That would include revenue sharing and eliminating SEC Rule 12b-1, which the Senators said has been a “bonanza for brokers and advisors but has not succeeded in lowering fund costs for shareholders.” This week, we asked readers what they thought new legislation might bring.
The most common response, roughly a third ( 31.8% ) of this week’s respondents, was an opinion that the legislation would cause fees to rise in other areas, including the reader who said, “If you change the money (12b-1) in the retirement plan equation, then either services will drop (unlikely) or sponsors will need to pay more. Today the participants are bearing some of the cost of the plan when fees are deducted from the funds. If these aren’t available to pay recordkeeping costs or for the cost of enrollment meetings, who is left to pay? The plan sponsor? Good guess.Washingtonlegislators always think they have a better answer. Unfortunately, in this instance, it could mean the ability to sponsor a plan may be out of the reach of some employers.”
Still, 9% said it was time to eliminate 12b-1 fees, and nearly one in five ( 19.7% ) said it was past time to do so. Among the latter group was the reader who observed, “I know exactly what I’m paying in fees, hate every bit of it, and do all I can to avoid them. If the Senators can get rid of this one, more power to them.” However, another reader who thought it was time to do away with them said, “It is not the responsibility of our politicians to protect us from stupidity. If plan sponsors (except for very small plans) are paying 12b-1 fees, they are not fulfilling their fiduciary responsibility.”
Roughly 18% saw it all as an election ploy, and 10.6% said it was a misguided attempt, including the reader who called it “…a typical knee jerk reaction from bureaucrats who have little real work experience, and even less financial services knowledge. This will make matters worse.”
Only about 7% thought the elimination was not an issue, and 6% opted for “other,” usually some version of multiple impacts, unintended results, or, as this reader said, “disclosure … many sponsors receive valuable services for the 12b-1 fees such as investment policy development and maintenance, quarterly investment reports and trustee meetings, and annual or semi-annual enrollment meetings and investment education meetings.” More common were responses like the reader who said, “Yes, it is (c) a law that will cause fees to increase in other areas, which makes it (d) a misguided attempt, and, as with so much already in 2004, it is (e) a political ploy in an election year. For our participants it appears to be f) not an issue, and it definitely is (g) time I figured out how much we’re paying in 12b-1s.” …before going on to admit, “I don’t know how you are going to score this answer.”
This week’s Editor’s Choice was, however, a call for clarity: “What is really needed are reforms demanding full disclosure of all costs for all investment products used in a retirement platform – mutual funds, collective Trust funds, group annuity products. A Plan Sponsor should not have to be a super-detective to understand the fee structure of his plan.”
Thanks to everyone who participated in our survey!
Are these the same legislators who think that there is not enough advice for investors? Are these the same legislators who are concerned about short term trading? Investors need ongoing advice which may be a buy and hold strategy. Financial representatives should be able to be compensated for their services. If the compensation turns into strictly a front-end load, I believe that it will increase the potential conflict of interest by forcing financial representatives to recommend active trading strategies. That said, the answer is c. The market place would most like respond by simply charging the same fee in another manner. Quality financial representatives interested in providing sound, long term advice free from conflict will simply charge a wrap fee. Another potential impact is on plan recordkeeping fees if there is revenue sharing from 12b-1's. Plan recordkeepers will simply increase their fees proportionally. Again, the answer is c.
(i) disclosure ... many sponsors receive valuable services for the 12b-1 fees such as investment policy development and maintenance, quarterly investment reports and trustee meetings, and annual or semi-annual enrollment meetings and investment education meetings.
If you change the money (12b-1) in the retirement plan equation, then either services will drop (unlikely) or sponsors will need to pay more. Today the participants are bearing some of the cost of the plan when fees are deducted from the funds. If these aren't available to pay recordkeeping costs or for the cost of enrollment meetings, who is left to pay? The plan sponsor? Good guess. Washington legislators always think they have a better answer. Unfortunately, in this instance, it could mean the ability to sponsor a plan may be out of the reach of some employers.
(f) Not an issue. We can still comparison shop, so not an issue
I think the bill is c, d and e.
These days, the 12(b) 1 is payment for fund distribution primarily, esp. for companies that do not have a sales force to distribute its funds. Brokers would need to be paid in some other way if there were no 12(b) 1 fees. It is interesting that the cost of 12(b) 1 payments is far less expensive than the loads (back-end and front-end) that are charged for these same funds.
I think there are a lot of factors that have led to increased costs in mutual funds, particularly distribution expenses to brokers and TPAs. As bad as the situation seems, I think it is much better with mutual funds than with insurance products used for retirement plans, but I don't hear anyone talking about that yet.
B. we have long needed a can of "12b-1 B Gone"
Remember the law of unintended consequences... almost anytime the government starts a program to reduce or fix something it only increases the something or breaks it even worse. I have yet to see, outside of military situations, a case where the government did something better and more efficiently than it could be done in private industry.
D a misguided attempt, a typical knee jerk reaction from bureaucrats who have little real work experience, and even less financial services knowledge. This will make matters worse.
As a retirement consultant I am all for reforms that allow Plan Sponsors to really see what they are paying for the value of services they receive, but focusing only on the 12b-1 fees is somewhat naive as there are so many layers of fees, (i.e.. sub-advisory, trading, soft dollar arrangements, asset based wraps, fees that pay for the buildings housing the fund family, administrative offsets to bundled providers) many of which are much more egregious than the 12b-1. What is really needed are reforms demanding full disclosure of all costs for all investment products used in a retirement platform - mutual funds, collective Trust funds, group annuity products. A Plan Sponsor should not have to be a super-detective to understand the fee structure of his plan.
B. I know exactly what I'm paying in fees, hate every bit of it, and do all I can to avoid them. If the Senators can get rid of this one, more power to them.
There are so many good answers to this question - Yes it is (c) a law that will cause fees to increase in other areas, which makes it (d) a misguided attempt, and, as with so much already in 2004, it is (e) a political ploy in an election year.
For our participants it appears to be f) not an issue,
And it definitely is (g) time I figured out how much we're paying in 12b-1s.
I don't know how you are going to score this answer.
Having been on both sides of the 12-b1 thing, I think we should get rid of them. There was no good way for our department to calculate them and we didn't get the benefit to our bottom line (sales took credit for them), so they were looked upon as sort of a 'bonus' whenever they showed up.
My answer to your question on the repeal of the 12b-1 Fees is: C: a law that will cause fees to increase in other areas.
As you know, many providers provide the PERCEPTION that their fees to ER's and EE's are lower than others, but the reason for that is the provider is getting some or all of the 12b-1 fees back from the funds as a 'distribution' fee. (I'm not naming any names, but my prior ER was set up that way).
I have very mixed feelings about all this:
1. Everyone in business is allowed to make a profit -- that's what capitalism is all about! It's just a question of HOW MUCH of a profit?
2. At the same time, those people who are supporting the business should not be taken advantage of.
What's the appropriate amount of fees to pay when one invests their money? Should it be dependent upon the returns they receive? Perhaps a percentage of a point for every percent of return?
How much should Mutual Funds charge for their services? Their knowledge? Their liability?
All very tough questions.
I believe the funds need to make a profit...but not to the extent of gouging the participants. I don't know what the correct answer is. I do know that if the 12b-1 fees are removed, the powers that be will be squeezing the balloon somewhere else! They may not be called 12b-1's, but we will still see some form of fee.
What an interesting dilemma for sponsors. It's all about market timing anyway. We want participants more savvy but that will only lead to more market timing. What have we created......?
RE: 12b-1 or not 12b-1? That is the question. Answer: B
My answer is (b), past time to get rid of 12(b) 1 fees. And I would have said that back when I was a stockbroker. The Street has to be cleaned up before what is left of its credibility is lost.
In my view, totally eliminating the fee is not the right fix. Instead, the fee should be fund-specific. First, there may be legitimate marketing and performance update costs that help spark interest in the fund, which ultimately could lead to a lower expense ratio. Second, the broker of record looks for some form of payment (but 25 basis points is far too high, given the precious little ongoing service the broker provides). At least the 12(b) 1 fee is identifiable, as opposed to some unidentifiable/more questionable payment.
However, these and related administrative costs can be quantified in a budget such that the typical fee can be far less than 25-35 basis points. Further, when the fund is closed to new clients, the advertising part of the fee should be required to be eliminated from the budget. In my experience, when the broker of record gives way to a non-broker financial advisor, the broker's payment should also be immediately eliminated. This has been an intractable problem leading to a broker being paid long after he has ceased to be involved.
In 1986 I was researching mutual funds, and 12b1 came to my attention, having to do with some Prudential bond funds I believe.
The theory of course is that the manager takes a little from the shareholder in order to make the fund bigger and in the future take advantage of economies of scale, blah blah. However, none of this has happened. I have not researched it lately, but the last time I looked, costs to fund holders have climbed steadily upward, notwithstanding many funds reaching the sweet spot for costs. So the shareholders have not benefited from this at all.
The other curious thing is that the fund managers have not gained from it, either. Again, last time I looked, which was a while ago, the profit margins of the public management companies were not rising. What is coming in from the shareholders is being paid out to intermediaries. I don't know if that means big intermediaries, who shake down the willing fund companies, or smaller intermediaries like banks etc, with whom the funds are trying to extend their reach. More likely than not it all accrues to the big brokers.
So-- I think 12b1 is a scam; I thought it was a scam in 1986 when I first learned of it, and it is worse now because of the betrayal of the economies of scale idea.
I think you have it right on more than one of the multiple choices this week.
a) It is time to eliminate 12b-1 fees. Rather than separate them, report all costs of the fund so an informed investor can make a reasonable investment decision. Why should sales cost be any different than any other expense?
c) It will cause other fees to rise. It is like pushing down on one end of the inner tube, it just bulges out the other side. Honest funds will just reclassify the expenses and report them in the "load".
e) An election year ploy? It is, after all, an election year.
i) Something else: an honest effort to give investors a fair shake or at least a start.
Once again, members of congress want to regulate securities laws without looking at the impact that it will have on the retirement industry in detail. I believe there is a real benefit to revenue sharing arrangements made with the mutual fund companies the benefit plan sponsors in reducing plan expenses. So this is another misguided attempt at congress trying to regulate something it knows nothing about.
If 12b-1 fees are eliminated, especially in 401k plans, the participants will wind up picking up more fees in other areas.
You asked your readership to weigh in on the latest 12-b-1 discussion, so, here you go:
1. Does anyone find it curious that NO ONE raised this issue when the markets were performing?
2. Which seemingly confirms my cynical conclusion that this latest move is purely a political ploy and
3. Will undoubtedly result in an increase in other fees.
Senator Fitzgerald...and by the way is he up for re-election...."by making it easier for consumers to compare funds....." Does the distinguished Senator from Illinois know that there are (roughly) thirteen thousand plus mutual funds available and that the consumer...wrapped up in work related and family related issues....has neither the desire nor the education nor the time to compare mutual funds?
The 12-b-1 fee is clearly disclosed and not, as Senator Fitzgerald asserts "obscure..."
In the prospectus I am reviewing (Oppenheimer Global) the 12-b-1 fees charged by share class can clearly be found on page 7.
If these three Senators with apparently nothing else to concern them....like unemployment, taxes, or the environment, would simply review the charges by share class, their course of action would be clear.
12-b-1 fees are the highest in B and C shares (1%) annually versus .23% in A shares
Therefore: eliminate both B and C shares and revert back to a single class (A) for it is only in A shares where expenses are reasonable and the consumer through a letter of intent or rights of accumulation can EVER qualify for a reduced sales charge.
Thank you for allowing me the opportunity to vent my spleen.
12b-1 fees are simply one component part of the total fee and expense structure. As long as all costs are properly disclosed, then the buyer can decide for himself of herself whether the total costs are excessive. The real problem now, as I see it, is with trading costs, which are not clearly disclosed. Of course, one can argue that excessive trading costs simply reduce gains (or increase losses), and so factor into the net return results along with all of the discloses costs. However, investors should be given the information so that they can easily determine how fund performance is affected separately by costs on the one hand, vs. performance of the assets held by the fund, on the other hand.
C, D & E are correct in my opinion.
There is no free lunch. If 12b-1 fees are eliminated new fees would appear. With no 12b-1 fees, advisors would only be paid if investors made changes. That is often not in the best interest of the investor.
I think it is both (c) a law that will cause fees to increase in other areas and (d) a misguided attempt.
12b-1 fees, in my experience, have gone back to the plan by being used by the administrator to fund marketing, education, etc. Surely profit was made by them - I've yet to see a not-for-profit mutual fund ever introduced. If those were taken away, a whole new set of charges would likely pop up on top of the usual administrative charges. Thank you, Senators. Now participants can complain that the fund choices they have are charging too much. . .
It is truly way past time to eliminate 12 b-1 fees, but only if we can foresee, or limit, their replacement costs
Retirement plan providers and brokers (advisors, trust officers and insurance folks included) that do not disclose receipt of these fees will select d or e and loudly proclaim unfairness forcing c. Plan sponsors that have purchased retirement plan services from the aforementioned providers/agents will select g or h and when they get the fee increase letter (if the bill passes) won't understand it.
Retirement plan providers and advisors that disclose all fees and or work as a "fee for service" provider, returning all 12b-1 type fees will select f. Plan sponsors that have purchased retirement plan services from one of these providers may select f, but more likely will still select g or h because the entire subject is way too confusing.
Once again, you've managed to pose a question with multiple right answers. In my view it's clearly a political ploy designed to produce an issue that will interest voters. I also strongly believe that the elimination of 12(b)1's will lead to an increase of other fees. In fact, many of those fees may be of the variety that will require some 'splaining Lucy. Change is inevitable and we can adjust but the product (and cost) we end up with may make us wish for the "good old days".
Interesting quiz on 12b-1 payments. I would have to say that the subject of revenue sharing payments is somewhat of a mess. I think it is understood that profit margins have been shrinking for most retirement plan providers. Elimination of the 12b-1 payments would result in further reduction of income for many of the providers that fail to disclose receipt of those payments. Disclosure is really the heart of this issue. In a perfect world, every provider would fully disclose all fees to clients and potential clients. If this were done, all fees would be fully understood and there would be no need to have any revenue sharing options. The end result would be reduced fund expenses for our clients, with understood and acceptable profit margins for service providers. We are a provider that offers a non-revenue sharing menu with corresponding asset charge as well as a revenue sharing menu with a reduced asset charge. Our fees are same no matter how we slice it. Fortunately, most providers don't fully disclose fees, and that gives us an advantage in the sales process to punch holes through existing arrangements. On the down side, many sponsors are being overcharged and they don't know it.
The other misunderstood fact is that overall fund expenses are typically higher even after you subtract the revenue sharing payments. For example, if you pick a fund at random like the PIMCO Low Duration fund which is a very good fund and fund family, the institutional class expense is 43bps. If you pick the same fund in the D share retail class, the expense is 75bps with a 25bps 12b-1. Therefore, the net expense is 7bps higher after you exclude the 12b-1. Thankfully, Morningstar generally rates revenue sharing funds lower due to the expense.
I doubt that mutual fund lobbying will allow the elimination of 12b-1 payments or Sub T/A payments, but it sure would make the playing field level. In the end, we could all make a profit while providing the best possible retirement benefits to our population. Until then, we can do our best to educate the HR and Benefits community above the fees in their plans.
There would be so many unintended consequences for plan sponsors. Elimination of 12b-1 fees would eliminate the ability of many recordkeepers to include outside funds in sponsors lineups, or if they did, it would drive up costs significantly.
(i) Something else. If Prissy worked in the Retirement Plan Services Fees industry, her response would have to be . . ."I don't know nothing about disclosing 12b-1 Fees".
Actually I think that all fees that are charged to a mutual fund that reduce NAV should be specifically disclosed in clear "SPD type" language. Plan Sponsors should be able to do a cost accounting for their plans. I also think that Financial Institutions that offer various mutual fund families as offerings should be compensated for doing such and that should be clearly disclosed. Service providers in this industry made a very inept tactical error when they promote "no fee" services. What this means of course is no explicit fees, and tons of implicit ones. It's time to fess up on the fees.
Eliminating 12(b)1 fees will probably cause fees in other areas to increase. The move will make fund fees less transparent. Right now if I buy A shares, I know that the front load is a sales charge, and it pays the person who advises me to buy this fund. If I have no advisor, I should not pay a sales charge; I should buy no-load shares.
12(b) 1 fees are supposed to pay for distribution and recordkeeping expenses. If someone is performing distribution and recordkeeping services for me, such as a bundled 401(k) provider, then I can reason that they're getting paid from the fund's 12(b) 1 fee. If no one is doing that for me, then I should question whether I want to buy a fund with a high 12(b) 1 fee.
If 12(b) 1 fees are eliminated, fund companies will still pay to get in the lineup of the major bundled plan providers. The money will probably come out of what the prospectus calls "administrative expenses." But when I see the description of administrative expenses, I can't really tell what that money is for. I don't know to what extent they're going to someone outside of the fund company. Disclosure takes a step backwards.
Regarding 12b1 fees…
As it pertains to small-to-mid 401(k) plans, 12b1 fees are essential for many plan sponsors and participants. Those plans tend to be serviced by brokers, bankers, insurance agents, and consultants and these 12b1 fees are their major source of revenues. Without 12b1 fees, most, if not all, of the ongoing revenues these service providers now receive would disappear, leaving them no financial incentive to service the plan year after year or even to bother working with the plan in the first place. Granted, Registered Investment Advisers, like my company, can charge hard dollar fees to the employer for employee education, performance measurement services, and search consulting. However, few small-to-mid size employers want to pay those fees out of corporate dollars. They consider it too expensive. Plus, they feel, rightly so, that the services received for these 12b1 fees for employee education, performance measurement services, and search consulting are reasonable expenses for the participants to pay for (via their mutual funds' 12b1 fees) under ERISA.
Without 12b1 fees, most of the consulting or investment firms who now provide services to 401(k) plans in exchange for 12b1 fees will leave the 401(k) arena and look to other types of clients to earn their living. Then, who will educate the participants if the employer doesn't want to pay for it out of corporate dollars? Who is going to sit on the same side of the table with the plan sponsor in objectively reviewing the 401(k) funds? Some may think the 401(k) companies will pick up the slack. However, that would be an expensive proposition since most rely on outside investment professionals (paid through 12b1 fees) to handle this and they don't have in place the expensive infrastructure to support such an endeavor for all their 401(k) clients. Also, do you really want to rely on your 401(k) provider to report back on themselves regarding how their funds are performing or how well their services are working? That's why outside investment professionals are necessary and need to be compensated.
For Washington to throw all types of investors into the same category instead of making separate analyses simply doesn't make sense. If the people in Washington feel that 12b1 fees should be eliminated, they must first understand the differences between the various market segments of mutual fund buyers. Individual investors may or may not need an investment professional to help them with their investments. If they don't need help, there are numerous no-load mutual funds available that do not charge 12b1 fees. If they do need help, the 12b1 fees pay for those services via investment intermediaries. In the retirement market, there has been much talk these days over how people aren't saving enough for retirement and need to be better educated. Additionally, plan sponsors are in dire need of professional assistance. Washington must understand that this particular market segment (i.e., 401(k) plans) needs the services of investment professionals and that it is reasonable to pay for these services via 12b1 fees. Otherwise, if Washington feels that the 401(k) companies should provide these services after eliminating 12b1 fees (which effectively eliminates those companies whose services are paid for with 12b1 fees), all that will happen is the extra costs of servicing 401(k) plans will eventually show up as increases in the internal operating expenses of the mutual funds that the 401(k) companies use - thus creating the expense of a 12b1-type fee without labeling it as such. For 401(k) providers, margins are pretty thin already. Replacing the financial advisor's role will force further consolidation in the industry and result in fewer choices for plan sponsors.
Perhaps Washington should look at the "R" shares many mutual fund companies have been issued over the past few years. These are special "Retirement" share classes used with 401(k) plans and include 12b1 fees to pay investment professionals for their work. If nothing else, Washington should allow R shares and their 12b1 fees to be used for 401(k) plans then deal with 12b1 fees from other share classes as a completely separate issue.
The bottom line is that the elimination of or a drastic reduction in 12b1 fees would hurt those people that Washington wants to help: the 401(k) participants.
In response to your question of the day, I suspect that the answer is "c" and "e." Wrangling with the disclosures required and addressing the bad deeds of a few by changing the rules for the many may give us "C" a law that will cause fees to increase in other areas. Quite likely, this is also "E" a political ploy in an election year. The reality is that plan sponsors and their providers have been both diligent and innovative in capturing the 12b-1 fees to offset the cost of plan administration, which, rather than diminishing, has increased with the advent of "advice" and other added services to participants. Plan sponsors, their participants, and elected officials should understand how the math of mutual funds works, but should also acknowledge that benefits are not free. The real focus should be on the overall expense ratios of the funds offered - are they reasonable and below industry averages - and the quality of advisory services and shareholder services provided by those expense ratios.
Thanks for the opportunity to vent, Nevin!
C. As pension consultants the cases in which we are paid by the 12b-1 fees, we would be forced to charge the clients a fee. Our fee schedule, which is extremely reasonable, in almost all cases is much higher than what we receive the 12b-1s. We have been rethinking being paid through 12b-1s because in many cases we are only receiving about minimum wage, but charging an outside fee can be a difficult sell in this economic climate.
My myopic opinion is d. My belief is that while some of the legislators concerns may be valid in that 12b-1s do play a part in making brokers wealthy, this does not take a global view of the situation. Brokers will find other ways to get rich; fund companies will still need to distribute their product and those costs will need to be borne somewhere; administrators such as my company who retain some of the 12b-1 will need to find another source to cover those costs. Given these realities, the end user will wind up paying the cost in one way or another - companies such as mine will need to increase fees, sponsors will find a way to pass along costs to their participants in the ever- increasing world of employee-paid benefit costs, and the necessary evil of distribution, the financial intermediary, will still find a way to get their pound of flesh.
Not to mention, I still don't really get the connection between the current market-timing/late trading situations that have put the industry under a microscope and lower fees/12b-1s. Spitzer has politicized an issue comparing apples to oranges and the misguided sound bite-oriented public has swallowed the whole glass of Kool-aid. Hopefully the tool will come to the realization that he couldn't be elected governor of his apartment much less NY. Not that I have an opinion.
I like your options, but I believe option (i), "something else" would be most beneficial, as 12b-1 fees do serve a place in the industry- provided that regulators develop a more well-defined description of how they are to be used. Currently, I think there is some abuse of 12b-1s, but I don't think that eliminating them is the answer. The bad-apples just need some guidance (or a thorough whipping with a wet noodle) so they don't ruin it for the rest of us.
(e) A political ploy in an election year.
12 b-1 fees have always been a disclosure to investors. If an investor did not want to purchase a fund that had a 12 b-1, no load funds were available. This topic has and is often discussed in financial literature readily available to investors.
i: something else.
But I also think this might cause fees to increase in other areas. At least now you know how much of the fee is SUPPOSED to go to 'distribution expenses.'
The reason I chose 'something else,' though, is that the increasing competition - and commoditization of the financial services industry in general - is a trend pushing prices and fees lower. Some companies will use this event to lower their fees, and will tout that.
I've got no idea so I suppose I'm in the (h) category even though I dutifully chart our 12b-1 fees every year to make sure they're in line similar funds. Not sure what options I have if they aren't. Mutual funds are a strange animal especially in years when your $10,000 has turned into $8,000 and you have the privilege of paying tax on $3,000 of capital (gains!)
Lately I have been really impressed with the information Vanguards John Bogle has published on mutual funds. The man loves graphs and charts so some of the reading gets to be rough plowing but I'm convinced I'll be a lot smarter when I've finished his Common Sense on Mutual Funds.
a & f. It is not the responsibility of our politicians to protect us from stupidity. If plan sponsors (except for very small plans) are paying 12b-1 fees they should are not fulfilling their fiduciary responsibility.
This is a way to offer funds other than just your Primary Provider/Recordkeepers funds. We consider the attractiveness of the fund when selecting it and the 12(b) 1 fee (and all other expenses) is all part of the equation.