From the April 2012 issue of Benefits Selling Magazine • Subscribe!

To bundle or not to bundle

In early February the DOL announced the guidelines for its new fee disclosure rule. Sadly, the DOL (again) pushed back the implementation date three months to July 1. It’s sad for two reasons. First, it only delays the inevitable and perhaps hurts investors. Second, it now precludes the delicious irony of exposing once hidden fees on April Fools’ Day and, given the conflict-of-interest ramifications of revenue sharing, the opportunity to mention “a fool and his money are soon parted.”

Fiduciary proponents no doubt delighted in the forthright aggressiveness of the DOL’s promotion of these new guidelines. Its simple rule to 401(k) plan sponsors should they find a service provider fails to properly comply with the new rule: Fire them. It wasn’t a suggestion; it was an order. This may place some vendors between a rock and a hard place. By showing 401(k) plan sponsors they were saving pennies while losing dollars, it may discourage those 401(k) plan sponsors from selling their soul for one-stop shopping.

Which vendors lay destined to soon fall within the crosshairs of the ire of 401(k) plan sponsors? A regulator once told me, when he first arrived at his job, he laughed at industry pros who told him many 401(k) investors thought they could get something for nothing. He now realizes too many believe they are getting their 401(k) for free. The new fee disclosure rule will expose this fallacy. Quickly. And disturbingly so for naïve plan sponsors. No longer will vendors be able to hide fees with 12b-1 payments or revenue sharing. Those who touted “low” fees as a result of these hidden fees must now fess up.

While not limited to this group, it’s likely bundled service providers might find, as Desi would say, they have some ‘splainin’ to do. Since fees now have to be identified by service, bundled fee providers can’t rely on one side of the business subsidizing any other side. For example, if a vendor is going to offer “free” recordkeeping, fee disclosure will likely expose higher than average costs associated with investments.

There’ss a growing consensus the costs of bundling, both in terms of direct and indirect dollars paid and the potential liability costs associated with due diligence, should move 401(k) plan sponsors away from such solutions. And by “bundled,” we’re referring to one—usually “big name”— company as opposed to an alliance of independent vendors. The former often features those hidden fees and conflicts-of-interest we keep talking about, while the latter often displays both fee transparency and a conflict-free open platform.

This last point may signal the future direction of the service provider industry (perhaps in the guise of multiple employer plans?). In the new world of the fee disclosure rule, 401(k) plan sponsors may find it’s better to have paid a little bit more for “best of breed” than suffer the potential fiduciary liability of one-stop shopping. After all, “he is no fool who gives what he cannot keep to gain what he cannot lose.”

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