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UpFront | Published in December 2016

When Can 12b 1 Fees Still Be Used?

Plan sponsors have a duty to compare funds having these fees with those not having them

By Lee Barney | December 2016
Some experts believe retirement plan sponsors should offer no mutual funds with 12b-1 revenue-sharing fees in their investment lineups. On the other hand, other experts maintain that by crediting revenue back to the plan, funds with 12b-1 fees can actually cost less than those without such fees.

In either case, given their strict fiduciary responsibility, defined contribution (DC) plan sponsors have a duty to compare funds having these fees with those not having them—and to decide which best suit their participants’ individual circumstances.

According to data from the Investment Company Institute (ICI), retirement plans have been moving away from funds with 12b-1 fees: In 2015, 16% of 401(k) mutual fund assets had the fees, down from 26% in 2010.

Rick Skelly, client executive at Barney & Barney, encourages plan sponsors to work with experts who can help document the comparison of share classes with 12b-1 fees against those without.

Whatever choice a plan sponsor goes with, robust documentation and proof of deliberation will be essential in responding to a Department of Labor (DOL) or Internal Revenue Service (IRS) audit, or even to an employee lawsuit.

“Not every fund will be net lower cost, even with favorably structured 12b-1 fees. Some will be the same, but we believe few, if any, would be higher,” Skelly says. “Each fund share class has to be looked at independently of the others to determine which is the most efficient pricing option for a given plan population.”

Subsidizing small retirement plans with $10 million of assets or less through 12b-1 fees can also make sense, says Fred Reish, a partner with Drinker Biddle & Reath LLP. “The recordkeeper can collect the 12b-1 fees and sub-transfer agency fees to pay for the recordkeeping and compliance costs. Then, any money left over could be paid into an expense recapture account and used to pay a level fee to the plan’s adviser,” Reish says.

Retirement plans have been moving away from funds with 12b-1 fees

In 2010
26%
of 401(k) mutual
fund assets had
12b-1 fees
Down to
16%
in 2015
Source: Investment Company Institute

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