Exclusive Interview with Phyllis C. Borzi: Why Plan Sponsors Shouldn’t Treat Their 401k Plans Like Cheap T-Shirts
Her name has been in the news constantly for the past several years as the Department of Labor (DOL) has taken the lead in spearheading the movement of the fiduciary standard. While the SEC’s former chair misread the political tea leaves and ended up surrendering to a bipartisan maelstrom, this woman stood tall, face athwart the winds of lobbyists and their elected henchmen. It’s not often we witness someone retain this stature while serving in Washington, D.C., but this official certainly qualifies as just such a role model. FiduciaryNews.com is honored that she has agreed to allow us to interview her. She is…
Phyllis C. Borzi, Assistant Secretary of Labor of the Employee Benefits Security Administration (EBSA). EBSA oversees approximately 707,000 private-sector retirement plans, approximately 2.3 million health plans, and a similar number of other welfare benefit plans that provide benefits to approximately 141 million Americans. As agency head, she oversees the administration, regulation and enforcement of Title I of the Employee Retirement Income Security Act of 1974 (ERISA). Borzi has published numerous articles on ERISA, health care law and policy and retirement security issues and has been a frequent speaker to legal, professional, business, consumer and state and local governmental organizations.
FN: Assistant Secretary Borzi, first, thank you very much for being willing to share your thoughts with our readers. Before coming to the DOL, you accumulated a tremendous background in employee benefit plans. What was the most surprising thing you discovered upon coming to the DOL?
Borzi: I joined the department in 2009, and one of the first things I did was to discuss priorities with my senior staff. I had, as you say, a lot of professional experience with employee benefit plans, but I wanted to know what they saw as the most significant issues. These were both political appointees and career employees – people who had been covering benefits for a few years and people who had made it the focus of their entire careers. Although it was already very high on my own list, I was surprised that almost every single one of them identified the same issue: the need to update and strengthen the current fiduciary rule so that plan sponsors and individuals saving for retirement are better protected from advisor conflicts of interest.
FN: We’ve heard from many in the retirement plan universe – both plan sponsors and financial service providers – that would suggest plan sponsors just aren’t aware of the nature of their responsibilities as plan sponsors. What has the DOL done to help train plan sponsors?
Borzi: Compliance assistance has been an important component of EBSA’s activities. The department has conducted an extensive education campaign since 2004 to help plan sponsors understand their obligations under the law. This program includes publications, live seminars (44 held to date with more scheduled) and regular webcasts. All of our webcasts are archived and available on EBSA’s website. In addition, our field offices have provided guidance to thousands of employer and service provider groups and hosted regional workshops. In the first three quarters of this fiscal year alone, our field offices conducted 256 compliance assistance events.
FN: Another common observation is that many plan sponsors – especially those in smaller plans – don’t recognize the true nature of their personal fiduciary liability. They simply don’t see their peers getting into trouble. Indeed, we could see how this could be tricky for the DOL. On one hand, you don’t want to discourage the formation of retirement plans by nit-picking plan sponsors. On the other hand, you don’t want to encourage plan sponsors to ignore their duties. How does the DOL balance these two completing objectives?
Borzi: Our mission in the Employee Benefits Security Administration is to ensure the security of the retirement, health and other workplace-related benefits of America’s workers and their families. This involves educating both plan sponsors and participants about legal rights and responsibilities. It means ensuring that assistance and guidance are available, and pursuing improvements whenever possible. For example, we believe the fee disclosure rule achieves this by ensuring that useful, reliable, comparable information is available to the plan sponsors and participants who need it, in a format that’s easily understood. Ultimately this is about protecting workers’ savings, giving them additional tools to inform their decision-making, and making it as easy as possible for them to get support for their investment decisions. But it also means effective enforcement when necessary. Last fiscal year alone we achieved over $1.2 billion in monetary results.
FN: We’ve just passed the first anniversary of the 401k Fee Disclosure Rule. Several commentators, including us, were critical of the DOL’s initially proposed reporting template (we even suggested an alternative). The Rule became effective without a reporting template and we immediate saw certain service providers give plan sponsors a “core dump” of data, much of it irrelevant. Does the DOL have plans to create a simple one-page form that all service providers must complete to make it easier for plan sponsors to understand their true fees?
Borzi: We’re currently working on a guide for service providers that will encourage a more uniform manner for disclosing information to plan sponsors, and our proposal is currently under review at OMB. The goal of the fee disclosure rule was to establish a system to ensure greater transparency with respect to fees and expenses for plan sponsors, as well as participants and beneficiaries. We wanted something helpful that people could really use to make decisions about their plans, and of course we still want that. For the first time, both plan sponsors and participants will be able to see how much the investment products they are offered actually cost. That is a big deal. But there is always room for improvement. At the same time, however, we know that behavioral change will take time. But it will come. We continue to evaluate how effective our regulation has been at promoting better decision-making, and that’s something we’ll continue to keep an eye on. Increasingly we see that employees have more responsibility for making investment decisions – and the more that is the case, the more important it is that they have the necessary resources to evaluate their options.
FN: One of the most frustrating complaints we’ve heard from fiduciary advisers of 401k plans is that some plan sponsors and even more plan participants have for a long time thought their 401k plan was free. We’ve got to imagine your staff has seen this same phenomenon. How have they responded to it?
Borzi: It is frustrating. The lack of transparency in the past has meant many plan sponsors thought, particularly when they were receiving bundled services, that services like recordkeeping were being provided free of charge. Unfortunately, many plan participants also didn’t understand that the available investment options had costs associated with them as well. Our fee disclosure rules are designed to remedy this very problem, so people can see precisely how much they’re paying and what they’re getting in return. But we’ve been working to fix this problem for a long time, so we’ve also done work in this area through our outreach and education, compliance assistance, and enforcement programs.
FN: Regarding the potential “worst case” scenario for the Fee Disclosure Rule, Fred Reish has warned against the “race to the bottom” of low fees-low service in terms of plan sponsors misinterpreting the Rule to mean they must always choose the lowest fee provider. He points out the Rule doesn’t require that and, in fact, only requires the fee match the service. Ideally, wouldn’t the DOL prefer plans to have an above average fee and receive above average service? What can be done to make sure we don’t see a “race to the bottom” as Reish puts it?
Borzi: The point of the regulation is to give plan fiduciaries the information they need to make a prudent decision. Fees are obviously very important, but fiduciaries also need to consider cost considerations in relation to performance, and the services they are obtaining as well as the quality of those services for those fees. People know how much tee-shirts cost too, and most people know where to find one for $8, but if you’re looking for something that will last a few years, you’ll pay a little more for it. And if your objective is to purchase a shirt for somebody that will keep them covered for the rest of their life, you aren’t going to look for the cheapest available option. To carry the metaphor a little further, people don’t just look at a price tag, they look at the label, the fabric, the manufacturer, the retailer – they take all the information available and form an opinion on the quality of the product. Similarly, the fee disclosure rule doesn’t simply require providers to reveal how much plan sponsors are paying in fees, but what they get in return, so fiduciaries will be in a better position to make informed decisions. It’s about making sure they have access to all the information they need to assess the quality of their investment.
FN: Focusing again on smaller plans – the plans that have traditionally paid the highest fees as measured by percentage of assets. Not only do they pay a higher percentage, but, according to the July 2013 GAO report, small employers are also lagging in terms of providing plans in the first place. At the same, we see a bipartisan effort to approve some form of “Multiple Employer Plan” (“MEP”). MEPs are currently permitted within a narrowly defined market. How can MEPs help reduce costs for small company retirement plans? What are some concerns you have about MEPs and how can those concerns be best addressed?
Borzi: Some have suggested that open MEPS provide a good option for small businesses to offer retirement benefits to their employees. However, there are very real concerns about fraud and abuse. In fact, one prominent open MEP promoter, Matthew Hutcheson, was recently sentenced to 17.5 years in prison for embezzling from an open MEP arrangement.
FN: There’s a lot of confusion about the role of mutual fund expense ratios in any plan fee analysis. For example, if a plan were to focus on “low fee” (i.e., low expense ratio) funds, then plans would be made up entirely of bonds funds – something almost no professional would recommend. In addition, despite reports to the contrary (and revealed in a story we ran last year – see “A 401k Must Read: Mutual Fund Expense Ratio Myth Busted,” FiduciaryNews.com, October 9, 2012), funds with “higher” expense ratios often produce higher returns (this applies only to actively managed funds). How can the DOL help plan sponsors focus on the fees that matter (i.e., revenue sharing, 12b-1 fees, etc…) as opposed to just the mutual fund expense ratio?
Borzi: The department is already providing support to sponsors through our education initiatives, and we intend to continue. But I think it’s important to reiterate that the fee disclosure rule doesn’t simply inform plan sponsors about how much they’re paying; it provides more information about what they get in return. The whole point of our fee disclosure rule is to ensure that people can see the relationship between what they’re paying and what their plan is paying and what they receive in return. Mutual fund expense ratios are important, but they are only one part of the equation. This rule paves the way for more education, more awareness and more informed decisions.
FN: In a recent interview with FiduciaryNews.com, Professor Tamar Frankel said ERISA originally included all plan service providers under the definition of “fiduciary,” but the DOL exempted several classes of providers in 1975. Why did the DOL exempt these providers in 1975 and what has changed since then to consider going back to the original rule?
Borzi: The 1975 regulation was based on the retirement marketplace of 1975, not the retirement marketplace of 2013, and the investment climate has changed significantly over that time. One of the most significant things that has changed is the shift from defined benefit to defined contribution plans. In 1975, the people making decisions about pension plan investments were generally asset management professionals who had the training to evaluate different options and make informed decisions. That’s not the case today. Today, in effect, individual investors must be their own investment professionals, and most of them don’t have the training necessary to make the best decisions regarding important investment decisions, such as how much to save and how to invest their savings so that they will have adequate retirement income. That means investors are increasingly reliant on the advice they receive, and while an investor may assume his advisors are putting his interests first, we know that’s not always the case.
FN: If you were a plan sponsor and you had a choice to hire either a fiduciary adviser or a non-fiduciary advisor, all things being the same, which one would you hire and why?
Borzi: Assuming that all things are equal, I think the average person would prefer to work with people who are legally required to provide unbiased investment advice and put the client’s interests first.
FN: Do you think the typical plan sponsor appreciates the difference between a fiduciary adviser and a non-fiduciary advisor? What efforts has the DOL made to educate plan sponsors on this difference?
Borzi: We’ve heard multiple reports from plan sponsors indicating that they don’t fully appreciate the difference. That’s why education is such a critical part of our outreach. We regularly provide blogs, newsletters, webinars, videos and other materials to help sponsors identify the important issues they need to focus on in order to provide the best options possible to their plan participants. But it’s clear that education isn’t enough, which is why we proposed a regulation to address the issue. In the re-proposal, we intend to make it very clear that there is only one rule: that you have to put the best interest of your client first and, as part of that process, refrain from conflicts of interest.
FN: Recent academic studies suggest conflicts-of-interest are costing retirement plan investors about a billion dollars a month (see “Study: SEC Fiduciary Delay Costing Retirement Investors $1 Billion per Month,” FiduciaryNews.com, February 12, 2013). The DOL currently provides an exemption (Frost National Advisory Opinion) that allows “fiduciaries” to continue to select investments from which they receive certain kickbacks (via 12b-1 fees and revenue sharing) as long as these are “disclosed.” We’ve seen many academic studies that conclude disclosure not only doesn’t work, (see “Exclusive Interview with Yale’s Daylian Cain: Just a Sugar Pill? Disclosure’s “Ah-Ha!” Moment,” FiduciaryNews.com, October 18, 2010) but might have an effect opposite of the one intended. How will the DOL deal with these facts and when can we expect these exemptions to be eliminated?
Borzi: It sounds like you’ve been reading our educational materials. The human costs of conflicts of interest and the insufficient protection that disclosure affords are two themes we return to frequently. These are issues we’ve kept in mind as we draft the final rule.
FN: Do you have anything you’d like to add that you think our readers may be interested in?
Borzi: The financial industry plays an important role in our nation’s economy and we know that there are many good, honest advisors who provide excellent advice; but we also know that today’s investors are more reliant on that advice than ever before, and the old laws don’t provide adequate protection in the current investment marketplace. Our agency’s goal is, first and foremost, to ensure that America’s workers and their families can enjoy the retirement they worked and saved for.
FN: Assistant Secretary Borzi, thank you so much for pausing for a moment in your no doubt busy life to share your thoughts, philosophies and insights with our readers. They are sure to find your answers fascinating and informative.