Fiduciaries Really Need to be Experts

Plan sponsors need to re-calibrate their fiduciary obligations with respect to their retirement plans.  They have to ask hard questions. Do they have the relevant expertise to fulfill these roles?  Do they understand the “business” of maintaining and administering plans?  And, finally, do they want to devote time and resources to this responsibility?

In reality, most plan sponsors are too busy executing on their business strategy to worry about fiduciary matters. And, this is the way it should be.  Typically, HR and finance staff members oversee the plans and identify policies, procedures and vendors — all to be rubber-stamped by  high-level corporate committees.

This model is old-school, is broken, and must be fixed.  A recent appellate court case, in the 7th Circuit, is bringing these issues into sharp focus.  Plan Sponsors need to pay attention.

The volume and sophistication of ERISA class action lawsuits has grown significantly over the past decade.  Until this April, however, plan sponsors and retirement plan service providers have largely successfully defended against this onslaught.  This has been good news for fiduciaries.

In April, however, the 7th Circuit, previously a defendant-friendly court, handed plan sponsors and fiduciaries, a very serious set back.  In a class action suit against Kraft Foods, the court did not dismiss the case, but instead sent it back to the district court to determine whether the plan sponsor, Kraft, breached its fiduciary duty to the participants.

This holding is a nightmare for plans sponsors and corporate fiduciaries. No fiduciary wants a trial court to determine whether it’s acts or omissions satisfied the fiduciary standards of ERISA.  Likely the insurance companies will settle.

Nonetheless, this case goes to the heart of the critical importance of fiduciary processes.  With respect to a company stock fund, the court questioned whether the fiduciaries ever examined the operational structure of the fund and balanced the relative merits and drawbacks of different structures.  Furthermore, a question was raised as to whether Kraft ever reached an affirmative decision supporting one structure over another.  Surprisingly, no documentation was submitted which would support that a decision had, in fact, been made.

In addition, the court was not comfortable with Kraft’s 10 year relationship with its record-keeper.  Although consultants had advised that the recordkeeping fees were reasonable, the court was critical that third party bids were not obtained and used for comparison purposes.  Maybe the court just thought that the relationship was too cozy.

At a minimum, this case indicates that fiduciaries must develop a sophisticated understanding of the technical intricacies of the mutual fund, recordkeeping, and fund administration businesses.  Relying on consultants is not good enough.  Instead, fiduciaries must dig into the weeds, compare and assess the merits, deficiencies and costs of various service delivery models.

Plan Sponsors need to focus on capturing their own target markets, developing products, satisfying customer needs and growing their earnings. Why should they be bothered with this stuff?  It can be a nuisance.

As stated in the title of this posting, fiduciary oversight is not a part time job.  There is significant subject matter and procedural expertise required in discharging fiduciary responsibilities.  Plan Sponsors should recognize the professional skill set required to serve as a fiduciary, and acknowledge that it is not in their interest to develop or maintain this expertise in house.  Plan Sponsors, as well as participants and beneficiaries would be best served by hiring expert Independent fiduciaries to oversee the plans.

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It Could Be Money in Your Pocket

Well over a year ago I wrote about the impact of fees in accumulating assets in retirement plans.in , It’s the Fees Stupid. Every 12 months is not too frequent to remind ourselves of this critical point.

In today’s NY Times, Ron Leiber sets forth a compelling analysis of the impact of fees on retirement savings in a 401(k) accounts.  Leiber also reveals a sophisticated understanding of the business of providing and pricing 401(k) services.  Revealing Excessive 401(k) Fees.

With the advent of 401(k) plans, mutual fund houses like Fidelity (mentioned in the Leiber article) launched turn-key products for plan sponsors.  Known in the industry as “bundled services”, a plan sponsor could turn to a single firm for a complete $401(k) program — all in one, they would receive recordkeeping, administrative, investment and sometimes even shareholder support services.

The mutual fund houses, had one goal in mind:  get their mutual funds on the platform of investment options for plan participants.

This was a great business model, until the class action lawyers rounded up plaintiffs to challenge these arrangements.  Numerous cases have been filed around the country, and Leiber focuses on the Fidelity case.  While the allegations are complex and nuanced according to the facts of each case, the basic claim is that the fee structures for these products were excessive and unreasonable.  Part of arguments also include allegations that the fees structures are opaque and not fully disclosed, therefore no fiduciary or plan participant could make an assessment of the reasonableness of a fee.  If a fee is not properly disclosed, it can be assessed for reasonableness.

As Leiber notes, these cases have been winding their way through the court system and it is taking a long time for the issues to be resolved.  No doubt, if the initial proceedings do not go well for the mutual fund houses, the settlements with the insurance companies will be significant.

Theses cases caught the attention of the Department of Labor, and as Leiber noted, the Department has issued new regulators requiring fee disclosures.  However, disclosing the fees is only the first step.  Fiduciaries must understand the various fees and understand the price competitiveness of the fees.  Expert independent fiduciaries could extract significant savings on behalf of plan participants.

Why does all this matter?

Leiber puts in very real terms, “just a quarter of a percentage point in annual savings now can mean tens of thousands of dollars more come retirement time.”   Why should this money end up in the pocket of mutual fund execs or sales people.   Instead, it come be “between vacation each year or two at age 75, or one plan ticket, or serveral, for the grand children to come see you annually.”

The mutual fund execs and the investment managers are likely flying around in their private planes.  Better that retirees get to spend time with their families.

Fees matter. Fees add up over time.

Prediction:  Future ligitation will focus on another mutual fund industry product:   target date funds.   More on that in another Post.

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