Are These Fees Unreasonable? – Part 2 of 3 – Inv. Management Fees

This week in our continuing series entitled “Are These Fees Unreasonable?” we address Investment Management Fees. (For last week’s post, see Are These Fees Unreasonable? – Part 1 of 3 – Inv. Advisory Services)

To recap, FRA PlanTools offers a Benchmarking Report through its web based PlanTools Risk Management System. The report benchmarks the fees paid by a retirement plan for the services rendered against other plans of similar size by plan assets or participant count using a proprietary, independent and objective database.

As a service to the industry for the purpose of starting or continuing the conversation about fees, we are publishing our internal data for the 95th percentile of fees entered into our system for (1) Investment Advisory Services, (2) Investment Management Fees, and (3) Recordkeeping Fees. What this means is that 95% of the retirement plans in our system pay at or less than the amounts found in the charts below. The data was pulled from our system on June 30, 2013.

What is challenging about benchmarking Investment Management Fees, and admittedly makes a chart below by definition incomplete, is properly taking revenue sharing into consideration. Revenue sharing is addressed in different ways by different plans (i.e. no revenue sharing at all, reimbursement to participants, crediting to ERISA accounts, offsets, etc…) There is no single right answer when it comes to revenue sharing. At a minimum,  plan fiduciaries must understand the amount of revenue sharing, who is paying it, who is receiving it, and why they are receiving it. It is perfectly acceptable to have revenue sharing pay for necessary services, as long as the total compensation paid to any service provider is reasonable and the plan fiduciary actually negotiates its receipt.

What makes this an especially challenging task is that mutual fund complexes negotiate different revenue sharing amounts with different platforms. They may pay 35 bps to one, but only 25 bps to others. It is our position that it is consistent with prudent behavior by a fiduciary to engage in a process to compare the revenue sharing available from a plan’s fund lineup across different platforms. This is necessary to make sure that if a plan uses investment options with revenue sharing, it is maximizing the benefit to the plan participants.

To our knowledge, a module contained in our PlanTools Risk Management System is the only product in the industry that can perform this comparison automatically through a web based solution. To date, we have revenue sharing information from over 20 different platforms. By way of example, I used the solution to create the following chart that was included in a written fee reasonableness opinion I provided to an advisor for one of their plans based on the fund lineup:

RevSharingChart

As you can see, our data suggests that the plan may be able to increase the revenue sharing for the benefit of the plan with the same plan lineup by either changing platforms or negotiating for additional revenue sharing.

We will finish out the series next Thursday, October 3, when we publish 95th percentile charts for Recordkeeping Fees.

Click here to download the infographic in PDF form: FRA PlanTools – Are These Fees Unreasonable – Part 2 – Inv Mgmt Fees.

FRA PlanTools - Are These Fees Unreasonable - Part 2 - Inv Mgmt Fees

 

8th Circuit Oral Arguments Heard in Tussey v. ABB, Inc.

Today, September 24, 2013, the oral arguments in the appeal of Tussey v. ABB, Inc. were heard in the 8th Circuit Court of Appeals. Because they were heard in downtown St. Louis, where I am based, I attended.

The Panel

The judges that heard the oral arguments and will decide the case are:

I’ve linked to each judge’s Wikipedia page for more information. (Most interesting facts: Judge Bright was appointed by President Johnson in 1968 and Judges Bye and Bright are both from North Dakota!).

It is also worth pointing out that Judges Riley and Bright were 2 of the 3 judges that decided Braden v. Wal-Mart Stores, Inc. The Braden case is one of the more important excessive fee case decisions for plan participants. There, the panel reversed a district court decision throwing the case out and found that the claims of excessive fees were plausible enough for the case to go forward. The case ultimately settled for $13.5 million.

 The Lawyers

Thomas E. Wack from the law firm of Bryan Cave represented ABB, Inc. and Jonathan Hacker of O’Melveny & Myers represented Fidelity Investments. (by way of background, Mr. Hacker’s name has appeared on appellate briefs in many of the excessive fee cases, including Hecker v. Deere & Co., Renfro v. Unisys Corp., and Tibble v. Edison Int’l, each time representing either a plan sponsor or a service provider)

Representing the plaintiffs was Jerome J. Schlichter of Schlichter, Bogard & Denton. David Ellis represented the Secretary of Labor Thomas E. Perez who filed an amicus brief on behalf of the plaintiffs.

The Oral Arguments

For those who are inclined, the 8th Circuit has uploaded the audio of the oral arguments. To download the audio, click here (on my Mac I had to right click to download). To play the audio in your browser, click here.

Like I’ve said before with the Abbott case, I’m not going to get into the game of tea leaf reading. Oral arguments are notoriously bad indicators of outcomes in cases. In fact, in my personal experience with the 8th Circuit in a non-ERISA case, I was convinced sitting in the gallery that we would ultimately win an issue based on the favorable questions asked at argument. When the opinion was published, we didn’t. Lesson learned.

That being said, I thought the judges today asked tough questions of both sides. Topics covered included whether an IPS is a plan document, when is the 6 year statute of limitations triggered, what is the proper measure of damages for a performance claim, how much discretion should a plan fiduciary have, what exactly is float, and whether target data funds are better than balanced funds because they are dynamic rather than static. It wasn’t clear that the judges agreed with one side completely, or the other. Instead, the judges seemed to still be making up their minds as they sought additional information outside the briefs.

Our Thoughts

Relevant to our readership, the Department of Labor attorney made a few arguments worth noting. First, under the Field Assistance Bulletin 2002-3, all fiduciaries have an obligation to understand and negotiate over float. And second, having an Investment Policy Statement is consistent with prudent fiduciary behavior and that they should be considered plan documents and thus binding on plan fiduciaries. These are two common compliance issues for many retirement plans and should be addressed by all fiduciaries.

Finally, it is worth noting the particular interest the court took in the case. Only 30 minutes per side was scheduled, but the court repeatedly allowed additional time to all parties, with oral arguments going a full hour and 17 minutes plus.

So when will we see a decision? Sometimes as short as 6 weeks, sometimes as long as 6 months (or more). It all depends on the complexity of the case and the workload of the court on other cases. If I were a betting man, I’d say we might see an opinion before Christmas.

Breaking: Class Cert Granted in Spano v. Boeing Co.

In light of the recent 7th Circuit decision in Abbott v. Lockheed Martin Corporation, the district court in Spano v. Boeing Company has granted the Plaintiffs’ amended motion for class certification. Spano is one of the original excessive fee cases filed in 2006.

(Read about the Abbott decision here: Victory for Plaintiffs: 7th Circuit Allows Class Certifications for Excessive Fee Cases)

As many of you are aware, it was the 2011 decision in the Spano appeal to the 7th Circuit that for a time put in doubt the exact standard for certifying a class in an ERISA fiduciary breach case in the 7th Circuit.

Plaintiffs’ Allegations

The court summarized the Spano plaintiffs’ allegations as:

  • (1) defendants caused the Plan to pay unreasonable administrative fees to its recordkeeper CitiStreet;
  • (2) defendants imprudently included, among the Plan’s 11 investment options, four mutual funds, when superior institutional investment products were available;
  • (3) that these same four mutual funds charged excessive fees which included kickbacks to CitiStreet in the form of revenue sharing;
  • (4) that among these four mutual options, the Technology Fund was included in the Plan even though it was undiversified and imprudent for a retirement plan, and the Small Cap Fund was included even though it failed defendants’ standards of prudence, because it provided additional revenue sharing fees to CitiStreet; and
  • (5) that the Boeing Company Stock Fund imprudently held high levels of low-yielding cash, allowing State Street to place cash in its own funds and receive multiple layers of fees.
The Court’s Decision

The court keyed in on what was different this time around, as compared to the class certification that was overturned earlier: (1) the breadth of the defined classes has been limited to a specific time period, not all participants, past, present, and future and (2) each of the claims has been broken into subclasses, rather than one gigantic class, with specific evidence that the class reps seeking to represent that subclass meets the adequacy and typicality tests.

The decision reads very matter of fact despite the last few years of upheaval in this area. Citation to the Abbott decision was limited to just the subclass for the Technology Fund claim because it used a benchmark to define the subclass. The court determined that each of the 5 subclasses met the standards for class certification under Rule 23, including 23(b)(1)(A) which allows a non-opt out class. The following subclasses were granted:

 

  • Administrative Fee claim and class: All participants or beneficiaries of the Boeing Voluntary Investment Plan, excluding the Defendants, members of the Defendant committees, and the Boeing directors, who had an account balance at any time between September 28, 2000 and December 31, 2006, as all participants during that time paid recordkeeping fees.
  • Mutual Fund Subclass: All participants or beneficiaries of the Boeing Voluntary Investment Plan, excluding the Defendants, members of the Defendant committees, and the Boeing directors, who, between September 28, 2000 and December 31, 2005, invested in any of the Plan’s mutual funds, since each mutual fund during this time were laden with imprudently excessive fees.
  • Small Cap Fund Subclass: All participants or beneficiaries of the Boeing Voluntary Investment Plan, excluding the Defendants, members of the Defendant committees, and the Boeing directors, who, between September 28, 2000 and December 31, 2005, invested in the Small Cap mutual fund in the Plan.
  • Technology Fund Subclass: All participants or beneficiaries of the Boeing Voluntary Investment Plan, excluding the Defendants, members of the Defendant committees, and the Boeing directors, who, between September 28, 2000 and December 31, 2005 invested in the Plan’s Technology Fund and whose investment in the Technology Fund underperformed that of the diversified domestic equity markets as represented by the Standard and Poor’s 500 Index Fund minus 5 basis points for investment management.
  • Company Stock Fund Subclass: All participants or beneficiaries of the Boeing Voluntary Investment Plan, excluding the Defendants, members of the Defendant committees, and the Boeing directors, who, between September 28, 2000 and December 31, 2006 invested in the Plan=s Boeing Company Stock Fund and whose investment in the Boeing Company Stock Fund underperformed that of Boeing Company Stock.

Our Thoughts

This is another victory for plan participants, like the 7th Circuit decision in Abbott. I frankly did not expect a decision so soon. Just recently, the 7th Circuit denied a motion for rehearing in Abbott, which leaves the defendants there with two options: appeal to the Supreme Court or go back to the district court and go to trial.

For the defendants in Spano, the path is less clear. The window to appeal this decision on an interlocutory basis under Rule 23(f) is quite short. Additionally, there still remains pending summary judgment motions. Just because class certification has been granted here, doesn’t mean these are viable claims for these plaintiffs. That decision is yet to be made by the court. This differs from the Abbott case where there, the court already ruled on the summary judgment motion, finding that the claims viable enough to proceed to trial.

It’s been an exciting few months for those who follow these issues closely. Unless something happens before then, the next bit of news will be the oral arguments scheduled in Tussey v. ABB, Inc. before the 8th Circuit this coming Tuesday September 24. As they are being held here in St. Louis, I will be attending in person.

Are These Fees Unreasonable? – Part 1 of 3 – Inv. Advisory Services

What makes a fee reasonable or unreasonable? As we all know, there is no definitive guidance provided by ERISA and the Department of Labor. Instead, we are left to make the determination based upon the facts and circumstances at hand.

As many of you are aware, FRA PlanTools offers a Benchmarking Report through its web based PlanTools Risk Management System. The report benchmarks the fees paid by a retirement plan for the services rendered against other plans of similar size by plan assets or participant count using a proprietary, independent and objective database. (We also are about to roll out a new iPad APP called PLANbenchmark to be debuted at the CFDD Conference in San Antonio in October. More on that in a later post.)

As a service to the industry for the purpose of starting or continuing the conversation about fees, we are publishing our internal data for the 95th percentile of fees entered into our system for (1) Investment Advisory Services, (2) Investment Management Fees, and (3) Recordkeeping Fees. What this means is that 95% of the retirement plans in our system pay at or less than the amounts found in the charts below.

The data was pulled from our system on June 30, 2013. As a lead up to the CFDD Conference, we intend to publish Part 2 – Investment Manage Fees next Thursday, September 26, and Part 3 – Recordkeeping Fees on October 3. If we receive positive feedback, we intend to update these charts on a quarterly or semi-annual basis.

Click here to download the infographic in PDF form: FRA PlanTools – Are These Fees Unreasonable – Part 1 — Advisory Services.

FRA PlanTools - Are These Fees Unreasonable - Part 1 -- Advisory Services

 

 

The Genesis of ERISA – A Humorous Distraction

(The following piece of humor was originally published by our Managing Director David J. Witz on ERISA’s 30th Birthday in 2004. I share with you this truly humorous distraction to begin your week in good spirits.)

On Labor Day, September 2, 1974, President Gerald Ford signed into law the Employee Retirement Income Security Act (ERISA).What was the genesis for Congress to ink this Act of extraordinarily complex rules? Some might argue that it was the demise of Studebaker in 1963 that was the impetus for the establishment of ERISA; however, I would offer this good humored reflection on the Genesis of ERISA with great anticipation of continued challenges for the next 30 years.

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In the beginning, Congress created ERISA. Now ERISA was formless and empty, darkness was over the surface of the deep, and Congress was hovering over boundless words of expression. And Congress said, “Let there be Title I” and Congress saw that Title I was good for it imposed minimum standards of eligibility, vesting, and funding to protect the common man – And statutory requirements were created to impose minimum standards for Reporting, Disclosure, Fiduciary Responsibility – And powers of Enforcement over these statutory requirements where delegated to the Department of Labor. And there was evening and there was morning – it was one of many days!

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And Congress said, “Let there be Title II” and Congress created a great expanse between the waters of Title I and Title II. And it was so. Congress called the expanse the Department of the Treasury to monitor greed and gluttony (410(b) – 415 & 416). And so there was the Department of Labor and there was Department of the Treasury – the second of many more days!

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And Congress said, “Let there be Title III” and Congress gathered the Department of Labor and separated them from the Department of the Treasury dividing enforcement between them over the great expanse. And it was so. Congress called the Department of Labor (DOL) – “Labor” and the Department of the Treasury (Internal Revenue Service – IRS) “Tax”. And Congress saw that it was good.

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Then Congress let DOL issue rules, regulations, interpretive bulletins, prohibitive transaction exemptions, field assistant bulletins, and private letter rulings and gave the IRS similar authority so that they may produce – so that man may know the heart and mind of Congress. And it was done and Congress saw that it was good. And it was evening and it was morning – the third of many more days!

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And Congress said, “Let there be Title IV” to fill the expanse between the powers of the DOL and the IRS over the accrued benefits created by Defined Benefit plans. So Congress created the PBGC to govern this expanse and to guarantee minimum benefits for the common man. And Congress saw that it was good. And there was evening and there was morning – and Congress was exhausted and temporarily decided to create no more.

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Then Congress said, “Let us name these Titles in our own image, in our likeness, and let it rule over plans sponsors in all these United States.” Congress thought long and hard over this great Act of creation and many more days passed. Finally, Congress named their Act of creation, ERISA, an acronym for “Every Ridiculous Idea Since Adam” for it truly reflected the image of its creator.

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So Congress created ERISA in its own image, in the image of Congress they created ERISA; and with the powers of Labor and Tax, Congress created ERISA.

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Congress blessed ERISA and said, “Be fruitful and increase the number of financially independent retirees and let them fill their retirement accounts.” For the account of a retiree will be for food, shelter, and enjoyment during their golden years. And it was so.

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Upon reflection, Congress saw that all it had created was very good in deed! And there was evening and there was morning – and it was the end of the 94th Congress 2nd session.