A New Gadfly Buzzes the 401(k) Industry

by Mark Hebner and IFA Contributors - Monday, 22 July, 2013

While we have often written about the sorry state of affairs that constitutes today’s 401(k) industry, as documented in this PBS Frontline documentary, Professor Ian Ayres of Yale Law School has taken it to the next level, according to this article from RIABiz. After extensively studying Brightscope’s data on retirement plan expenses (see here for a draft of his white paper), Ayres took it upon himself to contact 6,000 plan sponsors whom he identified as having especially high expenses. He sent these plan sponsors a letter (via snail mail) in which he writes: “Using data from the form 5500 your company filed with the Dept. of Labor in 2009 and BrightScope Inc., I have identified your plan as a potential high cost plan. We recommend that you improve your plan menu offerings, including adding lower fee options, both at the plan and fund level, and consider eliminating high-fee funds that do not meaningfully contribute to investor diversification.” For some plan sponsors, Ayres threatens: “We will make our results available to newspapers (including the New York Times and Wall Street Journal), as well as disseminate the results via Twitter with a separate hashtag for your company.”

Needless to say, the plan sponsors and the plan administrators were not happy about these letters, and some have threatened legal action. While we at Index Fund Advisors understand and sympathize with Ayres’ good intentions, he inarguably overstepped the bounds of academic research. It would have been sufficient for him to simply analyze the problem of high fees in the 401(k) industry and leave it to the attorneys to pursue the most egregious violators. This is already happening repeatedly and with significant financial settlements, as we pointed out in this article. Ayres would do well to take a lesson from Professors Fama and French who have documented the failure of active management but would never dream of writing letters to mutual fund companies threatening them with bad publicity. We are certainly not alone in our opinion that the 401(k) industry deserves a serious disruption, but we do not expect the disruption to come from academia whose credibility derives from its objectivity. While some may argue that the problem of insufficient funding for retirement is so serious as to warrant drastic action, we would counter that this action is best taken at a much broader level, such as the implementation of the new Department of Labor regulations requiring full disclosure of 401(k) fees to plan participants.

We know that Professor Aryes has already caught a great deal of flack for his provocative actions, but we hope he is not deterred from doing further research on this extremely important topic. We also hope that he publicizes his findings, even if by unconventional methods, short of subjecting himself to legal action. As with so many other problems, sunshine is the best disinfectant.