Plan Fee Lawsuits to Bring Change

Although plan fees might not be excessive, advisers and plan sponsors should consider whether they can be less.

So said Jennifer Marconi Flodin, COO of Plan Sponsor Advisors, speaking at PLANSPONSOR’s Plan Designs conference; the question isn’t necessarily whether the fees are too high, but whether the sponsor could have been paying less, she said.

“The spotlight more than ever before is on the plan sponsor and investment adviser,’ Nancy Ross, an attorney with the firm McDermott, Will & Emery, told the audience.
In light of the spate of lawsuits filed by the firm of Schlichter, Bogard & Denton challenging fees in 401(k) plans, as well as the recent attention to fees in Washington in Congress and the Department of Labor, “more than ever before, you guys are under the spotlight,’ Ross commented.

It is not only about how much was paid in fees on a particular plan, but rather whether the plan tried to lower their expenses. In fact, according to Jeb Graham of CAPTRUST Advisors, “The fees really aren’t that high.’ Instead, he said, ’the issue is going to shift to where the issue is not the fees but that the oversight is lax.’

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Moving forward, Thomas Pittman, Chief Marketing Officer, The Newport Group, changes will be seen across all fronts: plan sponsor, provider, and adviser. These cases have blown the fee discussion seriously out of proportion. Regulatory bodies are putting themselves into a position to make new discussions about disclosure, and even before that, an increases awareness is being seen, in things such as requests for proposals (RFP), which Pittman said now routinely ask about issues such as revenue sharing arrangements.

Ross, whose firm represents one of the firms sued by the Schlichter firm, said the lawsuits are focusing on revenue sharing, a focus that can be unsettling, because there is nothing inherently illeagal about revenue sharing. However, she said the lawsuits and increased attention in Washington have led plan sponsors to ensure plan fees are properly understood. Ross said that her firm has seen a significant increase in the number of companies looking for McDermott, Will & Emery to help with a plan fee audit.

Flodin agreed that sponsors should ask questions of plan providers, saying that advisers should get their clients to insist that providers acknowledge all direct and indirect revenue streams involved with the sponsor’s plan, she said.

QDIA Guidance Has Retirement Community Holding Its Breath

As the retirement plan and investing community waits for the final regulations governing qualified default investment alternatives (QDIAs), there is significant anticipation to see whether the final pronouncement adds stable value funds to the acceptable list.

Calling the situation fluid, adviser Jim O’ Shaughnessy, Managing Partner, Sheridan Road Financial, a Member Firm of NRP said he predicts a lot of wait and see and is advising many of his clients to wait to make their default choices until the DoL releases its final approved list: “I’d be hesitant as a plan sponsor to have something that was not listed as a QDIA by the DoL because that brings up all kinds of issues,” said O’Shaughnessy, speaking at PLANSPONSOR’s Plan Designs conference in Chicago.

Most panel members agreed that many plans won’t be making any moves until the DoL releases the final regulations, to see whether stable value gets listed alongside the original default suggestions of lifecycle funds, balanced funds, and managed accounts.

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Susan Walton, Senior Consultant at Watson Wyatt Investment Consulting, said she hopes that stable value does not get added to the group of approved options because since retirement plan participants suffer from inertia in their retirement savings decisions, being invested for too long in a traditionally low-return asset class might leave them with a potentially inadequate nest egg.

Fellow panelist Joshua R. Cohen, a Senior Consultant at Russell Investment Group, agreed with Walton’s assessment. “I really hope stable value is not on par with the other (options),” Cohen said. “It’s really hard to make a case for stable value.’

Although the panel did not always agree on the importance of stable value, target date funds appeared to be seen by all as a valuable default option – if chosen correctly. Walton reminded attendees that the fiduciary responsibility for monitoring lifecycle funds is the same as every other plan investment option. However, completing the same level of examination on these funds is difficult, panelists agreed, because the underlying fund components and asset allocation targets are so varied.

When evaluating suites of lifecycle funds, Peng Chen, president and chief investment officer at Ibbotson Associates, said advisers and sponsors should look at costs and who the underlying providers are. Chen also said it is important to look at the funds as they fit into a broader retirement income plan.

The panel agreed that these would be the most popular of the QDIAs – in fact, Joan L. Bozek, Managing Director, Merrill Lynch Global Wealth Management, said 75% of clients have opted to use them as a plan default.

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