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Can Funds With 12b-1 Fees Still Work in Retirement Plans?

Some experts say taking the 12b-1 approach can result in lower net fees, while others call for an end to the method for paying investment provider fees and expenses. 

By Lee Barney editors@plansponsor.com | November 04, 2016
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Some experts believe retirement plan sponsors shouldn’t offer any 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 with these fees to those without—and to decide which fits best for their participants’ individual circumstances.

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

The trend towards the levelizing of compensation, combined with the 2012 fee disclosure rules and the pending fiduciary rule make a strong case for why plan sponsors should not offer funds with 12b-1 fees, believes Chad Parks, CEO and founder of Ubiquity Retirement and Savings in San Francisco. “Adviser fees should be known and signed off contractually, not paid through the mutual fund,” Parks says. “Third-party administrator and recordkeeping fees should also be known and negotiated as hard-dollar costs. I see no reason why a plan sponsor would use a 12b-1 fee.”

Eric Endress, vice president and senior investment consultant at CBIZ Retirement Services in Cleveland, agrees. Even prior to the Department of Labor’s (DOL’s) 2012 fee disclosure rules, there was a trend among retirement plans to move towards funds with institutional share classes with no revenue-sharing, he says. “We are seeing a best practice among our clients to move to all institutional share classes and add on the fees for outside services such as recordkeeping and advisory services separately, so that there is clear transparency to the participants,” Endress says.

Brian Menickella, managing partner and head of the financial services division at The Beacon Group of Companies in King of Prussia, Pennsylvania, is adamantly opposed to retirement plans using funds with 12b-1 fees. “The current system under fire by the Department of Labor and its fiduciary rule is a system created by the broker/dealer establishment to disguise how and how much they get paid,” Menickella says. “There is no reason for revenue sharing. There are simpler methods for 401(k) plans to display costs as line items for every vendor. If, following the fiduciary rule, a plan sponsor elects to work with a broker/dealer on a commission-based 12b-1 revenue-sharing platform under a best interest contract (BIC) exemption, they face additional risks from the DOL.”

NEXT: When 12b-1 fees actually result in lower costs

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