Small DC Plans May Need 12b-2 Exemption

August 5, 2010 ( – A key issue in coming months is whether the Securities and Exchange Commission (SEC) exempts small defined contribution plans from its proposed rule about moving assets with 12b-1 fees higher than 25 basis points to a share class without an ongoing sales commission (OSC).

That was a key conclusion of a recent Webinar hosted by Avi Nachmany, Director of Research, and Executive Vice President of Strategic Insight (SI), an Asset International company, discussing the SEC’s 12b-2 proposal (see SEC Proposes Rules on 12b-1 Fees).  

Currently, Nachmany said, the costs of such small DC plans are partly offset by 12b-1 fees and without such revenue, those costs would have to be picked up by sponsors or participants.  “By not providing an exception for DC plans, 12b-2 may result in increased costs and complexity, and reduced access to retirement savings within the small DC plan marketplace,” Nachmany declared.

He pointed out that many small DC plans have no way to keep track of the duration funds have been held so they wouldn’t be able to buy funds with 12b-2’s limited duration OSC provisions.  

Adviser Fiscal Impact  

In other issues, Nachmany said that while the SEC proposal will mean financial advisers would lose about $1.5 billion in fees in seven years, that revenue will likely be replaced. 

He said SI estimated less than $250 billion of fund assets, charging more than 25 basis points in 12b-1 fees that are grandfathered by 12b-2 will convert by late 2017 to a share class without an OSC. That produces the SI estimate of potential FA fee loss, he said.  

But in the coming seven years, Nachmany said FAs will replace such discontinued fees with many new asset-based fee alternatives including through ongoing sales charges among current share classes, as well as new pricing options among their broker-dealers. “It’s not as dramatic as one might fear,” Nachmany said of the potential fiscal impact. 

He noted that the fiscal impact’s estimated seven-year time frame is because the proposed rule would become effective in about September 2017 – after a five-year grandfathering period that begins with a compliance date that, in turn, is 18 months after an expected early 2011 effective date.  

Finally, Nachmany told Webinar attendees, 12b-2 by itself is merely “transitional,” but its effect could be “transformational” depending on how it is ultimately implemented alongside other legal/regulator initiatives such as the Department of Labor’s recent fee disclosure rule release (see Fee Disclosure Is to Ultimately Help Participants Make Informed Choices) and the recent sweeping federal financial services reform legislation (see Financial Reform Measure Includes Compliance Provisions).  

The 12b-2 proposal is at More information about SI is at