enrollment, advice, call centers and investment education. Plans which provide greater services will have higher fees.
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Re: The Professor is not identifying companies

Postby Ged » Thu Jul 25, 2013 2:06 pm

manwithnoname wrote:According to the WSJ the professor is now back peddling and will not release any company specific data based on 2009 data.


:annoyed

Also he is not responding to any inquiries-all questions are being referred to Yale spokespersons. Yale recognizes its reputational risk.


Yale is also very big on academic freedom. I wonder what is really going on here.

One flaw in the professor's analysis that has been pointed out is that he did not take into account services which add value and improve returns such as auto enrollment, advice, call centers and investment education. Plans which provide greater services will have higher fees.


All of these services promote the use of these high fee 'services', enhancing the provider's bottom line.
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Re: The Professor is not identifying companies

Postby Strevlac » Thu Jul 25, 2013 2:12 pm

Ged wrote:
manwithnoname wrote:According to the WSJ the professor is now back peddling and will not release any company specific data based on 2009 data.


:annoyed

Also he is not responding to any inquiries-all questions are being referred to Yale spokespersons. Yale recognizes its reputational risk.


Yale is also very big on academic freedom. I wonder what is really going on here.

One flaw in the professor's analysis that has been pointed out is that he did not take into account services which add value and improve returns such as auto enrollment, advice, call centers and investment education. Plans which provide greater services will have higher fees.


All of these services promote the use of these high fee 'services', enhancing the provider's bottom line.



Something tells me Mr. Manwithnoname is quite aware of that and would like to see it continue.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby gkaplan » Thu Jul 25, 2013 3:03 pm

Something tells me Mr. Manwithnoname is quite aware of that and would like to see it continue.


Mr. Manwithnoname, with four posts to his name, and who registered on the forum on the date this thread was started, appears to have an agenda.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby Sheepdog » Thu Jul 25, 2013 3:12 pm

staythecourse wrote:
Sheepdog wrote:You know, the sad part is that the majority of the 401k participants, the workers putting their money into these plans, will not read this. They do not research their 401k funds offered. The majority seem not to understand fees. They pick a fund or group of funds, maybe by past earnings history, maybe not even that, and perhaps will look at their quarterly or annual reports and continue on not knowing what they are throwing away.

I know, I was there, maybe not in 401k investing, but in mutual fund investing in general. At least I read and learned later, but the majority will not. They just will not. Sad....

Jim.


I agree, but that is the reason these HR guys and folks sitting on pension boards should be held liable. It is their DUTY to do what is in the best interest of their employees. There is CLEAR cut data supporting lower fees AND that active management is a losers game. So, if one sits on those boards and do the OPPOSITE (hight cost active funds) then they should be held liable. A couple of lawsuits will be the only thing that cause change. Otherwise, the "business lunches" these custodians and managers court are not hard to resist.

Good luck.

My company had a defined pension plan and cancelled it in 1997 at which time they started a profit sharing 401k (no company match unless it made a profit and, because it was a private company the true profit was not known to the employees including management like me.) It hurt me to see my employees, especially the factory and office employees handle the change. I was told by the corporate and HR management that we could not give investment choice advice to my people. They would come to me and say, "Mr. XXXX, I don't know what to do? What would you do?" I told them that I was instructed not to give advice. I could only suggest that they read about the choices and to come back to me with questions. They didn't though. Then I realized that I was going to retire in another year or so and started to give simple advice anyway like, just invest in the appropriate year Target Retirement fund (Fidelity) in the plan.

When the company cancelled the defined benefit plan, they wanted to get rid of it entirely so that they gave them a choice of taking the pension's present cash value as a lump sum, or issue an annuity for when they do retire or roll the present cash value over into an IRA of their choice. A few old time employees saw that the pension cash value was in the mid teens and more, the most they had ever had, and with their ignorance took that, paid the taxes, I assume, and spent it. When I heard that after retiring, I was really upset. The company did not give them advice, just the figures. Yes the management should be held liable, but they aren't. But, then again, the employee was not willing or able to learn to help themselves. (By the way, the international union representing the factory employees gave them no assistance either to my knowledge.)

As a side note, I took my pension as a lump sum and rolled it over. I no longer could trust my company. (They are out of business today, sold to a large conglomerate.)
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Re: A Professor Puts the Scare in Plan Sponsors

Postby ruralavalon » Thu Jul 25, 2013 4:08 pm

manwithnoname wrote: . . . . . About 1/3 of 401k plans offer brokerage windows which are investments in actively managed funds and exotic investment such as commodities, RE, emerging markets, forex,variable annuities, closed end funds, UITs, tax liens, etc which have higher fees than the core funds of the plan but which few participants actually select as an investment. . . . . .

And the brokerage window allowed me to buy treasury bonds.

Getting data like this published can only help generate pressure to drive fees down, and net investor returns up.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby heyyou » Thu Jul 25, 2013 4:53 pm

At a business with more than two hundred thousand hourly employees, the 401k index fund fees were 5 to 10 hundreths of one percent, and they were touted in the quarterly newsletter.

Unmentioned was the .7% (ten times larger) admin fee until twenty years later when Spitzer sued a provider for excessive fees on a NY State pension fund. Any long term employee, nearing retirement, could have several hundred thousand dollars in the plan, thus paying a couple of thousand dollars annually for accounting work that a credit union or internet brokerage would deliver for free, on accounts with three or four digit balances.

I'm glad to hear that someone can publicize those admin expenses in a way that won't be dismissed by the decision makers. I do salute the cleverness of gathering the data on all of the largest 401k plans, using publicly accessable filings, then exposing the expenses in numerical order. Since those are facts, there are no grounds for defamation suits.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby manwithnoname » Thu Jul 25, 2013 5:49 pm

heyyou wrote:At a business with more than two hundred thousand hourly employees, the 401k index fund fees were 5 to 10 hundreths of one percent, and they were touted in the quarterly newsletter.

Unmentioned was the .7% (ten times larger) admin fee until twenty years later when Spitzer sued a provider for excessive fees on a NY State pension fund. Any long term employee, nearing retirement, could have several hundred thousand dollars in the plan, thus paying a couple of thousand dollars annually for accounting work that a credit union or internet brokerage would deliver for free, on accounts with three or four digit balances.

I'm glad to hear that someone can publicize those admin expenses in a way that won't be dismissed by the decision makers. I do salute the cleverness of gathering the data on all of the largest 401k plans, using publicly accessable filings, then exposing the expenses in numerical order. Since those are facts, there are no grounds for defamation suits.


The decision makers are aware of the fees that will be charged because Pension regulations require that they appear in all of the provider materials and are disclosed to participants. Minimum fee to pay for cost of plan administration is .80% with higher fees for smaller plans and higher level of services such as auto enrollment and investment education which are promoted by the Employee Benefit Security Administration because they increase retirement savings. Running a plan is expensive due to all of the tax and pension rules that apply and complying with the mundane provisions which protect employees. Small plan owners are surprised to learn that when the number of participants exceed 100 the plan must hire an accountant to conduct a plan audit which costs anywhere from $7000 to $15,000 each year. Someone has to pay for all this regulation.

As noted previously the professor will not publish plan specific data based on 2009 data because it is not reliable.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby ResearchMed » Thu Jul 25, 2013 6:13 pm

manwithnoname wrote:
heyyou wrote:At a business with more than two hundred thousand hourly employees, the 401k index fund fees were 5 to 10 hundreths of one percent, and they were touted in the quarterly newsletter.

Unmentioned was the .7% (ten times larger) admin fee until twenty years later when Spitzer sued a provider for excessive fees on a NY State pension fund. Any long term employee, nearing retirement, could have several hundred thousand dollars in the plan, thus paying a couple of thousand dollars annually for accounting work that a credit union or internet brokerage would deliver for free, on accounts with three or four digit balances.

I'm glad to hear that someone can publicize those admin expenses in a way that won't be dismissed by the decision makers. I do salute the cleverness of gathering the data on all of the largest 401k plans, using publicly accessable filings, then exposing the expenses in numerical order. Since those are facts, there are no grounds for defamation suits.


The decision makers are aware of the fees that will be charged because Pension regulations require that they appear in all of the provider materials and are disclosed to participants. Minimum fee to pay for cost of plan administration is .80% with higher fees for smaller plans and higher level of services such as auto enrollment and investment education which are promoted by the Employee Benefit Security Administration because they increase retirement savings. Running a plan is expensive due to all of the tax and pension rules that apply and complying with the mundane provisions which protect employees. Small plan owners are surprised to learn that when the number of participants exceed 100 the plan must hire an accountant to conduct a plan audit which costs anywhere from $7000 to $15,000 each year. Someone has to pay for all this regulation.

As noted previously the professor will not publish plan specific data based on 2009 data because it is not reliable.


Auto-enrollment increases fees noticeably? Really!?

It's typically a matter of clicking on a box on an online enrollment, or perhaps checking a box on a paper form, and the data from the form would need to be "entered" anyway.

And the "higher level of service" is what? Informing employees of the choices?
Very few plan participants typically ask questions, at enrollment or later. Far too many never even bothered to sign up or choose funds, which is why the defaults were changed.

" Running a plan is expensive due to all of the tax and pension rules that apply and complying with the mundane provisions which protect employees."
So the reason that Vanguard funds - even the ACTIVELY managed funds - have such low fees is...? Are you really claiming that Vanguard (and TIAA-CREF, etc.) doesn't comply with "all of the tax and pension rules that apply..." or with the "mundane provisions..."??

I wish this was a joke, but you are indeed apparently an apologist for the high fees that are now becoming recognized.

And no, these high fees are NOT always fully disclosed, even when someone insistently inquires specifically about them. That's part of the problem: that these fees are often hidden, although some of the fee(s) may be disclosed.

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Re: A Professor Puts the Scare in Plan Sponsors

Postby umfundi » Thu Jul 25, 2013 6:47 pm

And, the financial services advice industry whines about regulations driving costs.

And, I am sure the Yale professor now has a handsome retainer as an advisor to 401k plan providers.

I wrote (and deleted) a rant about this a few days ago.

If your financial plan fails, is the adviser responsible? No.

If the bridge falls down, is the engineer responsible? Yes.

The lack of will of the financial advice industry to organize themselves as a responsible profession like engineers or accountants or medical professionals is just breathtaking. A pox on their house.

<end rant

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Re: A Professor Puts the Scare in Plan Sponsors

Postby Strevlac » Thu Jul 25, 2013 8:09 pm

manwithnoname wrote:Someone has to pay for all this regulation.
[/quote]


Which is exactly the way you like it, I'm sure.

One simple change in tax law would make all of this moot, and kick 95% of guys like you to the curb. Sure would be a bummer to have to get a real job though wouldn't it?
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Re: A Professor Puts the Scare in Plan Sponsors

Postby manwithnoname » Thu Jul 25, 2013 10:37 pm

Strevlac wrote:
manwithnoname wrote:Someone has to pay for all this regulation.



Which is exactly the way you like it, I'm sure.

One simple change in tax law would make all of this moot, and kick 95% of guys like you to the curb. Sure would be a bummer to have to get a real job though wouldn't it?[/quote]


I made my pile and its enough to build several castles. I spend my days managing my investments and those of family members. In my spare time I advise veterans on how to obtain the benefits they earned and work as volunteer tax preparer for low income workers.

If you have a comment on fees in retirement plans I will respond.

If not, Hasta la vista, baby.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby grok87 » Fri Jul 26, 2013 12:32 am

that yale professor is my hero. that being said, i think the data on this will soon be widely available due to the new DOL disclosure requirements on plan expenses and will effect change. in other words i think he is just slightly ahead of the curve.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby Texas hold em71 » Fri Jul 26, 2013 12:55 am

I hope you are right, grok. I just don't know if anyone will read them or understand them. To most people, a 1% fee doesn't sound like a lot.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby manwithnoname » Fri Jul 26, 2013 3:01 pm

grok87 wrote:that yale professor is my hero. that being said, i think the data on this will soon be widely available due to the new DOL disclosure requirements on plan expenses and will effect change. in other words i think he is just slightly ahead of the curve.




To be useful the data must be current (no more than 12 months old) not the 4 year old information that the professor used in sending out his threatening letter which is why he has agreed not to identify any plan for which the 2009 fee data was used. Plans make changes each year by adding new funds and/or eliminating poorly performing or expensive funds or changing providers to lower fees. Funds also change their fees. In reviewing a participant's 401k investments I noticed that the provider's S&P 500 index fund reduced its fee beginning 2013 from .75 to .30%. Anyone relying on 2010 5500 filings would not know that the fees had been reduced.

Secondly the fact the a fee may be higher than a similar fund of another fund co doesn't mean that its excessive if the fee includes ancillary services. For example, the CREF Stock fund (first VA index fund established in 1952) has $112B in assets and charges a fee of .49%, considerably more than the VG S&P 500. However, only .12% of the fee is for investment management. The rest is for mostly for servicing the participant's retirement plan account, tax reporting, plan disclosure, call center, etc. which are expenses of plan administration.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby umfundi » Fri Jul 26, 2013 3:20 pm

manwithnoname wrote:Secondly the fact the a fee may be higher than a similar fund of another fund co doesn't mean that its excessive if the fee includes ancillary services. For example, the CREF Stock fund (first VA index fund established in 1952) has $112B in assets and charges a fee of .49%, considerably more than the VG S&P 500. However, only .12% of the fee is for investment management. The rest is for mostly for servicing the participant's retirement plan account, tax reporting, plan disclosure, call center, etc. which are expenses of plan administration.

.49% of 112B is $500 million!!

Seems the investors are indeed being serviced.

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Re: A Professor Puts the Scare in Plan Sponsors

Postby meowcat » Fri Jul 26, 2013 3:43 pm

manwithnoname wrote:The decision makers are aware of the fees that will be charged because Pension regulations require that they appear in all of the provider materials and are disclosed to participants. Minimum fee to pay for cost of plan administration is .80% with higher fees for smaller plans and higher level of services such as auto enrollment and investment education which are promoted by the Employee Benefit Security Administration because they increase retirement savings. Running a plan is expensive due to all of the tax and pension rules that apply and complying with the mundane provisions which protect employees. Small plan owners are surprised to learn that when the number of participants exceed 100 the plan must hire an accountant to conduct a plan audit which costs anywhere from $7000 to $15,000 each year. Someone has to pay for all this regulation.

As noted previously the professor will not publish plan specific data based on 2009 data because it is not reliable.

There is a huge misconception on your part regarding 401k fees. You apparently have been lead to believe that the DOL's full disclosure ruling now makes it clear to all participants each and every expense deducted from your account. Nothing could be further from the truth. Some, not all, 401k plans have fees upwards of 5%!! The funny thing is, their full disclosure statement shows "all in" fees of only 1.5%. You will never be able to find the other 3 1/2%. It is completely and totally buried in documents that don't have to conform to 408(b)(2). If you have a plan that is wrapped up in an annuity contract, you will have fees in excess of 3% that will not have to be disclosed. Mortality rate fees will never need to be disclosed because it's not an administrative cost. Sub account fees will never need to be disclosed and these can be huge and your plan or you plan sponsor will never share this information with you. Full disclosure, in the overall realm of things is completely meaningless.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby manwithnoname » Fri Jul 26, 2013 3:51 pm

Its expensive to pay investment managers to work in high cost living San Francisco.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby IlliniDave » Fri Jul 26, 2013 3:57 pm

manwithnoname wrote:
Secondly the fact the a fee may be higher than a similar fund of another fund co doesn't mean that its excessive if the fee includes ancillary services. For example, the CREF Stock fund (first VA index fund established in 1952) has $112B in assets and charges a fee of .49%, considerably more than the VG S&P 500. However, only .12% of the fee is for investment management. The rest is for mostly for servicing the participant's retirement plan account, tax reporting, plan disclosure, call center, etc. which are expenses of plan administration.


I'm pretty sure VG does at least part of that stuff for my IRA accounts. They don't manage my 401, but Fidelity (who does) doesn't jack up ERs to do the plan servicing in it. As best I can tell there are service fees on the order of 0.1% deducted annually from my account for administrative and accounting fees, and the index fund ERs are all below 0.1%, some below 0.05% (Vanguard Total Stock Market is one, 0.02% IIRC).

Like someone said ~$414M/year for a single fund over and above the investment management fees seems like quite a lot.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby umfundi » Fri Jul 26, 2013 4:22 pm

This is a little off topic, but when GM offered to buy out my pension the lump sum offer was far less that the value of the alternative Prudential annuity which would continue my pension payments.

At the time I decided that part of the reason was that the costs of administering the pension at GM were "outside" the pension itself. To purchase an outside annuity, the costs would be "inside". I have no way of knowing, but I suspect the amount GM sent to Prudential on my behalf was significantly larger than the lump sum they offered me.

Nothing fishy here - the lump sum offer had to conform to a specified formula. I am simply pointing out that the full costs of administering such plans may not be charged back to the participants, but borne by the company.

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Re: The Professor is not identifying companies

Postby ofcmetz » Fri Jul 26, 2013 4:42 pm

manwithnoname wrote:According to the WSJ the professor is now back peddling and will not release any company specific data based on 2009 data

"Letter about 401ks stirs tempest" 7/25/13.

Also he is not responding to any inquiries-all questions are being referred to Yale spokespersons. Yale recognizes its reputational risk.

One flaw in the professor's analysis that has been pointed out is that he did not take into account services which add value and improve returns such as auto enrollment, advice, call centers and investment education. Plans which provide greater services will have higher fees.


http://online.wsj.com/article/SB1000142 ... 41648.html

The article never says "back peddling". Those are your words. My take is he is not using the 2009 data because its old and maybe he has newer data.

Prof. Ayres referred questions about his letters to a spokeswoman at Yale Law School. She said Prof. Ayres still intends to publicize the aggregate results of his study, but "no company-specific data will be publicized that is based on 2009 data," which was the information used to generate the results described in the mass mailing. When asked if Prof. Ayres would publicize any company-specific information using more-recent data, the spokeswoman said she didn't know.


Don't see anything in the article that you mention about Yale recognizing it repetitional risk. It seems normal to refer questions to a spokes person for something as high profile as this has become.

I totally disagree that the extra costly services add value. My wife pays 0.79% on top of her fund fees in her 401K and I do not see any value added above the index funds that she invests in.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby Epsilon Delta » Fri Jul 26, 2013 5:38 pm

Knowing the costs for 2009 would be useful. If they were unreasonably high and only dropped because they had to be disclosed you know the manager is a scoundrel.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby umfundi » Fri Jul 26, 2013 5:44 pm

Epsilon Delta wrote:Knowing the costs for 2009 would be useful. If they were unreasonably high and only dropped because they had to be disclosed you know the manager is a scoundrel.

Why would you need that evidence? :D

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Re: A Professor Puts the Scare in Plan Sponsors

Postby manwithnoname » Fri Jul 26, 2013 5:56 pm

umfundi wrote:This is a little off topic, but when GM offered to buy out my pension the lump sum offer was far less that the value of the alternative Prudential annuity which would continue my pension payments.

At the time I decided that part of the reason was that the costs of administering the pension at GM were "outside" the pension itself. To purchase an outside annuity, the costs would be "inside". I have no way of knowing, but I suspect the amount GM sent to Prudential on my behalf was significantly larger than the lump sum they offered me.

Nothing fishy here - the lump sum offer had to conform to a specified formula. I am simply pointing out that the full costs of administering such plans may not be charged back to the participants, but borne by the company.

Keith


Pru was paid 10% more than the actuarial present value of the pension benefits to compensate it for the longivity risk and investment risk it assumed for guaranteeing the GM pension benefits. In other words why would Pru assume GMs financial risks without being compensated for talking the risk that additional capital could be needed to pay the future benefits? After all Pru is a publicly traded company responsible to shareholders. Since GM wanted to eliminate the pension liabilities from its balance sheet it had to pay a premium.

Pru also gambled that a certain % of retirees would take the lump sum option which would reduce any future longevity risk and investment risk on the contract.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby Epsilon Delta » Fri Jul 26, 2013 6:16 pm

umfundi wrote:
Epsilon Delta wrote:Knowing the costs for 2009 would be useful. If they were unreasonably high and only dropped because they had to be disclosed you know the manager is a scoundrel.

Why would you need that evidence? :D

Keith

Evidence can be useful. I tried to get additional information on a 401(k) for several years, but was stonewalled until Merrill Lynch was caught in the 2003 mutual fund front running scandal and I could ask "Now that Spitzer has caught Merrill Lynch stealing from fund owners how can I know they are not stealing from me?" Suddenly online statements started including details of transactions.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby umfundi » Fri Jul 26, 2013 6:24 pm

manwithnoname wrote:
umfundi wrote:This is a little off topic, but when GM offered to buy out my pension the lump sum offer was far less that the value of the alternative Prudential annuity which would continue my pension payments.

At the time I decided that part of the reason was that the costs of administering the pension at GM were "outside" the pension itself. To purchase an outside annuity, the costs would be "inside". I have no way of knowing, but I suspect the amount GM sent to Prudential on my behalf was significantly larger than the lump sum they offered me.

Nothing fishy here - the lump sum offer had to conform to a specified formula. I am simply pointing out that the full costs of administering such plans may not be charged back to the participants, but borne by the company.

Keith


Pru was paid 10% more than the actuarial present value of the pension benefits to compensate it for the longivity risk and investment risk it assumed for guaranteeing the GM pension benefits. In other words why would Pru assume GMs financial risks without being compensated for talking the risk that additional capital could be needed to pay the future benefits? After all Pru is a publicly traded company responsible to shareholders. Since GM wanted to eliminate the pension liabilities from its balance sheet it had to pay a premium.

Pru also gambled that a certain % of retirees would take the lump sum option which would reduce any future longevity risk and investment risk on the contract.

Do you have a source for what you say?

I was offered the lump sum by GM. Only after I refused it was my GM pension converted into a Prudential annuity.

The lump sum I was offered was only 2/3 of the amount I would need to buy an equivalent SPIA. The amount I was offered was based on a mandated formula that, so far as I could see, had no provision for administration costs. Some of my cohorts actually verified the lump sum offer by calculating it according to the formula.

For those that took the lump sum, the advantage went to GM in having to transfer fewer pensions to Prudential.

I am very skeptical that GM retirees (or anyone) is able to estimate their longevity to the extent that GM would have to pay Prudential a premium to provide annuities to those remaining who did not take the lump sum.

Those sorts of decisions are very much behavioral, proof being that most people make non-optimal Social Security claiming decisions.

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Re: A Professor Puts the Scare in Plan Sponsors

Postby manwithnoname » Sat Jul 27, 2013 11:20 am

umfundi wrote:
manwithnoname wrote:
umfundi wrote:This is a little off topic, but when GM offered to buy out my pension the lump sum offer was far less that the value of the alternative Prudential annuity which would continue my pension payments.

At the time I decided that part of the reason was that the costs of administering the pension at GM were "outside" the pension itself. To purchase an outside annuity, the costs would be "inside". I have no way of knowing, but I suspect the amount GM sent to Prudential on my behalf was significantly larger than the lump sum they offered me.

Nothing fishy here - the lump sum offer had to conform to a specified formula. I am simply pointing out that the full costs of administering such plans may not be charged back to the participants, but borne by the company.

Keith


Pru was paid 10% more than the actuarial present value of the pension benefits to compensate it for the longivity risk and investment risk it assumed for guaranteeing the GM pension benefits. In other words why would Pru assume GMs financial risks without being compensated for talking the risk that additional capital could be needed to pay the future benefits? After all Pru is a publicly traded company responsible to shareholders. Since GM wanted to eliminate the pension liabilities from its balance sheet it had to pay a premium.

Pru also gambled that a certain % of retirees would take the lump sum option which would reduce any future longevity risk and investment risk on the contract.


Do you have a source for what you say?

I was offered the lump sum by GM. Only after I refused it was my GM pension converted into a Prudential annuity.

The lump sum I was offered was only 2/3 of the amount I would need to buy an equivalent SPIA. The amount I was offered was based on a mandated formula that, so far as I could see, had no provision for administration costs. Some of my cohorts actually verified the lump sum offer by calculating it according to the formula.

For those that took the lump sum, the advantage went to GM in having to transfer fewer pensions to Prudential.

I am very skeptical that GM retirees (or anyone) is able to estimate their longevity to the extent that GM would have to pay Prudential a premium to provide annuities to those remaining who did not take the lump sum.

Those sorts of decisions are very much behavioral, proof being that most people make non-optimal Social Security claiming decisions.

Keith


The information regarding GMs transfer of pension liabilities to Pru was taken from an article in the WSJ at the time of the transfer. Verizon also transferred pension liabilities to Pru which is the subject of a law suit by retirees who believe that VZ should not be allowed to transfer risk to a third party because they will lose the PBGC guarantee of paying benefits if VZ files for bankruptcy. Under pension laws employers can transfer pension liabilities to an insurer to reduce plan liabilities.
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Re: The Professor is not identifying companies

Postby Cash » Sun Jul 28, 2013 9:21 am

ofcmetz wrote:
manwithnoname wrote:According to the WSJ the professor is now back peddling and will not release any company specific data based on 2009 data

"Letter about 401ks stirs tempest" 7/25/13.

Also he is not responding to any inquiries-all questions are being referred to Yale spokespersons. Yale recognizes its reputational risk.

One flaw in the professor's analysis that has been pointed out is that he did not take into account services which add value and improve returns such as auto enrollment, advice, call centers and investment education. Plans which provide greater services will have higher fees.


http://online.wsj.com/article/SB1000142 ... 41648.html

The article never says "back peddling". Those are your words. My take is he is not using the 2009 data because its old and maybe he has newer data.

Prof. Ayres referred questions about his letters to a spokeswoman at Yale Law School. She said Prof. Ayres still intends to publicize the aggregate results of his study, but "no company-specific data will be publicized that is based on 2009 data," which was the information used to generate the results described in the mass mailing. When asked if Prof. Ayres would publicize any company-specific information using more-recent data, the spokeswoman said she didn't know.


Don't see anything in the article that you mention about Yale recognizing it repetitional risk. It seems normal to refer questions to a spokes person for something as high profile as this has become.



That was also my takeaway. Ayres does not seem like the type to "back peddle." And YLS is not the type of institution to care about angry 401(k) sponsors.
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Re: The Professor is not identifying companies

Postby manwithnoname » Sun Jul 28, 2013 10:01 am

Cash wrote:
ofcmetz wrote:
manwithnoname wrote:According to the WSJ the professor is now back peddling and will not release any company specific data based on 2009 data

"Letter about 401ks stirs tempest" 7/25/13.

Also he is not responding to any inquiries-all questions are being referred to Yale spokespersons. Yale recognizes its reputational risk.

One flaw in the professor's analysis that has been pointed out is that he did not take into account services which add value and improve returns such as auto enrollment, advice, call centers and investment education. Plans which provide greater services will have higher fees.


http://online.wsj.com/article/SB1000142 ... 41648.html

The article never says "back peddling". Those are your words. My take is he is not using the 2009 data because its old and maybe he has newer data.

Prof. Ayres referred questions about his letters to a spokeswoman at Yale Law School. She said Prof. Ayres still intends to publicize the aggregate results of his study, but "no company-specific data will be publicized that is based on 2009 data," which was the information used to generate the results described in the mass mailing. When asked if Prof. Ayres would publicize any company-specific information using more-recent data, the spokeswoman said she didn't know.


Don't see anything in the article that you mention about Yale recognizing it repetitional risk. It seems normal to refer questions to a spokes person for something as high profile as this has become.



That was also my takeaway. Ayres does not seem like the type to "back peddle." And YLS is not the type of institution to care about angry 401(k) sponsors.


Its not Ayers choice because he is an employee of Yale and Yale's attorneys are now involved.That's why Ayers has back peddled on his earlier comments that he will publicly name employers whose plans have high fees based on 2009 data.

"When asked if Prof. Ayres would publicize any company-specific information using more-recent data, the spokeswoman said she didn't know."

Referring questions to a corporate PR person who issues non responsive answers is standard procedure when an institution wants to limit its exposure to a controversal issue.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby pkcrafter » Tue Aug 06, 2013 9:45 pm

Update:

Manwithnoname wrote:
One flaw in the professor's analysis that has been pointed out is that he did not take into account services which add value and improve returns such as auto enrollment, advice, call centers and investment education. Plans which provide greater services will have higher fees.

Manwithnoname seems to think along the lines of TPAs (third party administrators) because they their lawyers have replied to Professor Ayres' letter.

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.”


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.


http://www.investmentnews.com/article/20130805/FREE/130809959&cslet=UnhOY2lLZjlKL0taK2lNaXM3T25UUE5ycnU3cXVHREg=
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Re: A Professor Puts the Scare in Plan Sponsors

Postby umfundi » Tue Aug 06, 2013 10:22 pm

From the little I know about Professor Ayres, I am not an admirer, though I share his point of view about plan administrators in general.

It is only a matter of time before this comes crashing down. Detroit's pension administrators flew first class to Hawaii for a conference only weeks before the city declared bankruptcy.

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Re: A Professor Puts the Scare in Plan Sponsors

Postby Valuethinker » Wed Aug 07, 2013 7:44 am

Sheepdog wrote:As a side note, I took my pension as a lump sum and rolled it over. I no longer could trust my company. (They are out of business today, sold to a large conglomerate.)


An honourable man in a dishonourable situation.

My presumption is the company was warned by its lawyers it would get sued if it provided 'advice' which turned out later to be wrong (and, inevitably, it would not be the best advice-- that's the whole point of diversification, that you get not the best return, but not the worst).

ERISA, for Defined Benefit schemes, protects the plan sponsor (employer) from that, largely. The 'prudent man rule' as I understand it basically says if the Trustees take their fiduciary responsibilities seriously, and retain good external advisers, then they are in the clear.

Looks like it does not apply in the case of DC schemes. Another unforeseen and dangerous consequence of the move to DC schemes in the US and the UK over the last 30 years.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby manwithnoname » Wed Aug 07, 2013 7:49 pm

Valuethinker wrote:
Sheepdog wrote:As a side note, I took my pension as a lump sum and rolled it over. I no longer could trust my company. (They are out of business today, sold to a large conglomerate.)


An honourable man in a dishonourable situation.

My presumption is the company was warned by its lawyers it would get sued if it provided 'advice' which turned out later to be wrong (and, inevitably, it would not be the best advice-- that's the whole point of diversification, that you get not the best return, but not the worst).

ERISA, for Defined Benefit schemes, protects the plan sponsor (employer) from that, largely. The 'prudent man rule' as I understand it basically says if the Trustees take their fiduciary responsibilities seriously, and retain good external advisers, then they are in the clear.

Looks like it does not apply in the case of DC schemes. Another unforeseen and dangerous consequence of the move to DC schemes in the US and the UK over the last 30 years.


VT:

Your last paragraph make no sense; it is gibberish. Your second paragraph is unintelligible due to the double negatives at the end of the parentheses. Cant figure out what you are intending to say.

DC plans are subject to same rules as DB plans that require fiduciaries to act prudently in selecting investments for participants. However, DC plan options do not guarantee any benefit amount unless participant selects an investment with a guaranteed benefit such as an annuity.

Under ERISA, Plan fiduciary is not responsible for adverse investment outcome which results from participant's selection of an investment option, e.g., selection of 100% investment in S &P 500 index fund in Oct 2007 which declines by 40% by March 20009.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby ruralavalon » Thu Aug 08, 2013 7:05 am

D. Mercado wrote:In the 12-page memorandum, Mr. Reish [Drinker, Biddle attorney] 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.
Investment News, 08/05/2013, "Retirement attorneys say Yale prof's 401(k) charges hot air" .

Does anyone have a link to the 12 page memorandum, or to the Professor's letter to Plan Sponsors? The article provides little information about the dispute or how to evaluate the quality of plans, and little of substance about the 12 page memo. Leading to the suspicion that there was little of substance in the lawyers' memo?

Its pretty well established (by simple arithmetic, etc.) that investing costs matter, and matter a lot. Its pretty well established (SPIVA Scorecards, etc.) that index funds beat the very large majority of comparable actively managed funds in any given time period, and long term. So have those lawyers said why those two factors should not be the primary factors in evaluating a plan? The article is not helpful on that.
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Re: A Professor Puts the Scare in Plan Sponsors

Postby manwithnoname » Thu Aug 08, 2013 2:42 pm

ruralavalon wrote:
D. Mercado wrote:In the 12-page memorandum, Mr. Reish [Drinker, Biddle attorney] 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.
Investment News, 08/05/2013, "Retirement attorneys say Yale prof's 401(k) charges hot air" .

Does anyone have a link to the 12 page memorandum, or to the Professor's letter to Plan Sponsors? The article provides little information about the dispute or how to evaluate the quality of plans, and little of substance about the 12 page memo. Leading to the suspicion that there was little of substance in the lawyers' memo?

Its pretty well established (by simple arithmetic, etc.) that investing costs matter, and matter a lot. Its pretty well established (SPIVA Scorecards, etc.) that index funds beat the very large majority of comparable actively managed funds in any given time period, and long term. So have those lawyers said why those two factors should not be the primary factors in evaluating a plan? The article is not helpful on that.


Plan fiduciaries are not required to scour the investment universe to find the lowest fees for plan investments- Under ERISA a plan is only required to pay reasonable fees for plan services provided.

A plan can pay retail fees if the plan receives greater services which reduce the cost to the wholesale level. In Hecker v. Deere, the Federal Court of Appeals gave the following rebuttal to the employees' claim that a fiduciary who approves retail funds in a 401k plan instead of cheaper wholesale funds breaches his fiduciary responsibility because the participants pay higher fees:

"We add another point that was raised earlier but that we did not mention in the opinion:  the complaint is silent about the services that Deere participants received from the company sponsored plans.   It would be one thing if they were treated exactly like all other retail market purchasers of Fidelity mutual fund shares;  it would be quite another if, for example, they received extra investment advice from someone dedicated to the Deere accounts, or if they received other extra services.   If the Deere participants received more for the same amount of money, then their effective cost of participation may in fact have approached wholesale levels.

Another point made by the lawyers is that under ERISA a plan sponsor can pass plan expenses to participants. Say a plan uses a provider who collects 12b-1 fees on active funds to defray the cost of the plan admin charges it incurs. If the plan fiduciaries eliminate the active funds and the 12b-1 charges then the plan provider will bill the plan for the cost of the fees that were being paid by the 12b-1 charges. The plan could then charge all participants accounts for the cost of plan administration say .70% in addition to the investment fees.

In other words there is no free lunch that allows participants to avoid paying for plan admin costs by limiting investments to low fee funds. Plan can pass reasonable plan admin cost on to participants and what is reasonable under federal law is determined by the level of services provided to plan participants. Higher plan admin fees are reasonable if plan participants receive greater services.
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