As the Department of Labor puts pressure on advisers to make 401(k) fees more transparent, some financial advisers are refunding fees to participants that they are being paid from mutual fund companies.
CHICAGO — As the Department of Labor puts pressure on advisers to make 401(k) fees more transparent, some financial advisers are refunding fees to participants that they are being paid from mutual fund companies.
The Labor Department plans to take a three-pronged approach to improved fee disclosure. First, it will require plan sponsors to disclose indirect compensation to the government. Second, it will require service providers, such as advisers, to disclose indirect compensation to plan sponsors.
Finally, it will mandate disclosure of indirect compensation to plan participants.
Industry insiders worry that these initiatives will force advisers to complete mounds of paperwork that will be ignored by plan participants.
“It’s going to require a lot of information be tracked and disclosed that’s not being tracked consistently and disclosed consistently,” said Ellen Goodwin, a former Labor Department lawyer who now works for Washington-based Groom Law Group. “There’s a real question of whether participants will be able to understand, or make better investment choices, based on this mountain of information.”
A Labor Department official said that the disclosure forms are meant to offer more information to participants and plan sponsors.
“The important thing is: The plan fiduciary has to be aware of all compensation that’s coming to their service provider as a result of services to the plan,” the official said.
Advisers say they have anticipated strict guidelines from the Labor Department and that is why they have begun to offer more disclosure or to return mutual fund fees to participants.
But it is important that participants and plan sponsors understand the fee disclosure, said John Moynihan, president of Diversified Financial Advisors in St. Louis.
“My concern is that the government will have [disclosure pages that are] four, five or six pages long, and people don’t have the appetite or patience to read a detailed explanation,” he said.
Right now, Mr. Moynihan’s firm offers a one-page fee disclosure form that all participants must sign and acknowledge they have read.
Paucity of platforms
He has been giving back mutual fund fees to participants for some time, but it has been a nightmare to find companies with platforms that allow advisers to complete this task, he said.
In a 401(k) plan, participants who invest in certain funds are charged marketing fees and other types of fees that can reduce the portfolio’s returns. Many of these fees typically go to advisers, but if they charge fees to handle a 401(k) plan and act as a fiduciary to the plan, they can’t also accept these commission fees.
Rebating these fees to the participants is complicated, because not all mutual fund companies pay these fees. In an open-architecture plan, one participant may be invested in a fund that charges these fees, and another participant may have their money invested in a fund that doesn’t charge these fees.
Some advisers refund those fees to the plan to pay for the administrative costs. However, some say that doesn’t seem fair, because not all funds have these fees, and some participants are ultimately paying more for the administrative costs of the plan.
Mr. Moynihan is refunding the money directly to the participants but said it was hard to find a company that had the technology to perform this task.
“There aren’t more than a handful who do this,” he said. Ultimately, Mr. Moynihan chose a small company, ePlan Services Inc. of Denver.
“We were reluctant to go with ePlan, because they’re a smaller vendor,” he said. “But these larger platforms simply can’t be flexible enough for you.”
Mr. Moynihan thinks that as the Labor Department goes forward with its initiatives, this will force other advisers and companies to offer more disclosure about these fees.
Perhaps an easier solution would be to ask the mutual fund company to simply not charge these fees, said Ed Ferrigno, vice president of the Profit Sharing/ 401(k) Council of America in Chicago.
“The easiest way to drive it back home to the individual accounts is not charge them in the first place,” he said. “But it’s probably not that simple.”
A big problem with fee disclosure is that software isn’t available to support it, said Mark Gutrich, president and chief executive of ePlan Services Inc.
“Most systems weren’t built with this system in mind to track finders’ fees,” he said.
As pressure from the Labor Department mounts, Mr. Gutrich thinks this will force advisers to outline all of the fees included in the 401(k) plan. “
The [Labor Department] is really pushing hard for fee transparency,” he said.
Regardless, some advisers will have a hard time disclosing or giving up these commission fees, particularly the 12(b)-1 fees, said Rick Meigs, president and founder of 401khelpcenter.com LLC in Portland, Ore.
“In the past, [consultants and advisers] have always picked up the 12(b)-1 fees, and they’d always routed their plans to those who pay good 12(b)-1 fees. That’s the way it’s always been in the past,” Mr. Meigs said.
