Lessons to be Learned From a Flawed 401(k) Fee Study (Part 1)

August 1, 2013

Authored by: benefitsbclp

Typically, academics do research and then write about their findings and conclusions.  However, as has been reported elsewhere, Professor Ian Ayers, the William K. Townsend Professor at Yale Law School, decided to take his findings and conclusions a step further.  He sent a letter to some 6,000 401(k) plan sponsors essentially accusing them of potentially violating ERISA fiduciary duties.   He then went even further and threatened to publicize their identities and advised them that he would assign each of the 6,000 of them with their own hashtag on Twitter when he publicized his study next year in periodicals including the New York Times and the Wall Street Journal.  His threats  have been garnering substantial attention in the popular press.  Needless to say, Professor Ayers has created quite an uproar in the 401(k) plan advisor and consultant communities.  You can read a redacted copy of the letter here.

The Study (and its Flaws)

Professor Ayers indicates in his letter, and in the draft study  that he and Professor Quinn Curtis of the University of Virginia School of Law co-authored, that he used 2009 data from Forms 5500 and from 2009 data compiled by Brightscope, Inc.  Brightscope has advised ASPPA that it had nothing to do with the study and Yale has confirmed that Brightscope’s 2009 information was used with no direct participation by Brightscope.

The draft of the study posted online is already coming under fire from other sources for a variety of reasons.  Based on what we know of the study, it appears to have several significant flaws:  (1) although Forms 5500 may, to some extent, reflect actual expenses, the 2009 data does not demonstrate whether the employer is paying some or all of the expenses or the accuracy of plan expenses, (2) there is no qualitative basis in the data to determine whether the amounts paid are reasonable in view of the services provided (in other words, are sponsors getting what they pay for?), (3) there is no basis to determine the extent to which plan fiduciaries have already controlled plan costs in concert with the availability of investment options and share classes available for specific plans, (4) complexity of plan design and operation together with features such as participant education are not factored into the conclusions, and (5) changes that have resulted from the imposition of the 408(b)(2) disclosure regulations are not factored into the study since they occurred after 2009.  Even assuming that the 2009 data was sufficient and valuable to reach the conclusions of the two professors, it seems difficult to justify sending letters to 6,000 plan sponsors alleging fiduciary impropriety when their plans may look very different in 2013.

Yale’s Official Release

Professor Ayers has been rather mum following the uproar he created advising many of those who have attempted to contact him that he is “too busy.”  In response to a request from ASPPA, Yale Law School’s Director of Communication, Janet Conroy, indicated that:

The letters from Professor Ayres aren’t a precursor to any legal action, and Professor Ayres has no intention of sharing data with plaintiffs’ attorneys. While he intends to publicize the results of his research when the project is published, those results will be presented as aggregate data. He does not intend to publicize company-specific data based on 2009 data.

Of course, this response, while contrary to the threatening nature of Professor Ayers’ letter, leaves the 6,000 plan sponsors with a bit of a dilemma.  What steps, if any, should they take now to mitigate exposure, even if wrongly asserted, that might result from a breach of fiduciary duty action?  We will cover that in a future post