While many experts advise that advisors and 401k/403b plan sponsors move beyond the “Triple Fs” (fees, funds and fiduciary) to focus on outcomes and participant readiness, legal expert and pundit Ary Rosenbaum predicts that the three Fs will have a profound effect on defined contribution (DC) plans like 401k and 403bs cautioning that plans that ignore them will suffer dire consequences.
So what issues will dominate the future and where are the landmines according to Rosenbaum?
- Fee Disclosure – When the cost of running a DC plan shifted from the plan sponsor to their participants through indirect fees imbedded within the overall cost of investments known as revenue sharing, it became harder for plan sponsors to know exactly how much was being paid. Which led to excessive fees with no one monitoring them. Which led to DOL fee disclosure rules 408b2 and 404a5 in 2012. Except that some providers took the opportunity to obfuscate their fees through complicated discloses written in 7-point type Chinese braille. And even if you could decipher them, you still need to compare or benchmark fees. The DOL promises to help with a summary format rules, but most plans need an expert like their advisor to benchmark fees comparing them to services received by similarly situated plans. Which raises the question of who will benchmark the advisor’s fees. More to come.
- Definition of Fiduciary – After the DOL finished with fee disclosure rules, they set their sights on advisors and potential conflicts of interest redefining and expanding who will be considered a fiduciary. Plan sponsors will have more liability as a result in the selection and monitoring of advisors providing advice to participants potentially getting dragged into lawsuits.
- Small Plan Lawsuits – Before 2006, skeptics argued that the threat of lawsuits was spurious until they happened. Before 2016, these same skeptics said that only large plans were at risk. With the recent excessive fee case filed against a $9 million plan in Minnesota and the new DOL rule, lawsuits are and will be the new reality for small DC plans.
- Revenue Sharing – Fees used to subsidize plan costs imbedded with fund expenses are called revenue sharing which can lead to confusion, higher fees and lawsuits. Rosenblum argues that the demise of revenue sharing is likely and welcomed.
- Share Classes – It makes sense that larger plans pay lower fees. But who understands the complicated alphabet soup of share classes which include, but are not limited to, A/B/C shares along with six classes of retirement specific share classes from R1-6 not to mention institutional funds. Seriously?
So while outcomes and plan success are the reason to have a retirement plan, forget the Triple Fs at your peril. Fees, funds and fiduciary.
