Color me perplexed. According to the Investment CompanyInstitute, 17% of all 401(k) plan assets are still investedin funds with 12b-1 fees or loads.

Related: Plan sponsors lemmings take a biggerchance than they realize with QDIAs

Who knows how many more are exposed to revenue sharing? (See“401k Fiduciary Alert: Regulators Targeting 12b-1Fees, Is Revenue Sharing Far Behind?”FiduciaryNews.com, July 26, 2016.) Unlike 12b-1 fees andcommissions, which are required to stand out prominently on pagetwo of every mutual fund's prospectus, revenue sharing recordsaren't required to be disclosed in an easily recognizableformat.

Related: Stop getting 401(k) participants allworked up about nothing

So let's focus on the fees that are readily apparent.

It's hard – but not impossible – to justify the continued use of12b-1 fees. There are just so many reasons it makes sense to avoidthem.

First, regarding specific funds, in many cases it's possible toselect a non-12b-1 share class of the same fund. Think about it.You have an identical portfolio, yet one share class pays more(thereby receiving a lesser return), while another share class paysless (thereby receiving a higher return). It's a no brainer. Who intheir right mind would pick the share class that gives the lesserreturn?

Second, and in more general terms, it is now undeniable, asevidenced by peer-reviewed academic research, that shareholderswith “broker-sold” funds (i.e., those with 12b-1 fees andcommissions) earn, on average, 1% less than shareholders who boughtdirectly from the mutual fund (i.e., those without 12b-1 fees andcommissions).

Granted, these numbers reflect averages, so you're bound to finda few funds with 12b-1 fees and commissions perform well aboveaverage and a few funds without 12b-1 fees and commissions thatperform well below average. So, theoretically, it is possible for afund with 12b-1 fees and commissions to produce higher returns thana fund without 12b-1 fees and commissions. It's just notlikely.

How many 401(k) plan sponsors will knowingly take the risk thatthe 12b-1 fee fund they just happen to pick will be the one thatbeats the average non-12b-1 fee fund? On the other hand, rarelyhave we seen successful cases brought against plan fiduciaries forpicking a poor performing investment.

Since, again, in theory, there's no guarantee the 12b-1 fee fundwon't underperform, it's not a slam dunk picking a 12b-1 fee fundrepresents a fiduciary breach…

…except in one very specific case.

To date, all successful 401(k) class actions have been based onholding more expensive share classes of a specific fund when lessexpensive share classes are available. (Please note the wordinghere. Just because a less expensive share class exists doesn't meanit's available to the particular plan. For example, consider lowcost share classes that require very large minimum investments –too large for smaller 401(k) plans to meet.)

In the very specific case of index funds, there need not be acheaper share class within the same fund to prove a fiduciarybreach.

The 401(k) plan sponsor needs to methodically justify selectingan index fund family offers a more costly (note again the wording)fund. Why? Because the index portfolios of competing fund familiesare, by definition, identical. It's possible poor execution willresult in dissimilar returns, , but if it's systemic then it shouldbe discovered in the due diligence process.

Now, about the wording I just used. Did you notice I referred to“costs” not “fees”?

That's because, in the explicit case of index funds, not only do12b-1 fees and commissions matter, but so do expense ratios.Remember that the base performance of all index funds (tracking thesame index) should be the same. That means the only differenceswill arise out of higher fees (i.e., 12b-1 fees and commissions) orhigher costs (i.e., expense ratios). It's possible to justifybuying the most expensive index fund (if there is measurablevalue-added as a result of owning it), but, again, any plan sponsorgambling on this justification stands on rather thin ice.

We find ourselves at the dawn of an era where regulators (boththe DOL and the SEC) have increased their scrutiny ofconflict-of-interest fees like 12b-1 fees. In addition, we haveseen a more aggressive class action bar willing to test the legalliability given this more rigorous compliance environment.

Given this backdrop, why have plan sponsors allowed 17% of 401kretirement assets to remain in funds with 12b-1 fees andcommissions? Are there that many brothers-in-law out there? Arethere that many financial providers out there who don't understandhow easy it is to convert from a transaction-fee based business toan asset-fee based business?

If you think this is disquieting, just wait until we see thenumbers on IRA plans!