Compliance May 31, 2011

EBSA Set to Make Fee Disclosure Deadline Extension Official

The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) will publish in tomorrow’s Federal Register a notice proposing to extend and align the applicability dates for its retirement plan fee disclosure rules.
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The requirements were scheduled to apply to plan contracts or arrangements for services in existence on or after July 16, 2011, but the department previously announced its intention to extend the deadline to January 1, 2012 (see “EBSA Sets New 408(b)(2) Deadline for January 2012“). The new proposal, when finalized, would make the extension official.  

EBSA said it has received many requests that the effective date be extended. A significant number of parties have argued that more time is essential to update systems and procedures for information collection and disclosure. Pointing out that the DoL has not yet published a final rule, parties have explained that, if the Department modifies the current interim final rule, service providers will need additional time to make further changes. Based on these concerns, the Department believes that an extension of the rule’s effective date would lead to fuller and timelier compliance by plans and service providers, and thus would be in the interests of participants and beneficiaries.   

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In addition, an extension will enable the DoL to align the effective date for this regulation with the applicability date of the participant-level disclosure regulation. Although the final participant-level disclosure regulation was effective on December 20, 2010, its requirements only begin to apply for plan years beginning on or after November 1, 2011.  

Text of the notice is here.   

Borzi recently gave an update on other proposed regulations as well (see “Borzi Provides Update of Proposed Regulations“). 
The Markets May 31, 2011

No Load Shares Dominate Fund Sales

No Load share classes, particularly those without 12b-1 fees, have grown to become the single most important share class in mutual fund sales through intermediaries, according to recent research.
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No Load shares accounted for 47% of total fund sales during 2010 among managers primarily selling through financial advisers, rising significantly from 42% in 2009 and just 34% in 2007, according to data from Strategic Insight (SI), an Asset International company. Behind the 47% of sales for No Load shares, the next-biggest share class in 2010 was “A” shares sold at NAV, which accounted for 28% of mutual fund sales through intermediaries in 2010. Traditional “A” shares sold with a commission came in third, with 14% of fund sales through intermediaries in 2010 (and just 6% of this total via high commission “A” shares – with 4% or greater sales load).   

SI said much of No Load shares’ recent growth has come from fee-based advisory programs, which have seen demand shift rapidly toward the lowest-cost share classes. During 2010, No Load shares made up 60% of total Fee-Based Advisory Program sales, up from 41% in 2008. Within these numbers, 83% of such No Load share sales within fee-based programs in 2010 came via share classes without 12b-1 fees (up from 72% in 2009).   

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“Clearly, the movement toward advisers being compensated through fees-for-advice has been an important secular trend impacting fund sales for some time,” said Strategic Insight senior analyst Dennis Bowden, the report’s lead author. “More recently, the growing demand for the lowest-cost share class within fee-based programs has added new dynamics to this trend.”   

Bowden continued: “In many cases, this demand has led to traditionally institutional share classes being made available to retail investors and advisers within fee-based programs. And for fund firms, meeting the costs of retail distribution with share classes that were originally priced for institutional use can create challenges.”

(Cont...)

12b-1 Reform  

As fee-based advisory programs continue to grow in importance, these trends in share class use also carry important implications regarding overall shareholder costs and potential Rule 12b-1 reform, SI contends.  

“The findings of this SI study, in particular the significant and on-going reduction in the use of share classes charging 12b-1 fees, raise the question of whether marketplace forces are reducing, if not eliminating, the need for a radical remake of Rule 12b-1,” said Avi Nachmany, Director of Research at Strategic Insight, in the press release.  

Other study findings include: 

  • Sales of No Load shares in total grew by 25% on an absolute basis in 2010 among firms selling primarily through financial advisers – the fastest growth rate of any share class; 
  • “A” share sales continued to decline among our peer group of managers – falling from 46% of total fund sales in 2007 to 38% in 2010. Within “A” share sales, “A” shares sold at NAV (without a front-end sales load, but generally carrying a 12b-1 fee of 0.25%) declined from 33% of total fund sales in 2008 to 28% in 2010; 
  • Increasing sales via fee-based programs spurred No Load shares’ overall growth, partly at the expense of “A” shares sold at NAV (without a front-end sales load, but generally carrying a 12b-1 fee of 0.25%); 
  • Within fee-based advisory programs, “A” shares at NAV have declined from 59% of sales in 2008 to 40% in 2010; and 
  • Aggregate Fee-Based Advisory Program sales, which span across several standalone distribution channels, accounted for 37% of total fund sales in 2010 among firms selling primarily through financial advisers, up from 34% in 2009. On an absolute basis, Fee-Based Advisory Program sales grew by 30% in 2010, a faster rate than any standalone channel captured in the study. 

These findings come from SI’s new report, “The Strategic Insight 2010 Fund Sales Survey: Perspectives on Intermediary Sales by Distribution Channel and Share Class.” The study was based on SI’s proprietary survey of 40 fund firms that distribute primarily through financial advisers. Survey participants managed in aggregate $4.4 trillion in U.S. open-end stock and bond fund assets as of the end of 2010, representing 56% of industry long-term fund assets. 

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