If a tree falls in the forest, does anyone hear it? If a fee stays hidden from a 401(k) plan sponsor, does it matter? In the past, it may not have. Today, as Fred Reish comments, it may (see "DOL Smacks 401k Adviser for 12b-1 Fiduciary Breach. Plan Sponsors Next?" FiduciaryNews.com, March 26, 2013).
This may surprise many 401(k) plan sponsors – and may further open the doors to litigation against 401(k) service providers. We'll have to wait for the next major downturn in the markets to find out for sure. Between now and then, what can diligent plan sponsors do to better protect themselves?
There are a lot of folks purporting to offer advice in this area. Some of it is good. Some of it is self-serving. Some see "low" fees as the only path (until, unfortunately, they discover you only get what you pay for, and find themselves in yet another fiduciary morass).
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The easiest path, especially for sponsors of smaller (less than $10 million) plans, is to include some form of the following statement in the due diligence selection of the plan's investment policy statement: "Our plan will not offer any mutual funds that have 12b-1 fees."
Ideally, this restriction would also disbar any revenue sharing arrangements, too, but they are so rampant among fund platforms (why do you think there are no transactions) that doing so might be a case of going too far, too fast. Best to take things one step at a time. Eliminate the 12b-1 fees first.
Then, maybe start by saying no more than 50 percent of the funds on the plan's menu can be subject to revenue sharing fees. In the best of all worlds, the cheapest way to buy funds is to buy them directly from the fund. Recordkeepers might have a problem with that, but the last time I checked, they aren't a beneficiary of the plan.
Ridding the plan's exposure to these normally "hidden" fees was the whole intent behind the DOL's 408(b)(2) Fee Disclosure Rule. The DOL probably thought the distraught masses would rise up against those service providers taking a bigger-than-necessary chunk of the pie, but we're yet to see evidence of that. Again, rising markets tend to calm investors. Once the market takes its inevitable plunge, attitudes may change.
In the past, plan sponsors could feign ignorance of these hidden 12b-1 and revenue sharing fees. With 408(b)(2), that is no longer a reliable defense. When 401(k) investors decide to revolt against these unnecessary fees, plan sponsors may be viewed as no other than the mere get-away driver.
And that's not a good place for a plan sponsor to be.
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
