Professor’s Study Riddled with ‘Deficiencies’

Fred Reish, Bruce Ashton and Joshua Waldbeser examined the study referred to by Ayres, the Yale law professor who sent the industry into a tizzy in late June and July by sending out thousands of letters to plan sponsors (see “Improve Your Plan—Or Else?”).

Ayres suggested to the plan sponsor recipients of his letters (there were several versions) that they were operating “a potentially high-cost plan” and might have breached their fiduciary duty. In some letters, he said he intended to publicize his study on plan expenses.

But Ayres’ study has material limitations, said Reish, Ashton and Waldbeser in a memorandum that sets forth their analysis. The memorandum states that the study “does not provide a valid basis for concluding that fiduciaries have breached their duties.”

Key deficiencies Drinker Biddle & Reath’s attorneys identified are a misunderstanding of the Employee Retirement Income Security Act (ERISA) fiduciary rules, use of stale data, and failure to consider plan design and the services offered by plans in relation to cost. As a result, the findings of Ayres’ study are not reliable indicators of the reasonableness of fund fees.

“The study relies on index funds for comparison of fund fees, and is biased against actively managed funds that can be prudent choices under ERISA,” the memorandum says. “For example, our analysis shows that, to evaluate fund fees, the study compared the expense ratios of Vanguard index funds with the mutual funds held in plans, thereby virtually ensuring that all actively managed funds would be considered expensive. The analysis also fails to take into account revenue sharing used to pay the costs of plan administration and/or to provide a return to the participants.”

Drinker Biddle & Reath’s analysis draws on data from the Investment Company Institute, the Department of Labor (DOL) and the Government Accountability Office (GAO), among others, as well as case law (Dupree v. The Prudential Insurance Company of America; Hecker v. Deere & Co.).

Drinker Biddle’s memorandum and a copy of their accompanying letter to the 401(k) community can be downloaded here. 

 —Jill Cornfield