Exclusive Interview with Fred Reish: 401k Plan Sponsors Who Fail to Properly Evaluate Fees “at Risk”
Those interested in 401k compliance matters know the name Fred Reish very well – and if they don’t they should! Reish is an ERISA attorney whose practice focuses on fiduciary responsibility, retirement income and plan operational issues. He has been recognized as one of the “Legends” of the retirement industry by both PLANADVISER magazine and PLANSPONSOR magazine. Reish serves as a member of his firm’s Retirement Income Team and is a member of the Institutional Retirement Income Council (IRIC), which focuses on retirement income issues and products, and has written extensively about retirement income issues.
Most recently, Reish has found himself quoted throughout the media regarding the controversial letter sent by two college researchers to plan sponsors across the country. While Reish commended the letter for raising the issue of “high” fees, he and his fellow researchers issued a more formal response saying, among other things, “We have done an in-depth analysis of the professor’s underlying study and have concluded that it has material limitations. As a result, it does not provide a valid basis for concluding that fiduciaries have breached their duties.”
We are especially appreciative to feature the very busy Fred Reish as this month’s FiduciaryNews.com Exclusive Interview. As you’ll read in his answers, you’ll see why “high” fees are not necessarily “bad” fees. You’ll also see why plan sponsors who don’t understand this may be in for trouble.
FN: Mr. Reish, you’re one of the most well respected ERISA attorneys in the nation. Please, tell our readers how you got interested in this aspect of the law and, in particular, what drives you the most when it comes to the subject of being a fiduciary.
Reish: I started working on retirement plans as a young tax lawyer. As a result, my early focus was on technical plan design and qualification issues. However, that changed in the mid-90s with the growing popularity of 401k plans. The investment and fiduciary issues in 401k plans intrigued me and my practice shifted in that direction. My “drive” comes from the fact that I am from a “blue collar” family. As a result, I wanted to help the retirement system operate properly and provide secure retirement benefits for workers.
FN: You’ve no doubt spoken to many plan sponsors and their service providers. What’s the difference between the two groups when it comes to their fiduciary responsibilities? Does one group have a greater awareness of their duties over the other and, if so, why? Which group is more concerned and why?
Reish: Most plan sponsors want to do the right thing for their employees – largely because the HR and benefits people genuinely care. However, I don’t think most employers really understand the fiduciary concept, other than that they are afraid of being sued. Out of fairness, though, it is an odd concept – requiring a high degree of responsibility for the well-being of employees. Generally speaking, the employer-employee relationship does not impose a paternalism like ERISA’s. On the other hand, service providers are much more aware of the concept – to live up to its standard, to avoid that status, to help plan sponsors comply and for other reasons.
FN: You’ve spoken a lot about the DOL’s Rule 408(b)-2, why you feel this Fee Disclosure Rule has or hasn’t been as successful as hoped?
Reish: I believe it has already been highly successful. And, people need to give it another two or three years to be fully integrated into the fabric of the retirement community. The next phase will be to understand that costs and compensation cannot be evaluated without a discussion of the quantity and quality of services… and the results those services produce.
FN: What do you see as the biggest challenge in the Fee Disclosure Rule’s implementation?
Reish: The biggest challenge for everyone was the cost – in money and time. Recordkeepers were challenged by the volume of data they needed to report. Broker-dealers were challenged by the complexity of their revenue arrangements. The challenge is now on plan sponsors to evaluate that information. Many are, but many aren’t. Those who don’t are putting themselves at risk.
FN: If you were to tweak the Fee Disclosure Rule to make it more effective, what changes would you suggest?
Reish: In discussions with the DOL, I believe they have identified two issues:
1. Some disclosures were hard to understand because they were lengthy or complex, or because they involved multiple documents.
2. Some disclosures were difficult for plan sponsors to evaluate because they used very wide ranges.
I expect the DOL will be making “changes” through guidance or enforcement on both of those issues.
FN: You have a very unexpected view on the Fee Disclosure Rule when it comes to “low” fees. Can you restate for our readers how you feel they should interpret the DOL’s demand to justify the value of the fees they pay?
Reish: People need to remember that the issue isn’t low fees – it’s whether the plan and the participants are receiving value for their money. Plan fiduciaries can decide to run a low-cost plan with fewer services for participants or a higher-cost plan with more services. In my experience, some of the most successful plans are paying money for robust participant services – but the plan, even though it might benchmark as higher cost, is prudently managed because it is providing value beyond the cost.
FN: In your opinion, what is the greatest fiduciary liability 401k plan sponsors face?
Reish: At this point, it is excessive expense ratios for investments and excessive compensation for service providers. And those two—expenses and compensation—are often connected at the hip.
FN: How, effectively, can 401k plan sponsors best mitigate at least a portion of their fiduciary liability (at least when it comes to investments)? In particular, how does choosing a 3(38) advisor help more than selecting a 3(21) advisor?
Reish: The best way to mitigate liability is to do a good job – to pay attention. A good step in that direction is to work with an advisor or consultant who specializes in retirement plans. A 3(38) fiduciary investment manager can add a layer of protection. With a 3(38) investment manager, the plan fiduciaries are not responsible for the investment decisions – but they must, of course, prudently select and monitor the investment manager.
FN: A few years ago, the issue of 12b-1 fees was all the rage, with the SEC even threatening to revisit their appropriateness. While the SEC’s interest may have been placed on the back burner, the issue still has the potential to increase fiduciary liability, especially for 401k plan sponsors. Although the self-dealing nature of 12b-1 fees would normally be considered a prohibited transaction, the DOL still allows exemptions, perhaps confusing the issue even further. What advice would you give 401k plan sponsors regarding the use of 12b-1 fees in general and, specifically, the use of R shares?
Reish: ERISA “talks” in terms of “money or other things of value” and in terms of “compensation.” It is agnostic on the form of compensation. The first step is for plan sponsors to make sure the total amount of compensation is reasonable. Where the compensation can present conflicts of interest (e.g.,12b-1 fees that vary), plan fiduciaries must manage those conflicts.
FN: The DOL has promised to come out with a new Fiduciary Rule sometime in October. If the DOL sticks to its original definition, how would this help and who would this hurt?
Reish: The greatest impact will probably be to expand “level” compensation for advisors. Most RIAs already have level compensation arrangements, so it will probably have little effect on them. Broker-dealers often have level compensation arrangements with group annuity contracts, but will need to structure level fees for open architecture platforms. But, there will still probably be traditional roles to the smaller plans—and they will often have a fiduciary service by a third party RIA firm associated with the platform.
FN: If the DOL backtracks on its Fiduciary Rule and exempts IRAs or allows more self-dealing, how would this hurt and who would this hurt?
Reish: If I had to guess, the DOL will provide a prohibited transaction exemption for IRAs – but with strings attached. Those “strings” might be disclosures similar to 408(b)(2). For example, look at current PTE 86-128, which provides a very broad exemption for IRAs – but with no strings.
FN: If we could turn for a moment to the SEC’s deliberation of a uniform fiduciary standard, where do you see things heading in this area and do you feel this is a good or a bad thing?
Reish: I am not an expert on the securities laws, but one observation is that RIAs are likely to be much more regulated in the future, perhaps subject to FINRA-type rules. So, yes, I expect there will be broad SEC fiduciary standard for RIAs and BDs for personalized advice to retail investors—but at a cost.
FN: What do you see as the biggest fiduciary issue the industry and plan sponsors will face in the next 12 months?
Reish: There will be two. The first is the DOL’s re-proposal of the fiduciary advice regulation, accompanied by proposed PTEs. The second will be the aftermath of 408(b)(2). There will be a third issue – but just for advisors and providers. That is whether they can actively “capture” rollovers and, if so, under what circumstances.
FN: Are there any other issues or topics you want to mention that you think our readers might be interested in?
Reish: The role of 401k advisors is changing. In the future, I expect that less than half of their time and value will relate to investments. Most of their time will be spent as “success” consultants helping plan sponsors have successful plans – which will be measured by the retirement readiness of the employees. Interestingly, advice on success metrics such as participation, deferral rates and retirement readiness is not a fiduciary activity.
FN: Fred, thanks for taking the time to share your thoughts and insights with our readers. You’ve given them a lot to chew on. I’m sure we’ll be hearing more from you in the future.