Tuesday, September 3, 2013

Academic Freedom, Or Retirement Plan Harassment?

It’s probably safe to say that most who get letters from Yale University are eager to receive them.  They are likely to be prospective college students, hoping they’re about to learn they’ve been accepted into this prestigious Ivy League school.  It’s equally safe to say that the 6,000 or so retirement plan administrators who recently got letters from a Yale Law School professor were not only very surprised, but were less than eager once they learned the letters’ contents.
These letters informed plan administrators that their plans were part of a study being conducted by a Yale Law School professor, the focus of which was excessive fees.  Of the three letter versions sent out by Professor Ian Ayres, one version boldly stated that the professor had “identified your plan as a potential high-cost plan,” and that it “ranked worse than X percent of plans.”  The letter went on to say that the professor intended to publicize the results of the study sometime in 2014 by releasing it to such publications as the New York Times and Wall Street Journal, and would “disseminate the results via Twitter with a separate hashtag for your company.”
Not surprising, the letter caused more than a little heartburn among even the most calm and conscientious plan administrators as they attempted to digest its meaning, including why they had received it, what they might have “done wrong” in administering their plan, and what negative fallout might be in their future. 
This plan-level bewilderment was soon transformed into industry-wide consternation, frustration and—justifiably—more than a little anger.   Not because the industry should be immune to scrutiny, whether from participants, regulatory agencies, the media, or even the academic community.  The displeasure generated by Professor Ayres’ letters was due both to flawed methodology in Professor Ayres’ study, and to its undeniably accusatory, inflammatory and intimidating tone.   
As intrusive as Professor Ayres study may seem to some, it would be wrong to suggest that the subject of retirement plan fees is “not his business.”  It is unquestionably in the public interest that retirement plans be properly run, in order that American workers have a chance to enjoy a financially secure retirement.  “Properly run” does include reasonable fees.”  What is not in the public interest is shoddy workmanship in the design and execution of a study whose stated purpose was to shed light on plan fees and whether or not they were reasonable. 
Among the statistical objections to Professor Ayres’ study is the fact that the data used is from 2009.  In the world of retirement plan fees and fee disclosure this is like road testing a long-out-of-production Rambler against a modern computer-regulated, flex-fuel consuming, state-of-the-art automobile.  Times have changed greatly and especially in the retirement plan industry. Fee disclosure and awareness has resulted in many changes in the industry since 2009.  Professor Ayres’ also looked at fees in a superficial manner, not taking into account the natural economies of scale created by larger plans having more participants, or plans with higher average balances.  Nor did the study weigh the fees charged against the menu of services provided to a plan.  Employee education, participant-tailored investment advice, and other services that are in some contractual arrangements—but not in others—can and do have a large impact on plan fees, many of which are justifiable and reasonable in light of the services received.
Yale Law School was contacted by industry representatives deeply concerned over the flaws in Professor Ayres’ study, and the damage that could be done to individual plans, their administrators and the plan participants, as well the image of the retirement industry as a whole.  Unfortunately, the Law School administration gave what some might characterize as a political response.  It stated that the letters sent by Professor Ayres did not represent the views of either Yale University of Yale Law School, but because Yale faculty “possess academic freedom to pursue their own research,” the institution “cannot either endorse or repudiate [his] research.” 
If Yale cannot—or will not—openly repudiate or question Professor Ayres’ research, perhaps somewhere between the lines of the university’s response one can hope that that it will convey to him the message that the quality and accuracy of his final product is likely to be scrutinized with a fine-tooth comb.  Yale itself does have a reputational stake in the outcome.
It might also be prudent for Professor Ayres to consider the fact that academic freedom granted by an educational institution is not a license to wrongly imply that a plan or a plan administrator is deficient in meeting its fiduciary responsibilities.  It would seem that Professor Ayres may be the party acting “unreasonably” in this case.