401(k) industry flummoxed over Yale professor's 6,000 'threatening' letters to plan sponsors

The eclectic academic says he'll go public targeting alleged 'high-cost plans' as sponsors flood phone lines of advisors and recordkeepers and Brightscope is drawn into the fray

Thursday 7.18.13 by Lisa Shidler

Industry leaders are furious at a Yale law professor who’s mailed 6,000 letters to plan sponsors warning them they are paying too much for their 401(k) plans and encouraging them to make changes — or else. See: Why the industry needs to accept some blame for 'flaws’ in PBS Frontline’s 'Retirement Gamble’.

In the letters, Prof. Ian Ayres writes: “Using data from the form 5500 your company filed with the Dept. of Labor in 2009 and BrightScope Inc. I have identified your plan as a potential high cost plan. We recommend that you improve your plan menu offerings, including adding lower fee options, both at the plan and fund level, and consider eliminating high-fee funds that do not meaningfully contribute to investor diversification.” See: Why the 'naked fear’ from a Yale law professor’s letters to 401(k) plan sponsors is still present.

The letter, which plan sponsors started receiving at the end of June, links to a draft of a white paper written by Ayres and Prof. Quinn Curtis, an associate professor of law at the University of Virginia School of Law, entitled: “Measuring Fiduciary and Investor Losses in 401(k) Plans.” See: 9 things advisors to 401(k) plans must do to keep clients out of hot water.

Advisors and 401(k) leaders alike feel Ayres’ letters have a threatening tone, particularly a section in which he tells plan sponsors he would mention names of these specific “high cost plan” companies and their hashtags on Twitter in the spring of 2014. The missives have prompted confused plan sponsors to flood the phone lines of their advisors and recordkeepers. See: Obfuscation Nation: 401(k) fee disclosure laws still don’t give the true cost of plans and may well cause more agita for would-be retirees.

Good reason to worry

This brouhaha won’t end anytime soon and will likely result in more 401(k) lawsuits and possible congressional hearings, says Fred Reish, an attorney with Drinker Biddle & Reath LLP. Reish says his firm intends to draft a formal response to Ayres in the next two weeks. See: What a wave of 401(k) lawsuits tell us about what RIAs really need to worry about.

“The industry is very sensitive to bad publicity — particularly when they’re doing a pretty good job,” Reish says. “To get hit with this, it’s like someone is throwing mud at them. This has legs. It is being discussed on bulletin boards online. It is compounding. This is going to be a big topic at the fall conferences. It is already growing — there is no doubt about it. If I were a plaintiffs’ attorney, I would certainly have my eye on this. See: The PBS 'Frontline’ 401(k) documentary names suspects but leaves out major culprits of the theft of the American retirement.

Advisors and those in the 401(k) industry are already defending themselves via blog posts and LinkedIn messages.

Brian Graff: This is an harassment letter. It's certainly threatening.
Brian Graff: This is an harassment
letter. It’s certainly threatening.

Brian Graff, CEO and executive director of American Society of Pension Professionals and Actuaries and the National Association of Plan Advisors, wrote a blog post on the topic earlier this week that he dubbed, “Love Letters from Yale.” He says his agency has received more than 100 calls and e-mails from angry plan sponsors.

“This is an harassment letter,” he says. “It’s certainly threatening. These are companies that are on a voluntary basis providing retirement plans.”

Graff says his agency is exploring a number of actions including a lawsuit. He says he has reached out to Prof. Ayres, but has not been able to speak with him.

It appears Ayres sent out many different copies of his letter and they were sent through the U.S. Postal Service. “All of the major recordkeepers are getting phone calls. That’s a lot of postage to send out,” says Reish. “That’s a lot of wasted postage. I’d like to think that with all of these issues facing the country that Yale University could find better use for its money.” See: The Yale endowment model 
of investing is not dead.

Fidelity spokesman Mike Shamrell confirms that his company has received a “small number” of phone calls from plan sponsors.

“The questions have been general in nature,” he says, with plan sponsors asking if the letter was legitimate and whether they should take any action.

Shamrell says his firm explains to plan sponsors that Fidelity wasn’t a part of this study and encourages plan sponsors to speak with their advisor or Fidelity rep. to talk more about their plan costs. See: Fidelity brings its 401(k) muscle to RIAs with new product.

Yale response

RIABiz e-mailed Ayres multiple times seeking comment. Ayres’ voicemail was full and could not receive new messages.

However, Jan Conroy, director of communications with Yale Law School, e-mailed this response: “Prof. Ayres sent some letters to retirement plan fiduciaries as part of his research on the impact and regulation of costs in retirement plans. The letter was motivated by a desire to inform the recipient about the results of his scholarship and analysis of historical data regarding these plans.”

She also confirmed that no additional letters are being sent out by Ayres.

46,875 plans

While there are different versions of Ayres’ letter, his central message is the same. RIABiz has seen five different versions of Ayres’ letter and some industry leaders say they’ve seen more than a dozen versions.

In each version, Ayres identifies himself as the William K. Townsend Professor at Yale Law School. He explains that he is currently engaged in a study of the financial impact of investment and administrative fees in retirement fees and recently began a study with Prof. Curtis, which aims to measure the relative costs to 401(k) plan participants’ menu limitations, excess fees and investor allocation mistakes.

It appears he only sent letters to plan sponsors that he identified as high-plan costs. He explains that he has analyzed the costs of 46,875 plans and tells each employer where their plan stood in that ranking for its fees. In other words, he lets plan sponsors know that they were among the higher-cost plans.

In one version Ayres wrote: “Your plan ranked 29,337 out of 46,875 plans in total plan costs. Among plans of comparable size, (measured by total net assets), your plan ranked worse than 78% of plans.”

In some versions of the letter, he tells plan sponsors about his intent to publicize the news.

“We will make our results available to newspapers (including the New York Times and Wall Street Journal), as well as disseminate the results via Twitter with a separate hashtag for your company. See: 9 things to know about the 'truth’ concerning RIA use of social media.

In most versions, Ayres also urges plan sponsors to remember their fiduciary duties and, in some cases, encourages them to improve their plan options adding, “lower fee options, both at the plan and fund level.”

Brightscope on the spot

Mike Alfred: Obviously, going forward, we need to be more careful because there could be a rogue actor out there.
Mike Alfred: Obviously, going forward, we
need to be more careful because
there could be a rogue actor
out there.

Although BrightScope, Inc. is referenced multiple times in the letters, co-founder Mike Alfred says his firm was not involved in this analysis. Two years ago, Alfred says, Ayres called asking for data to aid in his research. See: How BrightScope plans to publicize RIA advisory fees fairly amid all those onion layers.

“Generally, if it’s Harvard, Yale, the Department of Labor or someone with legitimacy, we feel we’re public servants and we’re happy to help with these requests and do usually approve them. Obviously, going forward, we need to be more careful because there could be a rogue actor out there,” says Alfred.

BrightScope’s attorney spoke with Ayres last Friday and asked him to stop sending out these letters, Alfred says. The attorney also asked Ayres to stop using BrightScope’s name in the letters. Alfred says Ayres told his attorney he would stop sending letters. See: How BrightScope plans to publicize RIA advisory fees fairly amid all those onion layers.

Alfred says he has seen a handful of different versions of the letter Ayres sent out.

This is only a test

“I think he was trying to test plan sponsors’ reactions,” Alfred says. “Some are aggressive as saying 'we’re going to go public on this in The Wall Street Journal and tweet about it.’ We draw the line there and say that’s too much. You don’t need to poke at people. It was pretty unanimous across the board and people felt the language used was irresponsible. I think it’s hard to disagree with that.” See: BrightScope debate has familiar feel of an industry being dragged kicking and screaming into the new world.

While others think this issue will continue to blow up in the retirement space, Alfred feels it will die out in a week or two. “There isn’t a whole lot of underlying validity to this,” Alfred says. “It’s the middle of summer and a lot of people are on vacation. They’ll come back and probably never see this.”

Alfred also says he feels that Ayres didn’t have bad intentions. “I think he probably had good intentions. The approach offended a lot of people and in my mind, crossed a line. I’m sure the vast majority of his work is very credible. None of my comments are an attack on him. It’s just not liking the approach that was taken and not liking our name being attached to this.”

Fred Reish: The study seems to take the position that if you are paying a higher percentage of fees you could be in trouble and that's just not true.
Fred Reish: The study seems to
take the position that if you
are paying a higher percentage of
fees you could be in trouble
and that’s just not true.

Reish disagrees with Alfred and feels this could have a long-term impact. He fears that employers, and ultimately their advisors, could face huge backlash if the material from the study gets posted on Twitter. “Can you imagine the response if this is posted on Twitter and it says your company is in the bottom 99% with a hashtag of your company. If I were a plaintiffs attorney, I’d be all over this.”

Reish also fears this will mean more litigation to 401(k) plans and could result in congressional hearings.

'Amateur hour’

Industry leaders claim the data that Ayres used is misleading and is that some of his premises are based on incorrect assumptions. The data is old — from 2009 — they point out. In addition, Graff and Reish say that Ayres focused his analysis solely on the cost of plans and did not consider other factors such as the types of services some of these 401(k) plans provide to participants. See: Which three of DOL’s new 401(k) rules represent the biggest land mines for financial advisors and plan sponsors.

“The professor is treating the retirement services industry like a commodity,” Graff says. “He’s treating it like you’re buying a gallon of gasoline. It’s very amateur hour. We asked to talk to him, but he said he was swamped. He has time to send out 6,000 letters but not the time to make a phone call.”

Graff and Reish both point out that Ayres’ data comes from Form 5500 data, which many plan sponsors fill out themselves. Reish says this data is often inaccurate because plan sponsors don’t understand the exact questions and may fill it out inaccurately.

Reish also takes issue with Ayres’ assumption that cheap is better. For instance, Ayres’ baseline analysis is evaluating Vanguard’s index-only funds. See: What led to Vanguard allowing its 401(k) plan sponsors to shop around for non-Vanguard target-date funds.

“The only employers who use index-only funds provide virtually no other additional services to participants,” Reish says. “Those plans are going to come out very good in this study but it makes no sense. It defies logic,”

Graff says the data doesn’t account for fees paid directly by the plan sponsors and doesn’t include a complete assessment of the reasonableness of aggregate fees.

Faulty premise

Ayres’ data does not take into account the complexity of plan design and doesn’t factor in levels of service or performance, according to Reish says. For instance, if a plan advisor provides additional services to participants that would not be factored into Ayres’ data.

Reish also found a number of problems with Ayres’ report. He says one of the biggest concerns was that the study did not account for the fact that by law, plan sponsors are supposed to evaluate their fees based on the services they are receiving.

“The law is clear that you can pay additional money for additional services,” Reish says. “The study seems to take the position that if you are paying a higher percentage of fees you could be in trouble and that’s just not true. The analysis is inconsistent with the law and common practices.”

He continues: “For a lot of people, the integrity of the data relies on the answers to form 5500 questions and it is commonly believed that many plan sponsors don’t understand the questions and answer them inaccurately. There’s the issue of garbage in and garbage out.”

Reish also questions Ayres’ approach about posting employers’ hashtags on Twitter. “I think some plan sponsors have the right to say, 'who are you to do this to me. You haven’t looked at the quality of my plan and its services and you are publicizing that I’m in a bottom percentile.’”

Randy Long: I think if he really looked into the situation, he would realize that things aren't as overpriced as they may seem.
Randy Long: I think if he
really looked into the situation, he
would realize that things aren’t as
overpriced as they may seem.

The professor

Prof. Ayres’ range of interests appear to have an eclectic bent. In addition to his work in the financial sphere, Ayres has written books on the topics of self-help, gay rights and dieting. Ayres received his Bachelor’s Degree from Yale in 1981, his law degree from Yale in 1986 and his Ph.D. from MIT in 1988.

Ayres has been a columnist for Forbes magazine, a commentator on public radio’s Marketplace and a contributor to The New York Times’ Freakonomics blog. Ayres has published 11 books and more than 100 articles on a wide range of topics. His latest book is “Carrots and Sticks: Unlock the Power of Incentives to Get Things Done.” In 2011, he published “The $500 Diet: Weight Loss for People Who are Committed to Change.” In 2010, he published “Lifecyle Investing” (with Barry Nalebuff). He is also author of “Straightforward: How to Mobilize Heterosexual Support for Gay Rights (Princeton University Press 2005 with Jennifer Gerarda Brown). He also published “How to Use Everyday Ingenuity to Solve Problems Big and Small” (Harvard Business School Press 2003) (with Barry Nalebuff).

Ayres’ official website states that he helped convince a court to vacate his client’s death sentence In an Illinois post-conviction proceeding.

Confused clients

Randy Long, of SageView Advisory Group, LLC, whose firm has close to $24 billion in mostly 401(k) assets, says a handful of his clients have gotten the letters and were initially confused about why they were receiving the letter and also wanted a reminder of how their fees compare with others in the industry.

Long says his firm provides benchmarking metrics for its clients and has given heightened attention to fees. He feels all RIAs should offer this insight to plan sponsor clients.

Long says the industry is feeling defensive about its fees while pointing out that these services can’t be free. He says he didn’t lose any clients over this debacle but feels Ayres’ took a great deal of liberty in his interpretation of price of a plan.

“I think if he really looked into the situation, he would realize that things aren’t as overpriced as they may seem. It is true some plans are still overpriced, but with the full transparency that’s taken plan in the industry, people are taking offense by this. They’re feeling offended because every service provider does need to be paid. It almost feels like the industry is under attack.”

A life of its own

James Holland, with Millennium Investment and Retirement Advisors LLC, oversees fiduciary aspects for about 300 plan sponsors. His firm works with about 30 advisors providing fiduciary oversight for plans ranging from startups to $200 million in assets.

He learned about this issue in a LinkedIn group.

“We did tell advisors about it so they’d be aware,” Holland says. “This has obviously taken on a life of its own.”

Fred Reish | Randy Long | James Holland | Ian Ayres

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