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Bird

Kruger v Novant

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(Warning - rambling musings follow. May be boring.)

This ASPPA news article (I think it is available to non-members) caught my eye. ASPPA said “Another “excessive fee” lawsuit was settled recently — but what’s more interesting than the settlement amount is the speed with which it was reached and how it’s going to be spread among the parties.” I guess that is a valid observation; you can read the article for that take.

I’ve never been able to find details on these suits, specifically when they talk about different share classes - but I did on this one, in the complaint itself, not the settlement and found it interesting (in a dry, boring sort of way...).

The basis of the first part of the complaint is that they used retail shares when institutional shares were available. Looking at one specific fund, they say that American Funds Income Fund could have been used with R-5 shares instead of A shares. The total difference in fees is .29% (59 basis points vs 30 bps). For those who don’t know (and I think that many in this industry are appallingly unaware of such details), A shares have a built-in trail commission, aka 12b-1 fee, generally .25%, so the 12b-1 fee is part of the total fund fee. R-5 shares have no built-in distribution or 12b-1 fee. They are designed to be used in a fee-based platform, where an advisor charges a separate fee. I think that’s a significant point, and makes the direct comparison tenuous, because they are ignoring those other fees that doubtless would be charged. (Although I doubt .25% is the going rate for such a plan; I have no idea but 5-10 basis points still generates an awful lot of revenue on $1 billion - “One billion dollars, bwa-ha-ha.”)

They go further and compare the fund to Vanguard’s “VBALX” (I think they mean VBTLX, Total Bond Market Index), with expenses of .08%. Again, I think it is fair to say that in most plans, there would be some kind of an advisor fee built in, so the direct comparison is at least a bit misleading. And...I’ll be careful not to give investment advice here...let’s just say that there is a difference between active and passive investing, and I think there can be value in paying a manager. For AF Income Fund of America, the actual management part of the fee structure is .22%, and I think that is (more than) reasonable.

My conclusion on this part is that the fees were probably excessive, but probably not as excessive as their comparison would lead one to believe. (Incidentally, the complaint states that the institutional share fees were less than the retail share fees in every case, but in the settlement, Novant claims that some retail share fees were less than some institutional. Shrug.)

Next (there’s more!) they go on to the recordkeeper, GreatWest. They note that direct compensation to GW increased from $195,000 in 2009 to $2,400,000 in 2010 “without providing additional services.” (And $3,500,000 in 2011.) While I’m sure there were some additional services, I find it hard to argue this point.

Then they go on to the broker, and note that commissions went from the $800,000 range in 2019 and 2010 to $1,900,000 in 2011, “...despite Davis’ limited services not changing in any material way...” (Ouch.) I am having a hard time arguing with that. They use the term “kick-backs” repeatedly and it’s pretty ugly. There’s some other nasty business going on with gifts and co-ventures that I won’t get into.

Finally, there is a Fraud and Concealment section. Novant apparently bragged that “certain fees were waived” (I guess the reference is to A shares purchased at Net Asset Value, which is no big deal) and that “the checks for all administrative expenses are written by Novant.” I don’t know if they say that any checks were actually written, but I’m sure if they were they were for trivial amounts. Sigh. “Hogs get slaughtered” comes to mind.

My take on all of this...I’m not a lawyer, but I think there is a saying to the effect of “bad fact cases make bad law.” That’s in part what I see here; there was some greed (understatement) and they probably got what they deserved. I just have a real bug up my butt about the DOL’s obsession with fees, and they definitely relied on and quoted heavily from the DOL regs in the complaint. I agree that when a broker “takes” 75 bps as a trail commission instead of 25 bps - and that is what really drives the pricing - it might be egregious (depending on plan size). But saying that management fees of 22 bps vs 8 bps is a 175% increase is hysterical and misleading.

I deal mostly in the smaller plan market and am pretty confident that we not only have nothing to be afraid of, but are under the radar. Still, there are some things in here that are cause for concern. Thanks for listening if you got this far.

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I did, and I thank you for your observations.

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You know, I think the emphasis on fees is really an emphasis on fiduciaries being asleep at the wheel - and fees are the easiest to prove with some "mathematical" certainty. The market is HIGHLY competitive and if you overcharge, you will get "slaughtered." Just last month, advisors I work with LOST a bid for investment advisory services WITH a full recordkeeper search - for an $800,000,000.00 (that's EIGHT HUNDRED MILLION DOLLARS) plan with 16,000 employees. Their bid: $90,000 annually and that was the HIGH among those responding to the RFP. Seems like $75,000 was in the ballpark for the winner, and $45,000 was the LOW.

Those same advisors can't convince another company with a $70,000,000 and 1,000 employees that they are paying their current advisor too much, at $105,000.00.

Sometimes I wish I could call the DOL myself and report some of the egregious situations I run across daily (just today: $15,000,000 plan with barely enough employees to be audited - advisor paid $68,000.00)

Amazing....

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FYI, I live just down the road from this.

The main hospital in this chain has a cancer center named for Mr. Davis. Clearly, he made lots of money, and then gave lots to the hospital.

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Mojo, those numbers are so far from my league it's hard to wrap my head around them. But, just curious - when you talk about advisory fees, is this the RIA fee for a platform with mutual funds?

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Mojo, those numbers are so far from my league it's hard to wrap my head around them. But, just curious - when you talk about advisory fees, is this the RIA fee for a platform with mutual funds?

Both the $800,000,000 plan and the $70,000,000 plan are typical 401(k) plans with a menu of mutual funds/collective trusts for participant selection. Both are on "large" well known recordkeeping platforms (one is Vanguard, the other Fidelity) and both are fees for RIA services (and related "consulting" services). Both pay advisor fees out of the plan's assets.

The $800,000,000 million dollar plan thought $90,000 annually too expensive and selected an advisor who would do it for $70k, while the $70,000,000 plan thought the "comfort" of being with the same advisor for 13 or 14 years was "worth it" (although the advisor I work with said they'd do EVERYTHING the other advisor does and more for $45,000) and really doesn't want a benchmark.....

Sometimes I wish I were mean enough to send an anonymous note to the DOL about some plan sponsors....

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To put this discussion in perspective the fiduciary standard for fees charged by advisors and TPAs is that the fees must be reasonable for the services charged. If the fees increase by 100, 200% or more without any increase in services provided to the plan then the fees are unreasonable.

Conversely ERISA does not require that fiduciaries select only funds with the lowest possible fees but plan can offer funds with higher fees if the funds provide additional services to the plan at a reasonable cost.

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I'm like Bird - these numbers are WAY out of our league. So, speaking from a position of ignorance, and knowing nothing of the particular circumstances, is 105,000 on a 70 million dollar plan really necessarily out of line? I mean, (ignoring possible additional/better services) suppose they are getting the plan a return of even 1/8% higher than an "average" or better than average advisor? Wouldn't that more than make up the difference?

Just curious.

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I'm like Bird - these numbers are WAY out of our league. So, speaking from a position of ignorance, and knowing nothing of the particular circumstances, is 105,000 on a 70 million dollar plan really necessarily out of line? I mean, (ignoring possible additional/better services) suppose they are getting the plan a return of even 1/8% higher than an "average" or better than average advisor? Wouldn't that more than make up the difference?

Just curious.

The problem is, is that advisors these days are using the same, or similar black boxes to do investment monitoring and searches. Not much is actually left to the "art" of the advisor. The advisor I work is an LPL advisor - and they all pretty much use the same platform for investment monitoring reports.

In fact, once the tickers/cusips are entered into the system, it take about 30 seconds (NO EXAGGERATION) to produce the quarterly report, a few minutes to scan the report for trouble spots (color coded for ease of identification) and maybe 15 minutes or more to figure out why a particular fund or two are "yellow." If and ONLY IF a fund is "yellow" for four to six consecutive quarters (that's 18 months, folks) would there be any work involved in finding a replacement (and that requires "pushing a button" to produce a list and selecting maybe 3 from that list to present to the plan sponsor) Figure an hour to present (and that is generous) each quarter plus travel time and yes, $105,000 is excessive. In fact, the SIZE of the plan (either assets or participants) has NOTHING to do with the work involved in investment monitoring. Participant count MAY affect some educational services the advisor performs, but once you get north of 250 or so participants, no advisor is actually going to be involved in education presenting (although they may be the one setting the curriculum and beating up on the recordkeeper to provide targeted educational services).

Bottom line, the advisor thinks almost ANY plan can have quality investment monitoring services for $15k or $20k annually, and to get $30k or $40k you have to show SIGNIFICANT value add over and above investment due diligence.

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Thanks. In my world, the broker is at least doing some education and meetings and other communication with employees; whether there is true value in that or not is another discussion but now I see why the fees are so low.

So much is about perception - frankly I think this "monitoring" is just a lot of BS to show someone in case they ask if you are...monitoring. Anyone can judge funds based on past performance - I'd love to see a comprehensive study comparing replaced funds with replacement funds. Of course it's impossible, and that's why people get paid for this nonsense. At least in your world it's not very much.

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Bird -

It has been studied with institutional endowments several times. The studies show that 50% of the replacement funds under perform the replaced funds.

There are also several studies out there that look at skill vs luck of the investment manager (Eugene Fama's is one of the most recent). The studies find that only between 0.6% to 2% (depending on whose study) of the investment managers may be skilled, the rest may just be lucky.

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