12b-1 Fees Expected to Continue

Some experts believe retirement plan sponsors should never offer mutual funds with 12b-1 revenue-sharing fees in their investment lineups. On the other hand, other experts maintain that by crediting revenue back to the plan, funds with 12b-1 fees can ­actually cost less than those without such fees.

In either case, considering their strict fiduciary responsibility, defined contribution (DC) plan sponsors have a duty to compare funds that have these fees with those that do not—and to decide which best fits their participants’ individual circumstances.

According to data from the Investment Company Institute (ICI), retirement plans have been moving away from funds with 12b-1 fees: In 2015, 16% of 401(k) mutual fund assets had 12b-1 fees, down from 26% in 2010.

The trend toward the levelizing of compensation plus the 2012 fee disclosure rules and the pending fiduciary rule together make a strong case for why plan sponsors should not offer funds with 12b-1 fees, believes Chad Parks, CEO and founder of Ubiquity Retirement and Savings. “Adviser fees should be known and signed off contractually, not paid through the mutual fund,” Parks says. “Third-party administrator [TPA] and recordkeeping fees should also be known and negotiated as hard-dollar costs. I see no reason why a plan sponsor would use a 12b-1 fee.”

Eric Endress, vice president and senior investment consultant at CBIZ Retirement Services, agrees. Even prior to the Department of Labor (DOL) 2012 fee disclosure rules, there was a trend among retirement plans to move toward funds with institutional share classes with no revenue sharing, he says. “We are seeing a best practice among our clients to move to all institutional share classes and add on the fees for outside services such as recordkeeping and advisory services separately, so there is clear transparency to the participants,” Endress says.

Brian Menickella, who is managing partner and head of the financial services division at The Beacon Group of Companies, is adamantly opposed to retirement plans using funds with 12b-1 fees. “The current system under fire by the Department of Labor, and its fiduciary rule, is a system created by the broker/dealer [B/D] establishment to disguise how and how much they get paid,” Menickella says. “There is no reason for revenue sharing. There are simpler methods for 401(k) plans to display costs as line items for every vendor.