The shift from actively managed mutual funds and collective trusts (CITS) to index funds, especially in defined contribution plans like 401ks and 403bs, seem overwhelming with passive funds now enjoying a greater market share in the top 100 DC plans. It’s a hot topic at many of our TPSU programs where plan sponsors believe that its safer to offer low cost index funds or even required. Lecturers caution plan sponsors at TPSU that while passive funds look good in a bull market, active may be a better choice when the market turns.
The argument is that today, investors look at gross performance of funds including fees to pay advisors as well as administrative costs. Kitces argues that more advisors will be paid directly by investors with more funds using “clean shares” or those that do not include marketing fees (12b1) or administrative fees (sub-transfer agency or sub TA). In addition, as broker dealers limit the funds they can sell, smaller investment shops will die off moving more money into larger groups who can lower fees even further with more assets under management.
The move to “clean shares” or no revenue shares is driven by the DOL fiduciary rule in part because fiduciary advisors must receive level compensation easier to accomplish by charging a wrap fee on assets rather than being imbedded within the cost of the fund. The move to no revenue shares is also being helped by lawsuits against plan sponsors that do not use the lowest cost share class available.
Further, most fund companies have to pay the record keeper a fee for shelf space and to subsidize the cost of administering that plan imbedded within the fund fee hurting gross performance. But many index fund complexes like Vanguard pay little or no fees making them look even cheaper.
These inequities and confusion rife among plan sponsors attending our TPSU programs that are seriously confused about revenue sharing paid to record keepers and advisors out of the fund will be squeezed out the system as a result of the DOL fiduciary rule helping improve results for active managers and leveling the playing field with index funds who looked cheaper, not just because of their management fee, but also because of the lack of or lower revenue sharing fees.
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