12b-1 Fees Will Not Go Way of Dinosaur

February 26, 2004 (PLANSPONSOR.com)—Orlando, Florida—Even if 12b-1 fees are eliminated, the money will still be paid out to brokers and recordkeepers, although payments might take place under a different name, said Fred Reish, a partner at the law firm Reish Luftman Reicher & Cohen, specializing in employee benefits.

At the recent American Society of Pension Actuaries (ASPA) 401(k) Sales Summit in Orlando, Florida, Reish said that 12b-1s are a result of enormous contractual commitments, and that ” there is no choice but for the money to continue.”     He said “the costs will not go away, ” because the system has to adequately compensate the workers receiving the fees.

Gail Weiss, president of Gail Weiss & Associates, Inc., a provider of   services and software to financial services companies worldwide, explained that there is a need for regulators to distinguish between the sales related compensation from fund companies and service related compensation.  Furthermore, Weiss said that fees received for service should not be looked at negatively by regulators, but should be protected.

“The Securities and Exchange Commission (SEC) is encouraging fund companies to disclose fees, but their inclination towards 12b-1 fees is negative, and they treat it like a commission based charge,” said Janice Morris-Hatch, a partner for operations at Fidelity Ventures.

Matt Gnabasik, managing director of the retirement practice at Blue Prairie Group, a human resources consulting firm, agreed with others, saying, “12b-1s may go away, but the money needs to be there to make the system work.”

Instead of eliminating the fees, says Gnabasik, there will be an increased focus on transparency, with which Reish concurred, adding that full disclosure is very healthy, and very protective and will help everyone.

Brian Graff, executive director of ASPA, said that generally the fees are appropriate, and that the rules put forth through ERISA are there to protect plan participants from exorbitant and unnecessary fees.   Graff agreed with Gnabasik and Reish’s opinion, saying that from ASPA’s perspective the key is disclosure, rather than increased fee regulation.  However, he also anticipates that much education will be needed before people are able to fully understand the fees.

12b-1 fees are paid by a mutual fund to a broker or recordkeepers out of the fund’s assets to cover distribution expenses such as advertising and marketing the funds to new investors, as well as paying for shareholder service expenses.  Previously, the Senate committee testified that 12b-1 fees have been a “bonanza” for brokers and advisors but haven’t lowered shareholder fund costs as they were originally intended (see   Senate Panel Convenes to Discuss Fund Fees).