BNA Pension and Benefits Blog

I'm pleased that my somewhat, but only somewhat, tongue-in-cheek (as those who know me well would recognize) remarks about the responsibilities of fiduciaries to elicit fee and compensation information from financial institutions and plan providers drew additional commentary. As a career ERISA attorney, for over 35 years (in other words, I was a pre-ERISA ERISA attorney), I am very aware of the complexities of the disclosure issue, not the least of which is that today, to steal, no, bad word, just to borrow, a line from Willie Sutton . . . "retirement plans" are where the money is.

[As a sidebar, here's a personal experience from about 15 years ago, maybe longer. I represented a third-party-administrator who came to me concerned about legal issues with the by-then-common arrangements under which mutual funds compensated plan service providers, such as himself, "out of 12b-1 fees." In addition to providing the client with my legal opinion based on the written law and regulations, I suggested we call the Labor Department to try to get some informal insights from their perspective. Surprisingly to me (as someone who, like many of us, at the same time manages to be cynical and mistrusting, yet idealistic and naive), the PWBA attorney to whom I was referred had no interest in discussing the matter and finally became quite angry at my suggestion that there might be some issues here the PWBA should be concerned about. With friends like these . . . .]

The intended serious point of my original comment was simply that in finding solutions we needed to start our thinking from the fact that under existing law it should be the responsibility of the plan fiduciary to obtain fee (and compensation) information necessary to make prudent investment decisions, and where appropriate, which it may not always be, to pass that information on to plan participants. Many would say, well that's implicit, and of course it is, but to my way of thinking it's still worth mentioning, explicitly.

First, I think it is important that we not overlook the fiduciary's role and the fact that maybe, just maybe, fiduciaries could do a better job than they are doing now. (Of course, this is the naive and idealistic side of my personality.) I believe that fiduciaries of very large plans could be matches for the Fidelities of the world. In fact, I know some that are. Even better (and this is exactly the kind of response I was looking for), as Professor Stein points out, large plan fiduciaries could join forces (I'm not an antitrust lawyer so, please, let's not bring that up as a possible obstacle right now). Any good to come of that may or may not flow down to the smaller players, but I believe it would. The difficulty is that as far as I know there are no existing sponsor/fiduciary organizations that are completely independent of representatives from "the other side."

My second point was that regardless of disclosures, be they legislated, regulated, volunteered, or whatever, unless fiduciaries act prudently (as part of the process) based on disclosures, all will be lost. Yes, ERISA prudence is process-oriented, that's the point. For a multitude of reasons that process really isn't working very well, and so an area worth focusing on is the role of the fiduciary and what we should be able to expect of him or her. "We" haven't been able to educate these people and yet we're now talking about educating participants.

It is all well and good to read the prudence standard of Section 404(a)(1), but what does that mean and what should it mean when in real life the plan fiduciary picking funds is the harried owner of a small firm and his or her administrative assistant, bookkeeper, and personnel manager (all rolled into one). Who are they not to "trust" typical sales rep (by whatever name)?

I see no magic bullet and I don't intend to look for one. We have litigation, we'll have some regulation and more legislation (how about some legislation clearly giving individual participants the right to sue to recover for the plan losses to that affect the value of their individual accounts -- now that would be a real "pension protection act"), and maybe the industry groups can make a contribution (although not a perfect analogy, I will say that I've never seen much point in letting foxes draft the guidelines to keep their brethren out of the henhouse). Moreover, the DOL now seems to be on board to some degree. In sum, I see it as messy process. I just don't want us to lose focus on the integral role of the fiduciary as defined by law.

Thanks again for listening.

Carl Johnson raises an interesting point: ERISA is a process-oriented statute: if the fiduciaries engage in meaningful process, plans will get the results that we generally endorse: good investment returns, low fees, honest management. The problem, though, is that in many cases, particularly with fiduciaries with small plans, the fiduciaries--in effect, those we are deputizing to ensure justice on the frontier--are outgunned by those they have to police. Can a fiduciary of a small plan really make demands on a Fidelity or Vanguard? So we are all dependent on the fiduciaries of large plans changing the practice of the industry for everyone. But even the large plan fiduciary, standing alone, is not much of a match for Fidelity, and won't be unless it can join forces with fiduciaries from other large plans. And even if it could, through individual negotiations, reduce fees and clean up conflicts for the industry as a whole--including for small plans--what incentives do they have to help out the small plans that cannot help themselves? I think very little.

Perhaps we can rely on the market--shouldn't there be a market for really good financial service providers who look for small plan volume by charging and disclosing fair fees? Well, maybe, but maybe not. The market has been around for a long time and we don't see much turf fighting for this business through disclosing and charging lower fees. Plus, servicing small plans is more expensive, on a per capita basis, then servicing larger plans.

I thus have some doubt whether a process-oriented statute will really ever produce lower fees. Perhaps meaningful fee disclosure rules would shame some of the providers into lowering fees, but again I have my doubts.

And litigation will be against the fiduciaries, for the most part, rather than the overcharging service providers. And the lesson to be learned by the fiduciaries: do more process and document it. But I suspect that will not lower fees very much.

Maybe I am too cynical.

I was appalled by a group annuity wholesaler who told me the more plans we wrote with them, they would send my family on a cruise for a week with all the other top producers! My only thought was - is the cost of this cruise coming from the accounts of the participants I am working with? The answer is YES!

Why, in this fee disclosure world we are moving into, are the industry regulators telling the plan sponsors it is their responsibility to uncover the fees? How is that plan sponsor to know their advisor was promised a cruise - where in their service contract does it state this??

For those of us in the business, we know for us to even uncover the hidden fees is nearly impossible - how can we expect the plan sponsor to figure it out? Even with full disclosure, who is going to teach these employers what is appropriate and what is not? Will they put poor performing funds on their plan because their expense ratio is low and that keeps the cost of running the plan down? If the fund is inexpensive but it doesn't meet with the terms of the investment policy statement, how is that going to come out in a fee disclosure worksheet from the DOL or the IRS?

As professionals in this industry, we need to be held to a standard of practice. It simply isn't enough anymore to assume the advisor is doing what is right for their client. If the advisor isn't required to understand the products they represent and provide disclosure to the client on that product, how will the industry ever change?

To an extent, I agree with all three of the commentators, but don't think their suggested solutions are optimal.

Mr. Johnson is, of course, correct is saying that, in the first instance, it is up to fiduciaries to both know and determine the reasonableness of the fees paid by the plan and its participants. But, until Elliott Spitzer shone a spotlight on the subject, it was impossible for them to do their job. Mutual fund companies, insurance companies and brokers simply refused to disclose any more than was required by law. This non-disclosure included commissions (which were arguably not paid from plan assets), certain revenue sharing arrangements, directed brokerage payments, etc. Now that disclosure is possible, the big companies, usually under prodding from their counsel or consultant, are beginning to ask questions. However, even when disclosure is being obtained, true apples to apples comparisons are often impossible without expert assistance. Small and mid-size plan fiduciaries, however, are usually not asking and, when they do, cannot effectively consider their choices. They tend not to be experts in the subject matter, usually deal only with and rely on a broker (who may not be interested in full disclosure of his fees) and have other things to do with their time (like run a business). Although the fiduciary may not be doing his job, it is the participant who pays the price. In other words, while Mr. Johnson's solution may be the statutorily correct one, it is simply not working in practice.

Ms. Mazo seems optimistic about the new majority in Congress dealing with the problem. I don't think it will happen--at least in the next two years. I say this for several reasons. First, the current Congress has just spewed forth the PPA and, if past practice is any guide, will not want to return to pension issues so soon. Second, even though Democrats have a numerical majority in both houses, that may well not translate into a working majority on any specific issue. After all, these are Democrats, not Republicans, and, historically, internal organization has not been a Democratic strongpoint. Third, Washington is already focusing on 2008 and Presidential politics will undoubtedly make creating issues more important for both parties than passing meaningful legislation (despite rhetoric to the contrary). That being said, however, I think the coming Congress would be an ideal time for the labor and tax committees of both houses to begin addressing this issue, hold hearings, build support for specific options and draft legislation. Even though nothing significant will pass in the next two years, a Congress prepared to move quickly with a new President in 2009 may provide a good window of opportunity to get something done.

Finally, Mr. King accuses me of disparaging trial lawyers. To that, I plead guilty, primarily because I am one myself and know how inefficent and expensive litigation is. Litigation should be a last resort for resolving problems. My point was that, in the context of fee disclosure, at the present time, it is the only resort. Having to litigate to solve policy issues means that the other methods of solution have failed. It is similar to considering war (in most cases) to be the result of the failure of diplomacy. As far as disparaging lawyers is concerned, much as I would like to wear a halo myself, the truth is we are just doing our job as plan service providers and are being adequately (in some cases, more than adequately) compensated for it--often we receive more benefit for our services than the participants do. If I sound a bit cynical, I have simply seen too many stock drop settlements with eight figure legal fee awards (defense counsel often receive a similar amount) while participants are left with just a few cents on the dollar. Is this morally wrong? I believe not. I agree that is is capitalism at work and the successful attorneys in this area are no different than "any other bottom line oriented entrepreneur". My point was that this may not be the best way to solve the policy problem.

With deference to Sherwin Kaplan, I believe there is a fifth way to get there. Fiduciaries can simply do their jobs as they should and gather the fee information. Plans and their fiduciaries need to change the market place. The difficulty is that the typical plan fiduciary has neither the interest nor the gumption to stand up to the industry's representatives (e.g., sales agents) and demand that they be given the facts on fees and compensation arrangements they need to do their jobs properly. Funds and plan services are sold largely on the basis of relationships. Ever heard the phrase "trust me"? It's up to the fiduciaries to put an end this nonsense.

Why shouldn't the new majority in Congress welcome the chance to legislate the kind of transparency requirement -- to be spelled out in regulations -- that you're talking about? The law could even enlist the advocacy groups in the effort, the way HIPAA enlisted certain health-technology groups.

For non-disclosure of excessive fees, you say, “the problem will be solved by class action litigation–a boon to the lawyers, but to no one else.” A curious statement. Taken literally it would seem to disprove your thesis that nondisclosure of excessive fees is a significant problem in the employee benefits and financial services industries.

Of course, your comment is rhetorical excess. But why should you disparage the people who are, by your own admission, the most efficient forces at policing the bad actors who rip off consumers? Like all other market mechanisms, profit seeking trial lawyers turn self interested behavior into socially productive activity. They may not be the ideal force to produce good behavior. But you agree that, like capitalism generally, relying on the market is better than the alternatives. Why not give class action lawyers the same credit you would any other bottom line oriented entrepreneur?