With four kids in my house under the age of 9 it can be hard to get any sleep. To pass the time, I have become a connoisseur of late night infomercials.
One of my all-time favorites is Ron Popeil's "Pro" model rotisserie chicken oven - you know, the one where if you simply "follow all the instructional material you just set it and forget it." Wouldn't life be easier if managing a 401(k) plan was as easy as cooking rotisserie chicken? Sadly, the "set it and forget it" approach does not correlate well with being a prudent and responsible fiduciary.
In early October, the U.S. Supreme Court announced it would review parts of Tibble v. Edison International. Interestingly, the Court chose to review the case after requesting the opinion of the Solicitor General of the United States in conjunction with the Secretary of the Department of Labor (both of which recommended the Court take the case). As highlighted on the SCOTUS blog, the Court will focus specifically on a single issue: "whether a claim that ERISA plan fiduciaries breached their duty of prudence by offering higher-cost retail-class mutual funds to plan participants, even though identical lower-cost institution-class mutual funds were available, is barred by 29 U.S.C. § 1113(1) when fiduciaries initially chose the higher-cost mutual funds as plan investments more than six years before the claim was filed."
The plaintiff's attorney, Jerome Schlichter, actually describes the issue at hand more succinctly in a recent PLANSPONSOR interview:
The question before the Supreme Court is whether plan sponsors can get permanent immunity on an imprudent investment decision, for all time, based on the limitations period you mention. The lower courts have decided that, even if a plan has been shown to include a fund that is known to be imprudent, as is the case here, it can be protected from liability by the ERISA six-year limitations period. That’s the question the court has to decide whether to overturn—whether it’s appropriate to give sponsors permanent immunity from liability once the investment that is being challenged has been on the plan menu for six years.
Since 2006, Schilchter and his firm Schlichter, Bogard and Denton have brought more than 30 excessive fee cases against large companies and the PLANSPONSOR article is a really good read to get a sense of how he thinks (and frankly, I think he makes a lot of reasonable and astute points). What's really interesting is to juxtapose his perspective as compared to other well-known attorney's in another recent PLANSPONSOR article that represent the employer point of view. It will be very interesting, informative and far-reaching to see how the Supreme Court rules on this case.
In the meantime, I've got several practical tips that can help plan sponsors avoid being the subject of a Supreme Court case:
- Set It And Forget It Is Dead - The days of picking an investment menu for your 401(k) plan (usually recommended by the vendor) and calling it a day are long gone. The fiduciary duty to prudently select and monitor investment options in your plan is alive and well. Hiring an independent 401(k) advisory firm to serve as an ERISA 3(21) or 3(38) fiduciary to your retirement plan committee navigate the fiduciary landscape is a great first step (*bias alert - my firm helps plan sponsors do this). Second on the list is working with your advisor to develop an investment policy statement (IPS) to guide your committee through a consistent investment due diligence and reporting process. Pro tip - don't hire Ron Popeil as your advisor.
- Revenue Sharing Is Old School - Revenue sharing was an invention of a different era by the retirement and mutual fund industries as a way to make sure everybody with their hand in the proverbial cookie jar got paid but in a way that made it nearly impossible for plan sponsors and participants to know just how much. Thus, the rise and popularity of using "retail" share classes of mutual funds (which embed indirect compensation or revenue sharing to pay other service providers) versus "institutional" share classes (which strip out all indirect compensation to third parties). Since recordkeepers, TPAs and brokers typically received most (if not all) their compensation indirectly as a kickback from the mutual funds in the plan, it also enabled service providers to sell plan sponsors on the idea that their plan was "free" (really...does anybody work for free?). In reality, it was an easy way for vendors to get paid and plan sponsors to bear little, if any, direct cost for the plan. Since the 408(b)(2) and 404(a)(5) fee disclosure rules went into effect in 2012 the ability to bury fees has all but disappeared. The simplest, most transparent, way to structure plan fees is to do away with funds that revenue share and bill recordkeeping, administrative, advisory and even audit fees directly against the trust (i.e. participant accounts). This helps you avoid the whole imprudence argument around using funds and share classes that revenue share.
- Don't Pay Sticker Price - Nobody pays sticker price for a car but you'd be amazed at how often plan sponsors fail to effectively negotiate favorable fee arrangements for their plan and participants. One of the major arguments in these excessive fee cases is whether massive, multi-billion 401(k) plans (likeTibble v. Edison) should use higher cost share classes or use their scale to negotiate lower costs. It's a very reasonable assertion in my opinion, especially when plans use primarily asset-based fee structures for things like recordkeeping, administrative and advisory services. As plans grow, asset-based fees can quickly spiral towards unreasonableness. This method also ensures that fees as a percentage of plan assets stay constant, robbing your participants of economies of scale and a lower costs over time. The good news is that plans of just about any size can negotiate really effective fee structures if approached the right way. There has never been a better time to negotiate with vendors - if you haven't tried to aggressively reprice your plan over the past 12-18 months you really need to. Here are two simple ideas to take advantage of the current favorable market for retirement plan services. First, try to negotiate a fixed fee structure with your service providers to ensure that your plan's fees decline on a percentage basis as your plan assets increase. Second, ask your vendors to bid their services assuming no revenue sharing from any funds. Doing so will show you the true cost for services and should also give you full flexibility to use the lowest cost funds and share classes available since your vendor's comp structure will no longer be dependent on the investments selected. The vast majority of vendors now offer truly "open architecture" investment platforms so be wary of any vendor who limits your selection of funds or has proprietary fund requirements.
- Skate To Where The Puck Is Going - Wayne Gretzky once said "I skate to where the puck is going to be, not where it has been." No wonder they called him "The Great One". Industry best practices are rapidly evolving and certain things that were standard years ago (e.g. using retail share classes) have long since disappeared from the most progressive, highest performing 401(k) plans. To perform your fiduciary duties most effectively I believe it's important to be an early adopter of proven best practices. For example, automatic enrollment and escalation features have been shown to drive improved plan performance and retirement readiness for participants. While many plans have adopted these provisions, many have not, and the ones that have usually set things like the default (e.g. 3%) and escalation percentages (e.g. 1%) too low. The most progressive plan sponsors have moved these numbers to 6% and 2%, respectively, and sometimes even higher. Again, partnering with a 401(k) advisory firm that specializes in advising plan sponsors holistically regarding fiduciary, investment, fee and plan design best practices can go a long way toward helping you manage your plan more effectively which should greatly benefit your people and your company.
The time for accepting mediocre performance from your vendors and subpar outcomes from your plan is over. Having an exceptional 401(k) plan that reduces risk for your company and worry for your employees isn't hard but it does take time, effort and due diligence.