Exclusive Interview with Charles Field: Less Restrictive Open 401k MEPs Relieve Some Burdens for Smaller Employers

Posted June 20th, 2017 by .

Categories: News.

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Charles H. Field is a partner in the San Diego office of national law firm Sanford Heisler Sharp, LLP and co-chair of the firm’s Financial Services Litigation practice. Charles has been practicing in the securities law area for more than 28 years, and his current practice focuses on protecting the interests of investors. Having served from 2002 to 2013 as the General Counsel of Nicholas-Applegate Capital Management and its successor, Allianz Global Investors Capital, he brings a combination of private practice experience and a deep knowledge of the laws governing investment advisers, broker-dealers, and commodity trading advisers, which he uses to assess whether a seller has breached a legal obligation and to evaluate whether an aggrieved investor can recover damages.

FN: Charles, tell us a little about yourself. How did your journey to your current position begin? What inspired you? Why did you make the career choices you did? How did you end up where you are now?
 I grew up in rural Indiana in the late 60s and early 70s, so it seems strange that I would gravitate toward the stock market and investments. I can’t explain it, but since I was a teenager I have always had a strange fascination with investments. Every time I saw a 1920s photograph of a businessman reading the ticker tape, or an old grainy video that captured the trading action on the Floor, my fascination only intensified. I started my first job in the late 70s working for an educational non-profit that produced continuing legal education programs. It was a crazy time. The Hunt Brothers were trying to corner the silver market, people were getting rich off of bonds, and hostile takeovers started coming into vogue. This job gave me access to a library filled with copies of the Wall Street JournalBarron’sFortune, and newsletters published by Joseph Granville, Dow Theory Forecasts and Kiplinger. The job also exposed me to the law as seen through the eyes of thousands of lawyers and judges. To witness first-hand the passion these judges and lawyers held for doing the right for their clients and society as a whole was an invaluable learning experience. We produced a securities law program which brought together over two hundred securities lawyers to discuss cutting edge legal issues. For two days I engrossed myself in presentations that took me to a much higher level in securities area than I had ever been.   These securities lawyers struck me as a breed apart. They seemed to be interested less in the adversarial nature of the law and more in the creating solutions for fledgling businesses trying to build something and generate value for their investors. I knew I wanted to be a part of it.

After law school, I entered the securities business where I remained for the next twenty-six years, the first ten years in the retail investment space and the next seventeen years representing an investment adviser to institutional investors. Over the years, I became a student of the fiduciary duty standard. In 2015, I met with two lawyers, David Sanford and Ed Chapin, to discuss putting my 27 years of knowledge to use in aiding the cause of social justice for persons who had been the victims of financial abuse. I held tremendous respect for both men. I had worked with Ed and knew him very well, and I was well aware of David’s reputation as a social justice crusader. I joined Sanford Heisler Sharp later that year and have been pursuing fiduciary mismanagement and financial abuse ever since.

FN: You were among those who submitted a response to the DOL regarding their “Conflict-of-Interest” Rule. You were in favor of it. In what ways did this Rule appeal to you?
 The Rule appealed to me because it brings sorely needed clarity to the relationship between buyer and seller of financial products and services. For the most part, people believed that persons offering different investment products and services – whether they be stocks, bonds, mutual funds, or annuities –  were looking out for their best interests. Appealing ad campaigns extolling the virtues of the company’s financial services and the loyalty of its agents to consumers contributed to this perception. But it was an inaccurate perception. Most people were confused when they learned that one seller may be operating under different legal standards and loyalties than the next, depending on whether they were a registered investment adviser, a securities broker-dealer, or an insurance annuity salesman. A registered investment adviser has the highest standard, a fiduciary duty of loyalty and prudence. A securities broker dealer owes a lower duty of suitability; and the insurance annuity salesman owes even a lower duty still. Adding to the confusion was the fact that many salespersons carried similar titles like “financial consultant,” “financial advisor,” and “wealth manager.” While meaningless in substance, these suggested a level of expertise and degree of loyalty. Often, the buyer received neither.

Studies have shown that over the years investment advice tainted by ignorance and conflicts-of-interest needlessly have cost retirement savers billions of dollars in savings that they would have had otherwise if they had been the beneficiaries of sound, impartial investment advice. Many of these retirement savers, however, are victims without recourse because their so-called “financial consultant” operated under a diminished standard of duty and did what the law allowed. Now, the Fiduciary Duty Rule levels the playing field among sellers by placing a fiduciary duty on every seller of financial products and services to a retirement plan, including an IRA. And to give the Rule teeth, buyers will have a private right of action to sue sellers for breach of their fiduciary duties.

FN: Some critics say the Rule institutionalizes conflicts-of-interest rather than eliminating them. Give a specific hypothetical example of how this might be the case.
Field: I don’t agree with the critics. Granted some sellers will bury their compensation in fine print and fabricate justifications for why their fees are reasonable, but eventually the marketplace will dictate what is reasonable compensation. Already mutual fund companies are rolling-out low-load shares that pay a 2.5% commission. Eventually once the regulatory hurdles are cleared, pure no-load shares, or “clean shares,” will become a dominant force. Once the marketplace establishes a new benchmark for reasonable compensation, sellers will be hard pressed to deviate materially from the benchmark and still claim their compensation is no more than reasonable.

FN: What suggestions would you make to the DOL to improve the current version of the Rule.
 Obviously, the industry would like to see several improvements, most notably the removal of the private right of action and the prohibition on class action waivers. I appreciate the industry’s concern with increased litigation, but without the right of recourse for customers, the Rule has no real meaning. Compliance with the Rule is the industry’s best defense against litigation. From the customer’s point of view, I would like to see the DOL tighten the provisions on what constitutes reasonable compensation. That said, I believe the marketplace will resolve the issue eventually once low-load shares, “clean shares” and similar business models begin to take shape.

FN: You live and work in California, which is on the vanguard regarding state-run retirement plans. In what way do state-run retirement plans represent a “sleeping giant” that could decimate the private retirement plan industry? How might retirement advisers position themselves against such plans?
 The flaws embedded in state-run retirement plans make it unlikely that these plans could decimate the private retirement industry. It is important to remember that employers offer 401k plans as a form of compensation/fringe benefit to compete for and attract highly skilled employees. For a variety of reasons, it is not in an employer’s best interest to expose its employees to a plan that suffers from poor to mediocre performance. Employee morale suffers, good employees leave, and legal repercussions await employers that mismanage their plans. States already have a notorious reputation for being unable to manage the retirement plans for their own employees. The country is rife with mismanaged, underfunded state and municipal retirement plans. If I were an employer, I would think twice before outsourcing a compensation/fringe benefit function to an entity whose financial management skills may be called into question. It also stands to reason that the notion of outsourcing employee retirement plans to state-run plans would be anathema to financial services firms such as JP Morgan Chase, Goldman Sachs, and Fidelity. Furthermore, with a state-run plan, an employer with employees working in several states would be subject to the different rules of each states which may conflict with each other. And if that is not enough, it has become even more problematic for state-run retirement plans now that the Congress has approved resolutions rescinding ERISA safe harbors for states.

Given the shortcomings in the state-run plans, retirement advisers who align themselves with high-quality, low cost retirement plan platforms should be able to position themselves nicely.

FN: There are many ways state-run retirement plans might inadvertently hurt the retirement saver. Explain a couple of these scenarios. Do you think the citizens of California are aware of these issues? Why not?
 State-run retirement plans are an extension of the political apparatus. And as Tip O’Neill once said, “all politics is local.” People running state pensions are influenced by the policies of the party in power. These policies may seek to influence the allocation of assets to or from certain industries, geographic locations, or financial intermediaries for political reasons instead of sound investment analysis. While these people have the best of intentions, historically speaking, making a political statement has been no substitute for good fundamental investment research. California has learned this lesson the hard way.

The other problem for state-run retirement plans is that many states do not have in their budgets sufficient resources to hire the kind of staff needed to manage a multi-billion portfolio. Adding to the dilemma is the revolving door syndrome in which talented employees depart for better paying jobs in the private sector. All of this adds up to an inconsistent investment process which leads to poor to mediocre investment performance relative to an expected rate of return. Once the plan is unable to match its expected rate of return, promised benefits exceed assets available to pay for those benefits. As retiree benefit obligations mount, managers seek to make ends meet by assuming greater investment risks. California has learned this scenario typically does not have a good outcome.

FN: Open 401k MEPs may be a viable alternative to state-run retirement plans for private employees. What are the advantages and disadvantages of open 401k MEPs vs. state-run retirement plans?
 In their current states, both alternatives have significant flaws. Open 401k MEPs still impose administrative burdens and fiduciary responsibilities on employers. Then there is the uncertainty of what happens to employee accounts if the employer goes out of business. I talked about the problems of state-run plans in the above question.

There are current initiatives underway to ease the restrictions on Open 401k MEPs and relieve some of the burdens for smaller employers. This could prove beneficial for many retirement savers if that comes to fruition. These plans could offer superior features for the multitude of smaller companies which, in-turn, encourage more entrants into the marketplace, which, in-turn, create a healthier, more competitive marketplace for financial products and services.

FN: What is the biggest fiduciary risk for plan sponsors and how might plan sponsors best mitigate this risk?
 The biggest risk to plan sponsors is not fully understanding the scope of their fiduciary duties. Plan sponsors may feel their only duty is to establish the plan, select a variety of investment options from which participants can select, and forget about it. In other words, they get complacent. However, ERISA does not permit complacency. ERISA requires the plan sponsor to be careful and loyal in making decisions that affect the plan. Plan sponsors must keep plan expenses under control; and, as the U.S. Supreme Court said last year in Tibble v. Edison, plan sponsors must continuously monitor the investment options and promptly remove imprudent ones. The cases today fall into two categories: excessive fee cases and a failure to remove poorly performing options. Both can have devastating effects on investment returns of participants.

To mitigate the risk, plan sponsors must appreciate the broad scope of their fiduciary duty. As fiduciaries, plan sponsors owe the same duty to participants in the plan as a doctor owes a patient or a lawyer owes a client. Furthermore, when selecting investment options, plan sponsors are held to the same standard as professional investors. The important thing to remember is that it is the thought process, and not the end investment returns, that matters most. Accordingly, rather than approaching the function as a nuisance, plan sponsors should approach the function as serious business worthy of the upmost respect. Plan sponsors should consider becoming better educated on the investment options available in the marketplace. Plan sponsors should not have so many choices so as to confuse employees. Plan sponsors should also consider having both actively and passively managed investment styles in the core strategies of small cap, large cap, international, and fixed income. The plan sponsor’s investment committee meetings need to be regular, the discussions and questions robust, and the decisions well documented. Plan sponsors should consider enlisting the services of a qualified pension consultant to help steer them through the issues.

Smaller employers can partially mitigate their fiduciary exposure by joining MEPs and delegating some of their oversight duties to sponsors. But it is important to remember that delegating these duties does not result in total blame shifting from employer to the MEPs sponsor. The employer carries responsibilities to monitor the sponsor. Under ERISA, a monitoring fiduciary must ensure the monitored fiduciaries are performing their fiduciary obligations and must take prompt and effective action to protect the plan and participants.

FN: Some feel we can avoid a “retirement readiness” crisis by encouraging workers to save as much as they can as early as they can. Another way to accomplish this is to offer parents an incentive to set up a Child IRA for their children. [Ed. Note: You can read more about it here: – just scroll down below the sliding picture and click the links to the relevant articles.] How does The Child IRA better prepare people for retirement? How does The Child IRA address a future retirement crisis like the collapse of Social Security? What do you think is the best way to get the message of The Child IRA to parents and grandparents?
 The emergence of the Child IRA will require an overhaul of the “kiddie tax” and other changes to contribution amounts, which may be problematic because of who will be the major beneficiary of the Child IRA. Even with incentives, it seems the Child IRA would be a viable option only for families with one child or sufficient incomes to be able to sock away the amounts of money needed to make this a meaningful contribution to a child’s retirement. But for those who can afford it, a Child IRA, properly funded at $1,000 per year for 19 years, would offer parents who worry about the collapse of Social Security some piece of mind that they have done all they can to ready their child for retirement. Studies have shown that a $19,000 investment will grow to $2.5 million by the time the child retires. However, by 2067, $2.5 million will be a nice start but not enough. The task of preparing children to adhere to a lifelong pattern of savings rests with the parents. The messaging task rests with the financial services industry. This is why the DOL Fiduciary Duty Rule is so important, because a message delivered in the best interests of the children and free from conflicts-of-interest will be the best way to tackle the retirement crisis.

FN: We’ve seen reports of the “death of the 401k.” Do you believe the 401k has been a failure? Why not? In what ways do you see we can improve the current model of the 401k? Of these, which idea is most likely to see the light of day in the near future?

Field: A number of lawsuits brought in the recent past against 401k plan sponsors have revealed a number of flaws in the system. But these are not fatal flaws – they can be and are being addressed. Therefore, I believe the 401k is a work in progress instead of a failure. If these lawsuits have taught us anything, it is that a plan, efficiently structured and carefully monitored by plan sponsors, affords employees a simple, convenient and cost-effective retirement option. The rest is left to the employee’s good judgment on how much to save and where to invest it.

Improving the current model requires dual commitments from both employers and employees. Plan sponsors need to educate themselves on their roles as fiduciaries. Hiring experienced legal counsel can help, as can studying the rulings in the recent set of ERISA cases filed against plan sponsors. From these cases, plan sponsors can spot the traps and pitfalls to avoid and when to recognize when an investment option has gone sour. Employers must make their 401k plans a safe place to invest, much like they make their offices and factories a safe place to work. Plan sponsors should also consider doing what other more enlightened plan sponsors have done, and that is to conduct regularly scheduled mandatory employee trainings led by independent investment professionals (not an HR rep or a salesperson from the plan recordkeeper) to provide general assistance on understanding investment risk, fees and expenses, relative investment performance and asset allocation. In other words, help employees help themselves. For smaller plans that do not have the resources, the DOL could consider easing some of the administrative burdens until smaller plans reached certain economies of scale. The DOL could also consider easing some of the restrictions on Open MEPs for smaller plans so they could pool their resources and reduce administrative costs.

No encouragement or education, not even the best-conceived plan, will protect the employee who is his own worst enemy when it comes to saving for retirement. Foremost, employees should take advantage of the retirement savings plan and save as much as they can in both good and bad markets. Employees will be amazed to see what dollar cost averaging and tax-deferred compounded interest will accomplish over the long-term.

FN: Are there any other comments you’d like to share with our readers?
 I believe we have reached a watershed moment for retirement planning and saving. After relying on Social Security and company pensions to carry them through their retirement years, Americans are now facing the reality that they must assume a greater responsibility for their retirement planning. To meet this responsibility, Americans must acquire a basic literacy about financial services, investments, and risk. And they must commit to the habit of saving. The financial services industry must do its part by eschewing a sales-driven mentality in favor of honest, loyal advice that adheres to the customer’s best interest. Finally, the government needs to do its part by making it easier for smaller companies to offer retirement savings plans to employees. Solving the so-called “retirement crisis” by transitioning to a new model of retirement planning and savings will require a collective effort.

FN: Wow! Charles, this is some great stuff! It’s always instructive to see how one can examine the issue from different points-of-view. Your unique experience from both sides of the fence allows you to analyze these hot topics from a more comprehensive perspective that that of someone immersed in only one side of the debate. Certainly more sophisticated readers will realize this and seek ways to put your thoughts to use in ways that will provide them an advantage.

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