This is an interesting article from the New York Times, directed at plan participants who may want to increase the returns in their 401(k)s by decreasing the costs in their plans and of their investments. It is not interesting so much for what it says – nothing in it is likely to be very surprising, or even new, to most regular readers of this blog – but more for two points that it illustrates, both of which line up well with themes that have developed on this blog.
The first is the article’s discussion of the need for plan participants to focus on fees and the need to reduce fees in plans to increase returns; the article operates from the central premise that the plan participants reading the article may not be aware of the fees and expenses in their plans. Both recent litigation – the excessive fee cases – and Department of Labor regulatory initiatives have focused on fee disclosure and the effect of expenses on returns, and a focus on this issue is clearly trickling down – or up, depending on your point of view – into mainstream conversation at the participant level, as the article demonstrates. I have frequently mentioned in posts that the fee disclosure regulations may have more of an indirect impact on sponsors and fee structures than a direct one, in the manner in which sunshine is said to be the great disinfectant, in the classic formulation: bringing the issue out into the open is likely to provoke plan participants to press sponsors to reduce fees and the fear of being sued over fees once the information is more readily available is likely to motivate fiduciaries to focus on the issue. It is a safe bet that this indirect response is likely to have at least some downward impact on fees and expenses in plans, and it is my view that the point of the Department of Labor regulatory initiatives is to have this exact indirect effect, whereby disclosure improves performance rather than the Department having to focus its own resources or enforcement efforts directly at the issue. If they are right and it works – which, as noted, I think it will – they will have accomplished exactly what promulgating regulations should do, which is alter behavior in the intended manner solely through the process of enacting regulation. It is a much cheaper solution, and often more effective because it is prospective rather than backwards looking, then the use of litigation to change conduct.
The second relates to my recent post on Ary Rosenbaum’s article providing a short tutorial on fees and expenses in plans. In this article on excessive fee litigation, I pointed out that the use of shorthand in this area of the law can obfuscate what is really at issue with regard to the fee structure of plans, explaining that:
Certainly the starting point for any discussion of this issue should be an understanding of the nature of excessive fee claims. ERISA lawyers, like other specialists, tend to use shorthand to which only they are privy, and this type of claim is no exception. Pithy references to excessive fee claims, however, shortchange the depth and complexity of what is at issue. Teasing out the phrase’s full meaning gives a much more nuanced picture of what is at stake, and how it impacts fiduciary liability.
The New York Times article is a perfect example of this phenomenon, with the author writing that “plans sold by insurance agents (particularly with onerous “wrap” fees) and by stockbrokers tend to be the most expensive,” without ever explaining what a wrap fee is (leaving aside the question of whether this general statement is always true, only true on the outliers, sometimes true, or maybe true, etc.). This is not unique to the author of this article; the entire industry tends to throw around phrases like “wrap fees” as though everyone in the world knows what they mean, which is not the case. This is particularly not going to be the case at the participant level, which is the target audience of the story. One of the things I particularly liked about Ary’s article, which I referenced in this post here, is his excellent explanation of “wrap fees” for anyone who doesn’t already know what it means.