IMHO August 1, 2011

IMHO: “Free” Ride?

I was late to the NetFlix game—switching over only when my local Blockbuster closed its doors.   
Reported by

Honestly, I was more than a little skeptical about paying to rent movies while spending most of the month waiting for the mail carrier to shuffle things back and forth. 

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Those fears (along with concerns drawn from early stories about people being sent movies at the bottom of their list, rather than the newer, hotter releases) have turned out to be mostly a non-issue.  More recently, I “discovered” the firm’s online library of free movies—and while I would say that most of them SHOULD be free (some you should be paid to sit through), I have enjoyed having that “extra” feature.  Sure, there were times when the Internet delivery speed wasn’t optimal, or when a movie would time out a third of the way through, but heck, it was free. 

Until, of course, NetFlix announced its recent change in pricing policy, a change that would cut the cost of the traditional movie rental service, but that would charge—and charge just as much—for the online movie library.  Overnight transforming what had been a nice, free, additional service into—well, a pricey, sometimes erratic, delivery system of older, “b” movies.  In short order, my willingness to calmly accept certain service “glitches” associated with a “free” service—well, let’s just say I have completely different expectations when I have to pay for it.

The retirement plan industry has long wondered—and worried—what participants would do if they knew how much they were paying for their 401(k)s.  Despite the fact that most of those fees have long been disclosed in fund prospectuses, we’re generally inclined to think that most participants haven’t actually read those disclosures—and those who have probably didn’t understand them.  That’s all supposed to change—or at least begin changing—with the participant-level fee disclosures slated to take hold next year.

Personally—and I know I’ll get some pushback on this—I’m disinclined to think it will make a big difference.  After all, if there’s one thing that participants have demonstrated over the years it’s a strong and consistent propensity to gloss over (if not glaze over) big, complicated, legalistic disclosures.  It doesn’t help that retirement plan fee calculations have become complicated structures, imbedded inside the net asset value of mutual funds, with revenue-sharing offsets of varying amounts (see “IMHO:  Out of Proportion”), and most expressed in participant-unfriendly terms like “basis points,” or worse—“bips.” 

I’m not optimistic about the new regulated disclosures—too much data, and not enough information, IMHO.  That said, there are some new disclosures coming to market from the provider community ahead of those regulations that, IMHO, might actually help participants see—and understand—what they’re paying.   

Of course, for most, the concern is not that participants will now know how much they are paying—but that some may, perhaps for the first time, realize that they ARE paying.1

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1Consider that a survey published earlier this year by AARP indicated that only a quarter of 401(k) participants realize they are paying fees (see “Most 401(k) Participants Not Aware of Fees They Pay”). 

 

Compliance July 29, 2011

Court Finds Amendment not Adopted per Plan Rules Invalid

A court has found that a defined contribution plan amendment liquidating two investment options was invalid because the sponsor did not follow amendment procedures dictated by the plan.
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The Employee Benefits Institute of America (EBIA) reports that the court said the company offered no evidence that the plan’s amendment procedure had been followed. Instead, the company argued that an earlier plan amendment authorized the fund’s liquidation by members of the employee benefits committee (EBC). The court rejected this argument, though, finding that the earlier amendment only authorized freezing the funds—it did not require their liquidation.   

According to EBIA, the court also rejected the company’s alternative argument that the amendment was implicitly ratified by the notices and revised summary plan description (SPD) sent to participants about the funds’ elimination and by subsequent EBC consents and amendments. Ratification was not allowed by the plan’s specific amendment procedures, and even if it was permitted, no ratification had occurred.   

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The harmful effect of the amendment was, in the court’s view, an additional sufficient basis to refrain from recognizing any “implied ratification.” Based on its analysis, the court held that the amendment was invalid, leaving in place the earlier version of the plan, which required that the stock funds remain in the plan “in a frozen state.”  

EBIA said the funds – which held shares of stock in a business that was previously part of the same conglomerate – were liquidated at a substantial loss to participants shortly before their value increased dramatically. Because the plan document listed the stock funds as available investment options, a plan amendment was required to authorize their liquidation. The plan’s amendment procedure specified that action by the employee benefits committee (EBC) was required to adopt any plan amendment, and that the EBC could act either by a majority vote or by a written instrument signed by a majority of its members. No EBC meeting was held, however, and only the EBC secretary signed the amendment to eliminate the funds.   

A participant brought a class action lawsuit for fiduciary breach to recover losses suffered by the plan due to liquidation of the funds. The case is Tatum v. R.J. Reynolds Tobacco Co., 2011 WL 2160893 (MDNC 2011).

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