Two law school professors and their 401(k) study
There is a tendency to shoot the messenger because folks don’t like the message. I ought to know. Whether it was in college, law school, or working at a third party administrator, I was the messenger of some terrible news.
I have learned that sometimes life is close to the ‘It’s a Good Life” episode from The Twilight Zone where Billy Mummy as Anthony banishes people to the cornfield for thinking bad thoughts. However, when providing an unflattering message, you should think how you prepared that message and how it will be conveyed. You need to make sure that nothing about your message is suspect.
Two-law school professor finally released their study on 401(k) fees and fiduciary breaches. After causing a stir last summer with letters to plan sponsors that cited that the sponsors’ plans were high cost despite using old data. Ian Ayres, William K. Townsend Professor at the Yale Law School and University of Virginia School of Law associate professor Quinn Curtis released their reports and got the usual backlash from the industry.
The pair of Professors claim to “provide evidence that fees lead to an average loss of 86 basis points in excess of low cost index funds.” They state that: “In 16% of analyzed plans, we find that, for a young worker, the fees charged in excess of an index fund entirely consume the tax benefit of investing in a 401k plan.” Ayres and Curtis recommend, “the requirements for default fund allocations be enhanced to assure that the default investment is reasonably low cost.”
They also recommended “the Department of Labor (DOL) designate certain plans as “high cost” and mandate that participants in these plans be given the option to execute in-service rollovers to low-cost plans.” In conclusion, the two law professors recommend “participants be required to demonstrate a minimum degree of sophistication by passing a DOL-approved test before being allowed to invest in any funds that would not satisfy the enhanced default requirement.”
These two professors have a point and they have done a terrible job of proving that point. First off, the report doesn’t cite what plan data they used to determine whether fees are reasonable or not. If they are using that same old data that they used on contacting plan sponsors, then the entire study is flawed since fees have been going down since the DOL promulgated fee disclosure regulations that finally went into effect in 2012. The study doesn’t take into the effect these regulations have had on plans as a whole.
Their correspondence to plan sponsors was poorly written and came off as threatening. The fact that they were using 2009 was troubling because it took into account information that was stale because fees have gone down and some plan sponsors had changed providers since that time. Citing fee data only miss the whole point that plan sponsors may only pay reasonable plan expenses for the services provided. So plan sponsors could opt to pay higher fees if they get a higher level of service.
So while the study has some interesting points, the way these professors got around into making that report completely undermines its effectiveness. Their message has been lost since people are more concerned with their use of old data and those letters to plan sponsors. I give them a failing grade even though their aims seemed noble.