Let's say you're on your way to buy a new car. It's a great car. Exactly what you want. Sure, it costs a pretty penny, but you've checked your budget, and the price is well within your parameters. You're comfortable with your decision. You're happy.

A few steps away from the car dealer, a man appears in front of you. “Hey, buddy,” he says in a half-whisper, “Wanna car?”

You stop dead in your tracks. “Yes, I'm going to buy a new car right now.”

“No, you misunderstand,” says the mystery man. “I want to give you this car. For free. It won't cost you anything. No strings attached.”

You ponder for a moment, then smile and shake the man's hand. You're now the owner of a car, and it didn't cost you one red cent.

Fast-forward to twelve months later. You've now sunk more maintenance money in this “free” car than it would have cost you to buy that new car. And you can't even take advantage of Lemon Laws. Why? Technically, you didn't “buy” it. It was free.

Imagine instead of a car we're talking about a mutual fund. Do you see how there's more to “free” than the upfront cost? This is what the DOL meant when it warned, following its release of the 401(k) Mutual Fund Fee Disclosure Rule in 2012, that it's not about low fees, it's about the value in relation to the fee (see “When Must a Fiduciary Say “No” to No-Fee Funds?” FiduciaryNews.com, October 4, 2018).

It's not that there's anything necessarily wrong with no-fee funds. After all, there's nothing necessarily wrong with a free car, either. You can always inspect it before you take ownership to make sure you won't be hit with high maintenance bills in the near term.

Aye, there's the rub with these no-fee funds. They're an experiment. There's no way to “inspect” them because they have no track record. And we're not talking merely about “past performance” – we're speaking to the entire business model.

All things being the same, lower fees are better than higher fees. But there's that tricky clause “all things being the same.” That's what the DOL was referring to when it mentioned “value.”

This is easy when “all things are the same,” when all you have are apples to choose from. What makes these apples-to-apples comparisons so difficult are all those oranges out there in the real world.

No-fee funds are a new phenomenon. They are specifically positioned as “loss leaders,” meaning the intent of the sponsoring company is to upsell investors once they have placed their cash in “free” funds. Again, this doesn't make no-fee funds wrong, it just means investors must maintain the discipline to continually insure they aren't buying those upsold products for reasons other than their best interests.

And this is why fiduciary liability doesn't disappear just because the fee does.

Instant Insights /

'No fee' doesn't mean no liability – Carosa

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