There’s been a lot of change in the decade since the first of the so-called excessive fee lawsuits were filed. How do NAPA Net readers view those changes?
Asked to identify the areas in which that litigation has had an impact on the industry at large, respondents to this week’s reader poll identified the following:
- 89% – Increased sensitivity about fiduciary responsibilities
- 74% – Lowered fees
- 44% – Expanded interest in hiring advisor/experts to help
A couple of respondents said that for most plans, there has been no change at all. “While there is evidence that fees have been coming down, at the plan/plan sponsor level, the stories in the media would suggest that many plans have continued to do business as usual,” noted one reader. “In some cases the rationale seems to be ‘we won’t get caught’ and/or the fear that if they make changes, it will possibly tip off employees that the plan has made mistakes. In other cases, seems to be ongoing lack of information re ERISA and fiduciary requirements.”
Another reader commented: “It has been great for the lawyers.”
Closer to Home
Bringing it a little closer to home, we also asked readers about the impact the litigation had had on the plans they work with.
The trends were comparable, if a bit muted compared with the above:
- 74% – Increased sensitivity about fiduciary responsibilities
- 63% – Lowered fees
- 52% – Expanded interest in hiring advisor/experts to help
There were a couple of significant differences, however. Most significantly, about 1-in-10 (11%) said it had discouraged plan formation – and a full quarter (26%) said for most plans, it had no impact at all.
One reader noted, “Development of meaningful education programs as opposed to previous programs, which were nothing more than glorified marketing programs with multi-colored pie charts, with no useful information re portfolio selection or management.” Another cautioned, “Note: Lower levels of service go along with those lower fees.”
We then asked if the subject came up in client meetings, and if so, how. In most cases (59%) it comes up because the NAPA Net reader brings it up. Just over 1-in-10 (11%) say that their client brings it up, but as for the rest, 15% said generally the topic didn’t come up, and the remaining 15% was split between “sometimes” and a simple “no.”
So how do NAPA Net readers assess the overall impact of the fee litigation? Well, it was something of a mixed bag:
- 6% – Good and bad
- 26% – Mostly good, some bad
- 22% – Mostly bad, some good
- 15% – Good
- 4% – Bad
“The litigation has increased awareness of fee reasonableness and fiduciary duty. If the litigation pushes too far it runs the risk of discouraging employers from establishing or maintaining a retirement plan,” noted one reader.
“Fee litigation, along with fee disclosure rules, have increased the awareness of previously hidden fees in fund charges, revenue sharing arrangements, and subsidies from other sales,” commented another.
“They have also brought needed attention to inadequate and inappropriate fund selection and monitoring. However, all of this has been overshadowed by the by a pervasive idea that ‘cheaper is better’ at any cost. Investment platforms, investment professionals, and pension administration firms have all been judged more on price than value far more frequently.”
“These suits have rightly caused $1 billion+ plans to pay better attention to their responsibilities of ensuring reasonableness of fees, but it has simultaneously wrecked the industry by making fees the primary focus of due diligence and plan analysis,” noted another.
“Decision-making is now fear induced, and not necessarily ‘in the best interest of the participants,’ but in the interest of the plan sponsor,” explained another reader.
“The main impact is on the very large plan market. Since most plans we deal with are well under $10 million, I don’t think that worth worrying about.”
“The fee litigation has not really reduced the fees in plans but it has significantly reduced any increases from happening (which I suppose is a cost reduction). I think the biggest impact is it has changed how fees are paid and shed some light on how much a plan costs to run and a lot of plan sponsors got a significant shock when it first started. I am also seeing a lot of providers, including the one I work at, take a harder line in eating any cost since there is less of a margin than their used to be with plans, and every cost is itemized and factored in and passed along to the clients.”
“Fee litigation has helped consolidation of recordkeepers, which in the long run will provide for less choice and less innovation in the industry.”
“The awareness of fiduciary duty and process has been good for plan sponsors and plan participants. However, let’s be honest – these suits enrich the attorneys, not the participants. With pensions becoming less and less common, and the replacement ratio of Social Security trending lower (no politician will privatize or eliminate this program) Americans need a stable and consistent way to plan and save for retirement. Continuing to beat up the best thing most Americans have going for retirement, may not create positive long term results. Coverage, litigation, tax reform (under current scoring rules), and financial illiteracy are challenges that every plan advisor must confront in the years to come.”
“Discussing fee litigation clearly gets plan sponsor attention. From an advisory perspective it allows you to perform services to assist sponsors perform their due diligence duties. This in turn produces a tangible value-add, particularly when you negotiate a recordkeeping fee reduction or highlight how current revenue sharing is being utilized.”
“It has caused most of our plans to go out to bid regardless of their satisfaction with the level of fees and services. Plan sponsors should not be forced by governmental regulation to shop for services for an employee benefit plan that they have adopted voluntarily. Long term relationships have tremendous value. This value has been lost by excess regulation by the federal government.”
“The negative side of fee litigation is the race to the bottom that it has created. There is a need to focus on value – not just fees. Unfortunately, value can be difficult to express.”
“Not going to go away. As an ERISA/securities attorney, most of these cases are the proverbial ‘low hanging fruit’ since they usually involve clear and egregious violations. In 2016 we saw an extension of these cases to private colleges and universities. Expect to see extension of these cases into public colleges and universities, as same issues involved as with private schools. ERISA does not apply to public colleges and universities, so plaintiffs’ counsel will have to base actions on common law grounds such as agency and trust law.”
“I just believe that these excessive fee lawsuits, particularly the ones opposing defendants who have *already* reduced plan costs (but just not quickly enough?), are placing an undue emphasis on fees. The notion of ‘appropriateness’ has been conflated with ‘lowest’ and that is a mistake.”
“Fee litigation has been very good… for the attorneys. The irony here is their own fee-for-service structure should be looked at also; I’m sure they care more for the fee than for the participants they have ‘helped.’”
“I think people are still stuck in that ‘I have to choose the lowest fees’ mindset (and might be encouraged by their financial representatives to think that way), causing them to move assets from one recordkeeper to another. In some cases it might be a good move, but in many in turns out to be a lot of work and a case of buyer’s remorse. You get what you pay for.”
Thanks to everyone who participated in this week’s NAPA Net reader poll!