James W. Watkins, III, J.D., CFP Emeritus^TM, AWMA

I recently received a call from the CEO of a corporation asking if I could meet with him. He said he had recently attended a conference where the major topics of discussion were potential liability issues involving the DOL’s new Retirement Security Rule and the so-called “retirement income” crisis. He said he wanted to talk to me because he felt he and other plan fiduciaries were being “okey doked.” He paused, apologized, and started to explain his use of the okey doke term. I stopped him and told him I was very familiar with the term, especially in connection with the financial services and annuities industries.

For those unfamiliar with the term “okey doke,” the Urban Dictionary defines it as “[t]o be misled, tricked, or otherwise hoodwinked.” An AI inquiry on askai.com asking what the term “okey doked’ means” produced the following response:

In this context, being ‘okey doked’ could mean being tricked or deceived by someone who is trying to maintain control over you.

A lot has been written about the so-called “retirement income” crisis, including whether such a crisis exists at all. To address the alleged crisis, the insurance industry has created various types of “guaranteed income” products, including annuities and target date funds containing annuity components

Whether the so-called retirement income crisis does or does not exist is totally irrelevant from a plan sponsor’s fiduciary responsibilities under ERISA and fiduciary law. Annuities and other retirement income products and strategies are essentially a liability trap for plan sponsors.

Anytime a proponent of annuities and/or other types of insurance-based guaranteed income product attempts to engage with me in a discussion, I quickly cut them off. I simply point out that as an attorney that specializes in fiduciary risk management strategies, nothing in ERISA or fiduciary law expressly requires a plan sponsor to offer any specific investment within a plan, certainly not annuities or guaranteed income products. Plan participants interested in such products are free to pursue them outside of the plan, thereby avoiding any potential fiduciary liability exposure for the plan.

My clients are familiar with my simple fiduciary risk management approach:

First question – Is the product or strategy expressly required by ERISA? In other words – “Why go there?

Answer: The answer will always be “no.” As SCOTUS pointed out in Harris v. Northwestern University decision¹, ERISA Section 404(a) only requires that each individual investment option offered within a plan be legally prudent.

My clients will typically provide an answer expressing some sort of altruistic reason for including unrequired investment options, such as wanting to help their employees. While that is admirable, a plan sponsor can provide the opportunity for an employee to work toward “retirement readiness” and retirement income by simply providing prudent, cost-efficient investment options within the plan, options that do not present potential unnecessary liability exposure for the plan.

Second, would/could the inclusion of the product or strategy possibly result in unnecessary liability exposure for the plan?

Answer: In most cases, the answer is yes. I have written several posts addressing the inherent liability issues with most of the investment options often offered within plans, including the cost-inefficiency associated with most actively managed mutual funds and the fact that most annuity products are designed to ensure that the annuity owner will never break even, resulting in an inequitable windfall for the annuity issuer and/or third-parties associated with the annuity issuer, all at the annuity owner’s expense. Equity law is a component of fiduciary law, and equity abhors a windfall.

As a result, my advice to my clients with regard to annuities and other insurance-backed guaranteed income products is simple and direct ‘ “Don’t go there.”

Protection Against Being “Okeydoked”
So, how does a plan sponsor or any other investment fiduciary protect against being “okeydoked/”

With regard to cost-inefficient actively managed mutual funds, the most effective means of protection is to require the plan adviser to provide a cost-efficiency analysis for each recommended mutual fund using the Active Management Value Ratio (AMVR) metric. The AMVR is essentially a version of the cost-benefit analysis used by corporations to evaluate the viability of a project. The AMVR analyzes the cost-efficiency between an actively managed mutual fund and a comparable index fund.

The AMVR allows the user to focus strictly on cost and benefit/return, ignoring all the disingenuous collateral arguments regarding “apples and oranges” and the need to factor in various strategy differences. Whether the AMVR user uses the simplified AMVR, relying on the funds’ nominal, or stated, incremental costs and incremental risk-adjusted returns, or uses the advanced AMVR, which uses the funds’ incremental correlation-adjusted costs and the funds’ incremental risk-adjusted returns, the AMVR will typically establish the cost-inefficiency of the actively managed fund.

The plan adviser’s AMVR analyses should maintain the format as set out in my posts. Based on my experience, the plan adviser will either refuse to provide such AMVR analyses or will “improve” the process by replacing the original AMVR format with some sort of self-serving measure, aka the okey doke factor.

As for annuities, I addressed several liability concerns with regard to fixed annuities in a recent post. To summarize:

• Fixed Annuities – Breakeven analyses factoring in both present value and mortality risk.
• Variable Annuities (VA) – The use of inverse pricing in calculating the annual fee for the VA’s death benefit and evaluating the cost-efficiency of the investment subaccounts offered within the VA.
• Fixed Indexed Annuities (FIAs) fka Equity Indexed Annuities – The excessiveness of the FIAs costs/fees, most notably the implicit cost/impact of so-called interest caps, participation rates, and spreads. For example, an FIA that caps annual interest achievable at 10 percent and imposes an alleged 2 percent spread, is effectively reducing an FIA owner’s end return by 20 percent, not 2 percent.

The plan sponsor should require the plan adviser and/or other plan consultant to submit a written report providing the specific numbers derived from the analysis above for each recommended annuity investment. The plan sponsor should also require that the adviser’s/consultant’s report should set out the potential impact of such costs/fees using the DOL’s and GAO’s findings that each 1 percent in costs/fees reduces an investor’s end return by approximately 17 percent over twenty years. As John Bogle pointed out, both returns and the impact of costs/fees compound.

Be advised, most plan advisers and/or plan consultants are not going to agree to such disclosure, especially in writing, as they know the results would indicate the cost-inefficiency of their products and recommendations. Better that plan sponsors know this beforehand in order to proactively protect against unwanted fiduciary liability. There are advisers who will gladly provide such analyses of prospective and/or existing plan investment options.

Going Forward
Beware the financial services and annuity “okey doke!” Large institutional plan advisers often combine their “okey doke” with a contractual fiduciary disclaimer clause that requires the plan sponsor to agree that the the adviser will not be held to a fiduciary standard in connection with providing advice to the plan. In my opinion, a fiduciary disclaimer clause is the equivalent of a plan adviser admitting that they know the poor quality of the advice and recommendations they intend to provide to the plan and, indirectly, the plan participants.

Transparency is the financial services and annuity industries’ kryptonite. Therefore, a refusal to provide the written analyses described herein may well be treated as an indication that the adviser is setting the plan sponsor up to be “okeydoked,” with the likelihood of resulting fiduciary liability. Just remember the words of Albert Einstein:

Notes
1. Hughes v. Northwestern University, 142 S. Ct. 737, 211 L. Ed. 2d 558 (2022)

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