Yale Professor’s Fiduciary Threat Has Retirement Execs Fuming

Retirement planning officials are warning plan sponsors about a Yale law school professor's threat that he plans to release a study next spring asserting that they have breached their fiduciary duties with respect to plan costs and investments. Still, some in the industry caution that the study relies on old data.

The yet-to-be released study by Ian Ayers, William K. Townsend professor at Yale Law School, and Quinn Curtis, associate professor of law at the University of Virginia School of Law, is creating a firestorm of opposition among retirement planning executives. They argue that while the professors' evaluation of the data used in the study is flawed, it is sure to spark inquiries from Congress and clients.

The Yale professor has sent letters to approximately 6,000 sponsors of 401(k) plans claiming that many of them may have breached their fiduciary duties by sponsoring a "potentially high-cost plan," and that they consider improving their fund lineup and doing away with more expensive fund offerings, according to Fred Reish (left), partner and chair of the financial services ERISA team at Drinker Biddle & Reath.

Ayers threatens in his letter to plan sponsors that the study results—which he says are based on data compiled from Forms 5500 for the year ending Dec. 31, 2009, as well as BrightScope data—will be given to The New York Times and the Wall Street Journal, as well as disseminated via Twitter, with a separate hashtag for each company's results.

In a July 23 Client Bulletin, Reish and his colleagues warn that while the Yale professor's data evaluation is questionable, and "may not be accurate or relevant to their plans," plan sponsors should take it seriously.

Indeed, Eric Ryles, managing director of Judy Diamond Associates, publisher of retirement and employee benefits industry prospecting tools and plan data, says that the professors' analysis is based on dated information. "The study is based on very outdated information from 2009," Ryles says. "There are currently 79,000 or so 2011 filings which should meet the same basic criteria as [the Yale professor's survey] sampling. There are approximately 1,500 or so 2012 filings which would do the same."

The study also uses information from the annual 5500 forms that is "likely incomplete and in many instances is not reflective of a plan's true costs," argue the Drinker Biddle lawyers in their client bulletin.

Further, the Drinker Biddle attorneys argue that the Yale prof's study "fails to consider relevant factors about the services being obtained for the indicated costs, the structure of the plans and the extent to which the costs are attributable to plan services that justify the cost because, for example, they help participants to achieve favorable outcomes."

As a measure of fiduciary performance, the "comparison of plans based solely on cost is at best incomplete and misleading," as a fiduciary's duty "is to ensure that costs are reasonable in light of the services being provided, not to provide the cheapest plan," the Drinker Biddle attorneys say.

Furthermore, for those plan sponsors that have already taken action to reduce plan costs and provider compensation from 2009 levels under ERISA 408(b)(2) fee disclosure rules, "the letters (and the study) are moot," the Drinker Biddle attorneys argue.

While the study does have flaws, given the heightened focus on plan expenses by the Department of Labor as well as in "class-action litigation" plan sponsors who received a letter "have a right to be concerned," the Drinker Biddle attorneys say, as do plan sponsors who haven't received a letter.

Reish urges record keepers, advisors and plans sponsors to brace for the study's release and take the following steps:

Record keepers, he says, "should consider communicating with their plan clients about the issues and inadequacies of the analysis it applies to specific plans, and should be prepared to respond to inquiries from plan sponsors about the costs of their plans."
Advisors, Reish says, "should be talking with their plan clients about the [professor's] letters and the study–and should be prepared to answer questions about their fees and the costs of the investments they recommend."
Plan sponsors, "if they have not already done so," Reish says, "should obtain benchmarking data on the cost of their plans and determine if the fees and costs are reasonable relative to the services being provided."

Yale Professor’s Fiduciary Threat Has Retirement Execs Fuming

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