Siedle: Recently there have been a number of lawsuits filed against 401k plan sponsors alleging excessive fees and a failure on the part of sponsors to monitor and disclose fees. These cases have been filed on behalf of participants of some of the largest plans in the country. Don't the largest plans generally have the lowest fees?
Barstein: Absolutely, the largest plans do almost always have the lowest fees. There are, of course, some exceptions. The very largest plans have several advantages. First, they are more sophisticated and knowledgeable buyers. The larger plans have more leverage in negotiating with vendors and are eligible for special products with high minimum balances that are not available to smaller plans. Also, the cost of the broker overseeing the plan is not included in the cost of the mutual fund. Smaller plans have higher distribution costs, whereas larger plans are easier to administer, service and sell to.
Siedle: So do you believe these 401k lawsuits have any merit?
Barstein: Absolutely. I believe that sponsors have not been as careful with expenses on their defined contribution plans as with their defined benefit plans. We all know why this gap exists and the gap is the basis of the suits. The responsibility of "outcome" has been shifted to participants. Participants pay the price for poorly designed plans. But the responsibility for offering participants a plan that has, at least, a good chance for success still rests with the sponsor.
Siedle: From your perspective, has the DOL been doing enough to protect 401k participants?
Barstein: No, I think we can all agree on that. For example, the DOL is just beginning to address older issues such as revenue sharing, a practice which is at the heart of the recent litigation. At best, the DOL is playing catch-up and at worst, I fear that special interests will dilute their efforts.
Siedle: What size plans does your firm focus upon?
Barstein: Small-to-mid size plans, with 25-1000 employees.
Siedle: How many of these plans have brokers advising them?
Barstein: About 75% and growing.
Siedle: What impact have these cases had upon the plan sponsors you're dealing with? Are plans making changes as a result of these cases?
Barstein: There is an ancient Chinese proverb: The way to scare 10,000 monkeys is by killing one. Everyone's paying attention now, except the smaller plans who believe that they are not in the crosshairs of the lawyers because there's not enough money involved. However, the record-keepers that service smaller 401k plans are sweating-- especially if the courts ultimately determine they are fiduciaries.
Siedle: Do you believe these changes are for the good? Are they long overdue?
Barstein: Yes, putting the spotlight on fees makes sense. If the plan is properly priced and well managed with periodic monitoring, the plan sponsor has nothing to worry about. Unfortunately most of the smaller-to-mid size plans are not in good shape because they have not gone to market to take advantage of lower prices. The classic situation is where a plan has increased in assets but has not renegotiated with or changed providers. 80% of smaller plans have an adviser who lacks the experience necessary to help the sponsor manage the growing plan. The problem is the smaller plans typically start out with an investment generalist who may be a friend of the owner but doesn't understand the complexities of ERISA plans. These guys are just retail brokers. The initial mistake sponsors make is they hire the wrong adviser-- someone who is most often clueless; all mistakes flow from this first flawed step.
Siedle: Let's talk about some simple 401k "mechanical deficiencies" that we at Benchmark have noticed and are of concern to us. It seems to us that the vast majority of 401k plans are not ERISA 404c compliant because they aren't giving participants all the information participants arguably need to make informed investment decisions. Is this true?
Barstein: Yes, everyone in the industry knows that most small-to-mid size plans are not 404c compliant because they haven't disclosed all that is required under the safe harbor to participants. But remember a plan sponsor can fulfill its fiduciary responsibility to participants without being 404c compliant. In my opinion, a lot of the disclosure requirements are unnecessary. Commonsense should be your guide.
Siedle: It seems as if we are in a new era where issuers of securities, at least with respect to 401k plans, are no longer required to deliver prospectuses to investors prior to or contemporaneous with an investment. Summary Fund Fact sheets, at best, are all participants are getting. Are participants being provided with mutual fund prospectuses? Should they be? Or is it enough that participants are told they can go to a website and download a prospectus?
Barstein: Participants generally are not getting prospectuses but most people can get them online. The requirement of physical delivery of a paper prospectus is not in keeping with the modern digital age.
Siedle: But Fred, today's most troubling investments, such as subprime and SIVs, would be disclosed, if anywhere, on page 59 of a 60 page prospectus or in the SAI. If Summary Fund Fact Sheets are the only documents participants are provided, how can we say participants are making informed investment decisions?
Barstein: They can get the prospectus online. And, of course, if it's not in the prospectus or SAI, then requiring the delivery of the prospectus wouldn't have prevented the loss.
Siedle: Do you believe 401k investors should receive a specific breakdown of all fees and expenses related to the administration, recordkeeping and investment management of their plan? Or is it enough for sponsors to provide broad expense figures and net returns? For example, should revenue sharing by mutual fund money managers be disclosed to participants?
Barstein: I believe we need to make this simpler for participants. Too much disclosure will only confuse investors. Only a small percentage of investors would even understand the disclosures due to the complexities involved. Net returns compared to benchmarks are all that are important for most participants. Employers should not be required to be professional sponsors and participants should not be required to be professional investors. For the really curious participants the information should be made available.
Siedle: While the lawsuits that have been brought to date have focused upon excessive fees (and we don't know what the courts will determine constitutes an excessive fee) many ERISA lawyers have opined that the most troublesome cases have yet to be brought- those involving conflicts of interest among plan services providers. Do you believe these cases are out there and will be brought in the future?
Barstein: There are issues involving conflicts of interest to which vendors to 401ks are subject. I don't believe lawsuits will be brought in the area of conflicts of interest because there are bigger targets out there.
Siedle: Lawyers being motivated by money? We'd better stop on that note. Thanks for your time.
Barstein: You're welcome. Let's do it again next year.
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