The “Next Big Idea” in Retirement Plans:

Most Plan Sponsors are not aware of the disparity in Plan options and fees between Large 401(k) Plans (over $100 million dollars in Plan assets) and Smaller 401(k) Plans (under $100 million dollars in Plan assets, 99% of all audited 401(k) Plans1) over the last three decades. 

Large Plans have been able to provide a Retirement Plan to their participants that offers the full universe of fund options at the lowest, or “cost”, pricing. That is because Large Plans have had access to Institutional Share Class mutual funds. 

BETTER FUNDS = BETTER RETURNS.  So, the Larger Plans have had access to better funds and lower costs, with better returns.

While Large Plans have been reaping these rewards, Smaller Plans have been stuck in the “revenue sharing model” of the 1990s. 

While this model worked, the only funds these Plans had access to were those funds with built-in 12(b)(1)  &  Sub Transfer-Agent (Sub TA’s) fees (“Fees”). These Fees went to compensate the investment companies, custodians, record keepers and advisors for offering (or distributing) a product on their platform or for performing certain administrative services.

By limiting the fund selection to mutual funds that fit into the Fees category, Smaller Plans do not necessarily have access to the “best of the best” funds!

And, to add insult to injury, selecting mutual funds based on their Fees has opened Plan Fiduciaries up to liability…

The SEC is going after 12b-1 fees. The DOL is questioning revenue sharing.…  class action attorneys are winning cases against Plan Sponsors exposed to these “backdoor payments”. Could it be, after years of warnings, we are finally about to witness the fall of the house of 12b-1? Will revenue sharing go the way of the dinosaur? More importantly, will the fossils they leave behind be fraught with fiduciary liability that 401(k) Plan Sponsors will continue to pay for years from now?

The wide use of 12b-1 fee compensation models in the early years (at one time nearly every 401(k) Plan contained 12b-1 Plan mutual funds in their investment menu) could in part be attributed to aggressive marketing by certain sectors of the financial services community.  A vast majority of the Plans that were sold to Plan Sponsors were sold by brokers who could only accept commissions. They were not registered as an RIA. There brokers needed to get paid and commissions/12b-1 fees were the only option.

So popular were 12b-1 fees and revenue sharing as a way to eliminate direct billing, that even non-investment related services took advantage of them. “12b-1 fees were once necessary in the 1990’s  to create a compensation incentive for recordkeeping vendors to offer non-proprietary mutual funds onto their recordkeeping platforms. But use morphed into abuse, to the point where it’s not unusual to hear cynical comments regarding 12b-1 fees from anyone, even financial professionals.” Paul Ruedi, a financial advisor, says. “12b-1 fees allowed the company owners to let their golfing buddies take advantage of the working folks, passing the costs (all or most) onto the backs of the workers.”

There is a growing consensus that states that no matter their original attributes, 12b-1 fees should be relegated to the 401(k) history museum.  

“12b(b)(1) fees have outlived their usefulness and the time has come to eliminate 12b-1 fees and revenue sharing and go with a system that is more transparent, regardless of plan size.”2

This is what we have done across the board for all of our clients.  We rolled up our sleeves, brainstormed with our internal advisors, met with our vendor partners, and in September, 2014, rolled out an Institutional Fund Program to our entire client base, including our Smaller Plans.  This concept is so advanced, it’s simple.  Not only are our Plans now offering the ‘best of the best’ investments such as Vanguard, Fidelity, T. Rowe Price, and Dodge & Cox, regardless of their plans assets, we have done away with 12(b)(1) fees/Sub TA/revenue sharing and the investments are offered at “cost” to the Plan Participants.  Better investments, better plan operation, less fiduciary risk.  



Let us show you how we can provide this program to your Plan!



[1]The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2013
[2]Excerpt from: 12b-1 Fees/Revenue Sharing Add to 401k Plan Sponsor Fiduciary Liability Woes, By Christopher Carosa, CTFA

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