In June, Yale Law School Professor Ian Ayres sent a letter to 6,000 companies whose 401(k) plans were perceived to be very expensive. While the backlash from the 401(k) advisor community has been quite palpable, there is certainly some truth to the underlying message: 401(k) plans are riddled with unnecessary fees. This letter asserts the cost of the companies’ 401(k) plans is excessively high and strongly implied that high fees could constitute a breach of fiduciary duty by plan fiduciaries.
Did Professor Ayres’ study have material limitations?
Could he have shared his research findings in a more appropriate manner?
But what cannot be refuted is the end result. It brought to the forefront once again the issues surrounding fiduciary duty and rationality of fees. So, while many 401(k) advisors rush to attack Ayres’ study, it is more important to keep the end-users (participants) in mind. Ultimately, if the letter serves as another much-needed impetus to cleaning up 401(k) plans, the end just might justify the means.
How does this impact your company?
At the very least, it should motivate your plan’s fiduciaries (e.g. company executives, senior HR, investment committee) to evaluate the current service providers and determine if the fees charged are commensurate to the services provided. Remember what it means to be a plan fiduciary: as the highest standard of care in common law, a fiduciary must act solely in the best interest of the plan participants and beneficiaries. Breach of this duty can result in personal liability; in other words, you can be held personally responsible for a multi-million dollar mistake. If that doesn’t grab your attention, what will?
Here’s what you can do to ensure your company’s retirement plan is in good shape:
• Review your fee disclosures – known as 408(b)(2) and 404(a)(5) – to understand what you’re actually paying, including revenue sharing. Is this cost reasonably relative to the value your plan (and participants) receives?
• Read your service provider contracts to determine the level (or lack thereof) of fiduciary protection afforded by each provider. (Hint: It’s probably much less than you think.)
• Contact a retirement plan advisor for a fiduciary assessment and fee analysis.
• Seek advice from a fiduciary advisor, rather than recommendations from a non-fiduciary broker/registered rep. If you do not know the important difference between ‘advice’ and ‘recommendations’, your plan is likely exposed to legitimate fiduciary risks.
If you have any questions on how this issue may further affect your business, please contact Aurum Wealth Management Group at 440-605-1900 or visit our website at aurumwealth.com. Also, sign-up for our research and commentary for additional updates relating to investment management.