Every year thousands and thousands of articles appear, each intending to address some vital concern of 401(k) plan sponsors and fiduciaries.
And every year, those plan sponsors and fiduciaries find themselves most attracted to a certain few of those articles. Towards the end of the year, we learn about these specific articles in the ubiquitous “Top Ten Most Read” lists.
That’s all well and good, but wouldn’t a longer span of time reveal more about the interests and concerns of plan sponsors and fiduciaries?
FiduciaryNews.com has published articles for nearly seven and a half years now. Imagine if you took a look at the most read articles during that entire period (see “401(k) Plan Sponsor and Fiduciary Top 10 All-Time Most Popular ‘Must-Read’ Articles,” FiduciaryNews.com, December 28, 2016). What might you find? Are there patterns in these articles? Is there a central theme? Do these popular stories create a mosaic which every plan sponsor and fiduciary could learn from?
The short answer is “yes.” Now, I know what you’re thinking: “If it weren’t then you’d be writing a different column.”
OK, OK, so the answer was obvious. Just as obvious, you’ll be delighted to discover, is the central theme of these articles: fiduciary liability.
Indeed, we can group all these articles under three headings, each exemplified by a single question:
1. Is there something about the plan’s fees that increases my fiduciary liability?
You might consider this the “old standby,” but that doesn’t mean it’s not high on the minds of 401(k) plan sponsors and fiduciaries.
This category represents the most often searched for and read articles ever published by FiduciaryNews.com. Why might this be so?
Simple: Every plan sponsor wants to know if they’re paying a “fair” fee. More recently (say, since 2012), fees have become the focus of both regulators and class-action attorneys. This, in turn, has led plan sponsors to ask the “fairness” question in a different way. It’s not enough for the fee to be “fair,” it must also be “appropriate.”
What does it mean for a fee to be “appropriate”?
It means the fees contain no problematic conflicts-of-interest. Although it seems like this topic has only arisen with the DOL’s new “conflict-of-interest” (a.k.a. “fiduciary”) rule, 401(k) plan sponsors have been curious about this issue for quite some time.
Admittedly, interest did spike when the DOL essentially codified the fiduciary liability caused by conflict-of-interest fees. Here’s the bad news for 401(k) plan sponsors: Older articles discussing fiduciary liability concerns involving 12b-1 fees and revenue sharing push the “liability clock” further into the past.
You can almost hear the class-action attorneys licking their collective chops.
2. Is there something about the plan’s investment menu that increases my fiduciary liability?
If plan fees represent an “old standby,” the plan’s investment menu represents an “oldie but goodie.” Of course, the nature of the topic has shifted.
The investment menu used to be all about style boxes and Modern Portfolio Theory. This traditional structure was once thought of as the “safe” way to design option menus. That was before behavioral finance researchers showed how categories-based investment option menus proved more beneficial to employees.
Yet, despite this “Keep-It-Simple-Stupid” advice, we just can’t keep new investment ideas from infecting 401(k) plans. And, with this infection comes increased fiduciary liability.
It doesn’t seem that way at first. Most new ideas come with the promise of a better alternative. In fact, one might be tempted to call them “alternative” investments.
Whatever name you use, every potential upside comes complete with a (usually hidden) downside. For example, collective investment trusts (CITs) have the advantage of operating at a lower expense ratio than a mutual fund.
Of course, there’s a reason for that: CITs don’t have the same regulatory burden as mutual funds. Yes, banks (only banks can offer CITs) can choose to unilaterally impose those same burdens on their own products (without the behest of any regulator), but that then takes the cost advantage away, without the imprimatur of sanctified regulation.
And that’s just one example of the minefield created by these novel investment ideas.
3. Is there something in the plan’s infrastructure that increases my fiduciary liability?
Finally we have a vastly underreported realm.
Every business consists of three legs: marketing, research, and operations. Marketing and research get all the headlines. Operations sits alone, doing all the ugly chores like some corporate Cinderella. Retirement plans are no different. Fees (marketing) and investments (research) merit most of the press.
The less sexy side of the plan – its infrastructure – constantly gets overlooked. But, like any business operation, it contains the critical pieces that often prove the difference between success and failure.
For example, is the plan designed to optimize salary deferral rates? True, to some extent this harkens back to the menu design we discussed earlier. It is, however, much more than merely using a category-based investment menu design. It includes such staid essentials as auto-enrollment and auto-escalation (but we already know about that). Less noticed, but regularly searched for, is the optimal matching policy. In addition, there’s a never-ending quest for techniques to encourage greater savings rates beyond the employer match.
When you wish to enumerate the duties and responsibilities of 401(k) plan sponsors and fiduciaries, it doesn’t hurt to look at what they’re reading. And not just what they’ve been reading over the past few months, but what they’ve been reading over the past few years.