Watch Those Fees!

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.”