Saturday, August 20, 2016

Boiling Points

One could hardly read the headlines this past week without experiencing a certain sense of déjà vu.

After all, it’s been not quite 10 years since the then relatively obscure St. Louis-based law firm of Schlichter, Bogard & Denton launched about a dozen of what have come to be referred to as “excessive fee” lawsuits.

Not that the recent batch of suits targeting multi-billion dollar university plans are a mere recounting of the charges leveled against their private sector counterparts. No, in the years since then the Schlichter law firm has sharpened their pencils, and their criticism. Those early suits focused on what, in comparison to the most recent waves, seem almost quaintly simplistic: allegedly undisclosed revenue-sharing practices, the use of non-institutional class shares by large 401(k) plans, the apparent lack of participant disclosure of hard-dollar fees (which even then were disclosed to regulators), and even the presentation of ostensibly passive funds as actively managed.

In the lawsuits that have been filed in recent months, it’s no longer enough to offer institutional class shares — one must now consider the (potentially) even less expensive alternatives of separately managed accounts and collective trusts. Actively managed fund options are routinely disparaged, while the only reasonable fee structure for recordkeeping fees is declared to be a per participant charge. The use of proprietary fund options, rather than being viewed as a testament to the organization’s confidence in its investment management acumen, is portrayed as a de facto fiduciary violation since the investment management fees associated with those options inure to the benefit of the firm sponsoring the plan.

The most recent suits targeting university plans add to the standard charges leveled against 401(k) plans some that are peculiar to that universe — notably providing a “dizzying” array of fund options that plaintiffs claim results not only in participant paralysis, but in the obfuscation of fees and the decision to employ multiple recordkeepers. The proof statement that these practices are inappropriate? Comparisons with the standards and averages of 401(k) plans.

Overlooked in the burst of headlines and allegations is that we know very little about these plans other than what the plaintiffs allege. We aren’t told anything about the employer match, for instance, not to mention participant rates, nor is the subject of outcomes mentioned. We know nothing of the services rendered for these fees, only that, of the investment funds on the menu, cheaper and ostensibly comparable alternatives were available. The plaintiffs’ argument seems to be, if there were cheaper alternatives available, the ones chosen were, by definition, unreasonable, regardless of the services provided.

One other thing overlooked in the burst of lawsuits is that precious few of these cases have actually made their way to trial, and that among those that have, on the issues of fund choices and fund pricing, the courts seemed inclined to give the plan fiduciaries the benefit of the doubt. The Schlichter firm’s own press releases now not only tout the 20 such complaints the firm had filed as of early August, but that in 2009 they “won the only full trial of an 401(k) excessive fee case.” A case in which the attorney fees turned out to be more than triple that of the recovery won by plaintiffs. But if the record at trial is more checkered than many appreciate, plan fiduciaries can’t ignore the fact that in the lawsuits it has brought, the Schlichter firm has succeeded in securing nine settlements.

A popular aphorism holds that if you put a frog in a pot of boiling water, it will immediately hop out, recognizing the peril that that water represents. But if you put the same frog in a pot of cold water and then slowly bring it to a boil, the frog will stay put, since the danger creeps up on it in a less noticeable fashion.

Perhaps that explains why, 10 years after the first claims were filed, so many multi-billion dollar retirement plans still remain vulnerable.

Though by now, that fiduciary pot is surely boiling — and has been for some time.

- Nevin E. Adams, JD

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