What’s next for the DOL when it starts investigating defined contribution (DC) plans? According to an advisor in Troy Michigan, it could be participant fee equalization. In 2014, the DOL recovered $600 million in direct reimbursements based on almost 4000 civil investigations – most common areas of investigation are fees and operational issues. But fee equalization could be next and may even rise to the level of a fiduciary issue.
So what’s participant fee equalization? Just because an employer sponsoring a DC plan does not write a check, it does not mean that the advisor, record keeper, TPA and money managers are providing their services for free. Even if a check is written, it rarely covers the entire amount. So who’s paying and how? Participants pay service providers through excess fees imbedded in their investments know as revenue sharing. More technically, they are called 12(b)(1) and sub-TA (Transfer Agency) fees. Certain share classes of the exact same fund have different revenue sharing – larger plans because of their buying power get better deals.
So what’s the problem? All revenue sharing for all money managers is not the same. Generally, index funds like Vanguard pay little or no revenue sharing fees to keep costs down which means that some participants pay more than others not based on the size of their account but based on their investment their select. That doesn’t seem fair, does it?
Solutions:
- Select all funds that have the exact same revenue sharing which is not practical because the lack of uniformity would limit investment choices.
- Select funds that have no revenue sharing and then charge each participant an equal amount to pay costs of running a plan – again, limited investment choice and the record keeper must have the technology to charge each participant accordingly.
- Use funds with different revenue sharing and charge those participants that pay less revenue sharing and reimburse those that pay more – comes down to record keeping technology.
Above and beyond fair, it could be a fiduciary issue. What if plan trustees and fiduciaries just happen to have index funds that pay less than their fair share of revenue sharing through no bad intentions? These fiduciaries have set up a situation where the rank and file basically subsidizes the cost of the plan which will have an impact on retirement income and account balance. Do you think that the DOL would take intent into consideration?
