WASHINGTON — Defined contribution plan consultants who pocket revenue-sharing payments from mutual fund companies ultimately might see their fees slashed under a new Department of Labor proposed regulation, experts said.
The proposed regulation would force consultants — typically financial advisers who work for large brokerage firms and insurance companies and service the small- to midsize DC market — to disclose these payments for the first time. Revenue-sharing payments can run as high as 50 basis points a year, sources said.
These hidden revenue-sharing payments are at the heart of fee-disclosure legislation proposed by Rep. George Miller, D-Calif., and others. Some industry experts hope the DOL proposal will derail the legislation. “DOL can do this without new legislation,” said Deborah Novotny, vice president and director of ERISA compliance at T. Rowe Price Retirement Plan Services Inc., Baltimore.
Experts believe that by shining a light on these payments, competitive pressures will drive down fees overall.
“Brokers for larger plans are losers (under the Labor Department’s proposed disclosure requirements),” said Robyn Credico, national director of defined contribution consulting services, Watson Wyatt Worldwide, Arlington, Va.
“This will change the marketplace significantly,” added Brian H. Graff, chief executive officer and executive director of the American Society of Pension Professionals & Actuaries, Arlington, Va.
The potential downside is that increased competition spurred by all of the new requirements will leave service providers with fewer profits to plow back into their businesses, Ms. Credico said.
Fred Barstein, chief executive officer of 401kExchange, a plan consultant based in Greenacres, Fla., said 72% of 401(k) plans with assets of $250,000 to $10 million worked with broker/financial advisers, while 48% of 401(k) plans with assets of $10 million to $100 million did so.
He estimated that fewer than one-fifth of plans with assets of $100 million to $250 million worked with a broker/financial adviser. He also said the compensation received by broker/financial advisers generally ranged from several basis points to 50 basis points, depending on the size of the plan and the services provided.
Many don’t know
Many 401(k) plan officials are unaware of how much compensation advisers are receiving from fund companies. What’s more, as the size of a 401(k) plan grows, so do the asset-based payments, even if the adviser provides little services after investment options have been selected.
“Many clients who use brokers don’t know what these fees are, and sometimes these fees are far in excess of the services the broker is providing,” said Watson Wyatt’s Ms. Credico.
The DOL’s proposed regulation would require brokers to report how much compensation they receive, along with an accounting of the services that are being provided.
“That has to be disclosed regardless of whether it’s embedded in the management fee,” said Mr. Graff.
Even some critics say some brokers already disclose their compensation voluntarily and provide good value for their services to the plans.
And Don Salama, senior managing director and head of New York Life Retirement Plan Services, Westwood, Mass., said his company renegotiates fees to brokers downward when plan assets have grown to a sufficient size.
However, Mr. Salama said other fund companies don’t necessarily follow New York Life’s lead, and in many cases plan sponsors are unaware of the size of the broker’s compensation. “Disclosure will put this on their (the plan sponsor’s) desk,” he said. “There is a bit of a wake-up call there.”
Experts said the proposed regulation will level the playing field for advisers who have been forthcoming about payments they receive.
“Those brokers who do a lot for their compensation will be on better footing relative to other brokers who may not do much after the initial sale but continue to get paid,” said Larry Goldbrum, general counsel of The SPARK Institute, an association of record keepers and other plan service providers based in Simsbury, Conn. “Historically, financial advisers (brokers) have not been doing as good a job as they should.”
‘Good value’
Elizabeth Varley, vice president and director of retirement policy for the Securities Industry and Financial Markets Association, Washington, disagreed. “Brokers are delivering a very good value for what they’re getting paid,” she said.
The Labor Department’s wide-ranging proposed regulations, published in the Dec. 13 Federal Register, essentially require service providers to disclose all compensation and services to plan sponsors in writing before any contract is signed. In addition, the proposal requires the disclosure of possible conflicts of interest that could affect plan services.
The proposal also includes a new class exemption that would protect plan fiduciaries from liability in cases where plan service providers fail to fully disclose the detailed information required by the proposed rule.
Comments on the proposed regulation are due by Feb. 11.
