September 7, 2012 (PLANSPONSOR.com) - Do you really know how your
broker/dealer makes money? If not, it’s time to learn before a Department of
Labor (DOL) investigator knocks at your door.
Plan sponsors and advisers should be well-informed of broker/dealers’
compensation, particularly because of 408(b)(2) fee disclosure, which one
source says is prompting more DOL investigations.
For example, 12b-1 fees a broker/dealer receives should be disclosed up
front and used for specific purposes or they are prohibited transactions, and
the recent disclosures developed by broker/dealers may not include all
appropriate information. A 12b-1 fee is
paid by a mutual fund out of fund assets to cover certain expenses. This
is why it is vital for sponsors and advisers to research their broker/dealers
and ask important questions regarding their compensation.
The DOL and the Securities and Exchange Commission (SEC) are cracking
down on companies failing to fully disclose 12b-1 fees and revenue-sharing
job just got a lot easier for these investigators [because of 408(b)(2)],”
Jason Roberts, CEO of
Pension Resource Institute and managing partner at Roberts Elliott LLP,
told PLANSPONSOR. With 408(b)(2)
disclosure information, the DOL has essentially “thrown [sponsors] a bone”
because the written disclosure makes it even easier to detect a problem.
Two such cases have come to light in the past
several weeks: An investigation
by the DOL’s Employee Benefits Security
Administration (EBSA) found that Glastonbury, Connecticut-based USI Advisors
made investments in mutual funds on behalf of Employee Retirement Income
Security Act (ERISA)-covered defined benefit plan clients and received 12b-1 fees
from those funds (see “USI Advisors Settles
DOL Suit Over Fees”).
USI Advisors failed to fully disclose
the receipt of the 12b-1 fees, and failed to use those fees for the benefit of
the plans either by directly crediting the amounts to the plans or by
offsetting other fees the plans would be obligated to pay the
On September 6, the SEC instituted a settled
administrative proceeding against two Portland, Oregon-based investment
advisory firms and their owner regarding the failure to disclose a
revenue-sharing agreement and other potential conflicts of interest to clients.