The United States Department of Labor is determined to issue a new fee-disclosure rule by year-end that will require mutual fund companies and retirement plan service providers that pay revenue sharing–which includes 12b-1 fees, finder fees, or other expenses–to disclose the amount they are paying and to whom.

For some time now, DOL has been making a big push to get fund companies and retirement service providers to come clean on the total fees they’re charging to retirement plan sponsors. Fed up with the fact that no firms seem to be voluntarily complying with its request to do so, the DOL’s new rule amending 408(b)(2) of ERISA will leave them no choice. Meanwhile, the Society of Professional Administrators and Recordkeepers (SPARK), an inter-industry trade association of investment managers and service providers, particularly in the defined contribution plan market, is pushing to ensure that DOL’s new rules under 408(b)(2) mirror the new disclosure reporting rules for Form 5500. Come January, new disclosure rules will take effect for Form 5500, which is the summary form detailing a plan’s fees, its providers, and so on, that qualified plans must file with DOL.

The new fee disclosure rules couldn’t come at a better time, as a slew of lawsuits have been filed recently against large companies’ 401(k) plans claiming they charged excessive fees and expenses. The complaints–class-action lawsuits filed by a single law firm in courts across the country–were filed on September 11 against the companies as well as the officers of those companies and members of their 401(k) plan committees, according to Joe Faucher, an attorney with Reish Luftman Reicher & Cohen in Los Angeles, writing in the firm’s most recent newsletter. The companies sued include International Paper, Lockheed Martin, Bechtel, and Caterpillar. Faucher warns, however, that “it’s reasonable to assume that a wave of ‘copycat’ litigation may hit small- to mid-market employers as well.” Advisors and service providers may also find themselves being sued in these cases, too. He counsels plan fiduciaries–which includes advisors–to obtain a written report detailing what fees, expenses, and revenue-sharing arrangements are associated with the plans they oversee. Once the report is obtained, he says, the plan fiduciaries should compare fees and expenses charged by other providers.

This is precisely the type of comparison reporting that advisors can generate from Invest n Retire’s new advisor portal, notes Darwin Abrahamson, founder and CEO of the Portland, Oregon-based firm, which offers a range of low-cost ETFs and provides technology tools and services to retirement plans. Launched six months ago, the advisor portal, called TandemModels, allows advisors to build asset allocation models for the retirement plans for which they act as fiduciaries. Through the portal, advisors can also perform a fee-comparison proposal, which shows “the trustees/fiduciaries exactly what the total fees are with their current provider and investment options,” Abrahamson says. This report will also show all revenue-sharing fees and all short-term redemption fees on the funds being used.

Choosing Options, Managing Models

Through the portal, advisors can build from three to eight models, which they can name themselves, and can also include the investment options that Invest n Retire offers as options in their models. Invest n Retire offers ETFs from Barclays, Vanguard, and Nasdaq, as well as Select Sector SPDRs, and institutional funds from Dimensional Fund Advisors.

After creating the models, advisors can also print out reports detailing the risk/reward characteristics of their models. Invest n Retire also updates all of the performance information in advisors’ models every quarter which, Abrahamson, points out enables “advisors to use the performance information reports for marketing purposes–for instance, to show prospective plan sponsors their models, and how they have performed on a weighted average against the indexes.” What’s more, once the plan is set up, advisors can give plan fiduciaries a quarterly report that shows how their models are performing.

Abrahamsom claims advisors who use the portal “can’t believe how simple” the portal is compared to other products they’ve used to build asset allocation models. Paul Goodworth’s planning firm is one of the 75 advisory firms that are using TandemModels. He likes creating models through the portal because it gives him an idea how much he can save the participant and the plan sponsor. Using TandemModels is “an objective way of looking at all of the costs,” Goodworth argues, “and an educational tool for us to go into the plan sponsors and educate them on what the fees are so they can make good decisions on what platform to use.”

Advisors also have the option of exporting the models they’ve built on TandemModels directly into Morningstar’s Principia software so they can see the more detailed reporting that Morningstar performs on the funds included in the models or on the models themselves. Advisors who mention Invest n Retire to the Morningstar sales staff receive a 15% discount on Principia and Morningstar’s DC software. The DC software allows “advisors to show if the current assets in a plan are diversified across all of the style boxes [that are required] to build a proper asset allocation,” Abrahamson says. The software will also show specific fund information like fees, style drift, and turnover. The DC software is a “good way for advisors to use Morningstar data to show a poor investment selection on an existing plan.”

Bob Louis, and attorney with Saul Ewing LLP in Philadelphia, knows first hand what it’s like to be snookered by high fees and expenses. He’s in charge of his firm’s pension plan, and is the first to admit that neither he–nor his colleagues–kept a close enough eye on the fees they were being charged. “We discovered we had been paying a lot of money in revenue sharing to our plan administrator,” he says. “Since we were also paying a fee for the work they were doing, they were really getting far more money for the work and not really earning it.” After hearing about the spate of recent lawsuits–and having a conversation with Abrahamson–Louis and his firm woke up to the fact that it was time to make a change. His firm promptly began to search for a new administrator, and landed one “that will charge us nothing for the administration. They’re getting all of their compensation from the revenue sharing, part of which they are sharing with us.”

Records and Calculators

Invest n Retire also offers a retirement calculator that can be accessed directly by plan participants. Participants “tell us what age they want to retire, the percentage of their income they want at retirement, and we tell them how much they’ll have to contribute and the rate of return they’ll need to earn to [secure] that retirement income,” Abrahamson says. “Then we match that up with the proper asset allocation model and put the participant in that model.”

In the third quarter, Invest n Retire will also unveil a revamped recordkeeping system. Abrahamson says the updated system is set up to comply with changes enacted in the Pension Protection Act of 2006. Under the Act, DOL has “blessed” what Invest n Retire has been calling its default asset allocation models by creating a safe harbor with what DOL calls the Qualified Default Investment Alternative (QDIA), stating that fiduciaries to the plan are no longer responsible for the performance of the QDIAs. “If plan sponsors select the proper QDIA, they are not liable for the performance of the investment options in the QDIA,” Abrahamson notes.

On the issue of default options, Abrahamson warns that advisors must be wary of using ETFs as default options in 401(k) plans because the majority of the ETFs out there are expensive.


Of ETFs and Lifecycles

Advisors should closely examine the fee structures of default retirement plan investments like ETFs and lifecycle funds, warns Invest n Retire CEO Darwin Abrahamson.

He notes, for instance, that lifecycle funds–also known as target date or lifestyle funds–often include ETFs as underlying investments, so it’s imperative that advisors examine the ETFs’ fees. Another problem, he says, is that some lifecycle funds only include as few as four funds, “so they’re not well-diversified.” The mutual fund companies “that are coming out with the target date funds see it as big profit center,” he says. “The only [target date fund] that I know of that’s not adding a fund management fee on top of the underlying funds is Fidelity.”

Invest n Retire’s average ETF portfolio charges about 25 basis points. Invest n Retire can offer such low expenses, Abrahamson says, because its software allows participants to invest directly in the ETFs. “We’re purchasing the ETFs themselves through our software, and [participants] are owning the ETFs; we’re not adding any additional expenses for the participants or advisor.”