Yale Professor Oversteps His Bounds

Updated September 19, 2013:

In an Aug. 15, 2013, letter to Brian Graff, Executive Director/CEO of ASPPA and NAPA, Robert C. Post, Dean of Yale Law School, distanced Yale University and Yale Law School from Prof. Ian Ayres’ 401(k) plan fees research and Ayres’ related letters to plan sponsors. Read More

Original Article Posted July 16, 2013:

Thousands of plan sponsors around the country recently received a letter from a Yale Law School professor named Ian Ayres. The letters indicate that he is conducting a study on the financial impact of fees and other fiduciary decisions on participant results in defined contribution plans.

The letter goes on to state that he has identified the recipient’s plan as a potentially high cost plan. Lastly, there is a link to a full study that will be completed in Spring of 2014, which he states will be published through a variety of public media outlets including social media. Most concerning is that he intends to name individual plan sponsors in the publication.

After reviewing the letter and a draft of the study, we question the motivation and the accuracy of both. While they do not appear to be solicitations, we find it peculiar that the letters prominently list Brightscope, a for profit company in the business of ranking retirement plans, as the data source. Moreover, the letters instruct the sponsor to visit the Brightscope website for more information.

With regards to the study itself, we believe it to be reliant on a flawed methodology that uses stale data. The data referenced in the draft study is from 2009, so by the time the final study is published, the data utilized for its construct will be approaching 5 years old. Further, in one version of the letter Mr. Ayers cites the figure of 46,875 plans in the universe, yet his study states that this universe was reduced to just over 3,300 because of the complexity of comparing costs. The study also makes inaccurate assumptions and ignores fundamental aspects of managing a plan. By way of example:

  • The study purports that any fee over the expense of a low cost index fund is an excess fee that is the direct result of a fiduciary decision. It then goes on to use that excess fee as a return reduction in an attempt to determine the fiduciary loss. (A fiduciary loss is defined by Mr. Ayers as a loss incurred by a participant as a result of a fiduciary’s decision.) In addition to being unnecessarily inflammatory, this method completely disregards the legitimate costs necessary to administer the plan, some of which are often paid through the assets, or by the plan sponsor.
  • The study also does not take into account the factors which impact plan costs “ asset size, participant count, and plan design complexity. Two $10 million plans, one with 100 participants locally and the other with 6,000 participants across the country will not have the same fee construct.

Having reviewed thousands of plans, we can say confidently that it is not possible to arrive at the conclusions presented in this report simply from the data utilized in this analysis. We suspect that the authors of the report may be aware of its weaknesses. If the analytics are complete, why, is the full study is a year away from being released? Why are thousands of recipients being directed to download a report that is marked DRAFT. PLEASE DO NOT CITE OR CIRCULATE

This study (and the letters) have garnered the attention of industry leaders like Brian Graff, the CEO/Executive Director of ASPPA (the American Society of Pension Professionals & Actuaries) and NAPA (the National Association of Plan Advisors). These institutions are dedicated to improving qualified retirement plans and have been very supportive of fee transparency and fiduciary standards. Mr. Graff posted an article on July 15, 2013, which supports our concerns with the study.

LAMCO has joined with NAPA and other industry groups to best determine how to address this individual and his study. LAMCO is also conferring with our legal resources to determine if there is a series of steps that can be taken to prevent the use of the individual plan names in the publication.

As an expert in this field who accepts fiduciary responsibility for its actions, LAMCO has been encouraged by the steps taken over recent years to improve cost and fee transparency. This makes our annual cost benchmarking more effective which benefits both sponsors and participants. While we do not yet know the motivation behind this exercise (academic or otherwise), we do know that had the letter not been sent on Yale letterhead, it would have likely been discounted very quickly. We have placed a call into both Mr. Ayers and Yale Law School to better understand how this study was conducted and if there was any remuneration paid to any party.

We will keep you updated as we learn more about this situation.

If you are a LAMCO client and have received a letter from Mr. Ayers, please forward a copy of the letter to your service team. If you are not a LAMCO client, and would like additional information on how to respond to Mr. Ayers or about our services, please contact our office.

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