Professor’s Study Riddled with ‘Deficiencies’

August 7, 2013 (PLANSPONSOR.com) – Attorneys at Drinker Biddle & Reath identified what they say are a number of deficiencies in Ian Ayres’ study of retirement plan fees.

 

Fred Reish, Bruce Ashton and Joshua Waldbeser examined the study referred to by Ayres, the Yale law professor who sent the industry into a tizzy in late June and July by sending out thousands of letters to plan sponsors (see “Improve YourPlan—Or Else?”).

Ayres suggested to the plan sponsor recipients of his letters (there were several versions) that they were operating “a potentially high-cost plan” and might have breached their fiduciary duty. In some letters, he said he intended to publicize his study on plan expenses.

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But Ayres’ study has material limitations, said Reish, Ashton and Waldbeser in a memorandum that sets forth their analysis. The memorandum states that the study “does not provide a valid basis for concluding that fiduciaries have breached their duties.”

Key deficiencies Drinker Biddle & Reath’s attorneys identified are a misunderstanding of the Employee Retirement Income Security Act (ERISA) fiduciary rules, use of stale data, and failure to consider plan design and the services offered by plans in relation to cost. As a result, the findings of Ayres’ study are not reliable indicators of the reasonableness of fund fees.

“The study relies on index funds for comparison of fund fees, and is biased against actively managed funds that can be prudent choices under ERISA,” the memorandum says. “For example, our analysis shows that, to evaluate fund fees, the study compared the expense ratios of Vanguard index funds with the mutual funds held in plans, thereby virtually ensuring that all actively managed funds would be considered expensive. The analysis also fails to take into account revenue sharing used to pay the costs of plan administration and/or to provide a return to the participants.”

Drinker Biddle & Reath’s analysis draws on data from the Investment Company Institute, the Department of Labor and the Government Accountability Office, among others, as well as case law (Dupree v. The Prudential Insurance Company of America; Hecker v. Deere & Co.)

Drinker Biddle’s memorandum and a copy of their accompanying letter to the 401(k) community can be downloaded here

 —Jill Cornfield

Participant Demographics Vary by Plan Type

Participant demographics and behavior vary by plan type, an analysis shows.

According to a report from the ING Retirement Research Institute, overall, defined contribution (DC) participant balances rose 10% from year-end 2010 to 2012. Participants in large private sector plans have consistently higher balances than in other types plans, followed by participants in higher education plans. Governmental (state and local) plan account balances are generally lowest.

Differences between plan sponsor types begin to widen for participants in their late 20s, and widen markedly with age progression. At very early ages, there is little substantive difference in account values across employer types—and private employer plan balances are lower than both K-12 and higher education up to age 25.

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Balances for most types of employer plan accounts continue to rise through participants’ 60s—with the exception of government participants. Governmental balances begin to decline after age 65. By age 50, in 2012, participant balances in large private employer DC plans were nearly $100,000, and only half that for participants in small-mid private and higher education plans.

Account balances for higher education plan participants in their 60s and older reached or exceeded the $100,000 mark by 2012, while those in K-12, healthcare and government plans did not. In 2012, balances for older (age 65+) participants in small-mid private employers’ plans topped $100,000. After age 50, participants in plans for larger private employers exceeded $100,000 in average account balance, and reached or exceeded the $200,000 mark, in 2012, for those ages 70 and older.

The analysis also found across plan sponsor types, there is a gender gap in retirement savings: Men have higher account balances than women. The gender gap is highest in health care employers’ plans and lowest in K-12 employers’ plans.

Women are more likely (than men) to take a hardship withdrawal; men are more likely (than women) to take a loan. Both loans and hardship withdrawals are most common in larger private employer plans, and least common in higher education plans. Generally, loans are much more common than hardship withdrawals. This could, to some degree, be a result of plan design decisions at the plan sponsor level about whether to offer certain features, the report said. Participants in the “accumulation” phase of their DC experience, younger than age 50, are most likely to take both loans and hardship withdrawals.

K-12 employers’ plans have the “oldest” participants (average age 52.0 in 2012), while small-mid private employer plans have the “youngest” participants (average age 45.6 in 2012). More than half of higher education plan participants average age 50 and older. The average ages of healthcare and government employer plan participants are equally split between participants younger than and older than age 50.

The report said average age is trending higher in all employer types, most dramatically in governmental plans. The upward trend suggests more older participants may be remaining in plans, and the workforce, than younger workers are entering/joining. Nearly two-thirds of the K-12 participant base is older than age 50; nearly the same percentage of the small-mid private participant base is younger than age 50.

Health care and K-12 plan participants are overwhelmingly female (76% and 74%, respectively). Small to mid-sized private plan participants are strongly male (66%). Government (45% men, 55% women), higher education (47%, 53%) and large private employers (53%, 47%) are more evenly divided.

All data in the report, “Retirement in Review: A Look at 2012 Defined Contribution Participant Experience,” unless otherwise indicated, represent ING-proprietary data analyzed by ING’s Business Intelligence Competency Center (BICC) and are as of December 31, 2010, 2011, and 2012. The report is based on the BICC’s analysis of approximately 5.1 million participants and 47,000 DC plans (401(k), Profit Sharing, 403(b) and 457).

Copies of the report can be downloaded by going to the ING Retirement Research Institute website, www.ingretirementresearch.com, and selecting “Publications.”

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