ERISA Fee Disclosure Rule Fails Smell Test

Everyone was waiting with bated breath over the Department of Labor fiduciary ruling that came down recently. I for one actually thought the tide might have been turning against Wall Street firms and insurance companies, but boy was I wrong. I was foolish to believe that the Department of Labor was going to level the playing field in the retirement plan area when it came to fee disclosure. This just didn't happen.

I recall when I was the Branch Manager II for Charles Schwab in Jacksonville, (almost 8 years ago now) we had a retirement plan guy come in to speak to my team about their retirement plan services. The spill was the usual non-speak..."we are the best and to hell with all the rest." However, I wasn't quite convinced. So, I began to question the young fellow as to how much the fees were inside their 401k plan that they wanted us to sell. He replied that "there was no fee to the plan participants." I knew this was not true because of revenue sharing offered by mutual funds. You see, mutual funds have 12(b)-1 fees which they use to pay firms to market their funds. In the retirement plan arena, fees have long been hidden from participants, but make no mistake they exist.

Typically, the sales pitch is made to the employer that "you can save on your administration costs by taking the revenue sharing from the mutual fund 12(b)-1 fees as an offset." So, when that young man was telling me that there was no fee to the plan participants, what he really meant is that he could reduce or eliminate the fees to administer the retirement plan by utilizing the 12(b)-1 revenue. The plan participants would never see any fees and the employer could possibly not have to pay any administration fees. It was a win-win situation for both.

Fast forward to the recent ruling by the Department of Labor on fiduciaries and fee disclosure. Retirement plan advisers who charge fees will have to disclose their fees to plan participants and employers. However, if you can believe this, 12(b)-1 fees can continue to be hidden from view! Wall Street firms and insurance companies win again!

As a result of this ruling, it will be business as usual for Wall Street firms and insurance companies who use 12(b)-1 revenue sharing arrangements to sell their retirement plans to employers. What has changed for them? Absolutely nothing.

However, retirement plan advisers who charge fees will now have to disclose their fees in writing, while the Wall Street firms and insurance companies do not have to disclose their 12(b)-1 fees. Are you getting this picture? Wall Street firms and insurance companies want to squash their fee based competitors and it looks like they have succeeded.

If this is any indication of the power and influence that these groups have over registered investment advisers, then I shudder to think how the SEC will come down with their interpretation of fiduciary rules. In my mind, this is proof that nothing will change for Wall Street firms and insurance companies. It is likely that registered investment advisers will be subject to more onerous rules, costs and requirements. The goal of course is to squash the competition. Sadly, the competition, registered investment advisers, are the best choice for retirement plans, in my opinion, yet they will not appear that way to employers and participants.