"Pension Trends" Newsletter

Fee sharing is becoming more common in the pension plan industry, especially with 401(k) plans. In its intended form, fee sharing should result in lower administrative and investment expenses for plan sponsors. In some cases, however, the beneficiary of fee sharing is the investment advisor. In other cases, no one benefits from fee sharing because no one asks for the fees to be shared.

Mutual funds are the primary source of most fee sharing arrangements. There are a number of different kinds of fees associated with a mutual fund: 12(b)-1 fees, sub-transfer agent fees, management fees, loads and commissions. Most often, it is the 12(b)-1 and sub-transfer agent fees that generate refunds or credits that can make their way back to the plan sponsor.

The 12(b)-1 fees are charged by about half of mutual funds. They are intended to cover certain marketing, distribution and servicing activities of the fund. They are sometimes paid to the same advisor or firm that is paid to provide investment advice to the plan. Some advisors credit all or a portion of the 12(b)-1 fees they collect to the fees they charge their plan sponsor clients. Other advisors collect and keep the 12(b)-1 income.

Whether it is fair, reasonable, and appropriate for an investment advisor to keep 12(b)-1 income it receives, on top of the other income it earns on investments sold to a retirement plan, needs to be determined on a plan-by-plan basis. But unless a plan sponsor asks, the ability to negotiate who will share in any 12(b)-1 income is lost.

Sub-transfer agent fees are truly hidden fees. They are not disclosed in a mutual fund prospectus like 12(b)-1 fees. They are paid by a mutual fund to an advisor such as a bank or trust company performing recordkeeping services or to a third party administrator (recordkeeping firm). Recordkeeping Firm #1 may charge its client $4,000 for recordkeeping services but actually earn $5,000, including $1,000 in sub-transfer agent fees. Recordkeeping Firm #2 may charge its client $4,000 for recordkeeping services and apply the $1,000 it receives in sub-transfer agent fees toward the client’s bill so that the client has to pay only $3,000.

Again, what is important is to ask. We recently learned that one investment company pays sub-transfer agent fees to third party administrators. However, if the administrative firm does not request or does not accept sub-transfer agent fees, the investment company keeps the money! The plan sponsor gets no benefit whatsoever. This actually caused us to change our long-standing policy on collecting fees from investment companies (see the box below).

Some investment advisors take the initiative to make sure their plan sponsor clients and plan participants get the benefit of any fee sharing arrangement, but unfortunately not all do. It is ultimately up to the plan sponsor to protect the best interest of the plan and its participants.

IAI’s policy on fees from investment firms: IAI will accept fees from an investment firm or investment advisor only if the fee income cannot and would not be paid to the plan sponsor or the plan. Rather than have the plan sponsor lose out on the fee altogether, IAI will accept the fee income and credit the full amount to annual administrative services we provide to the plan. IAI will not benefit in any way from any such fees collected.

This newsletter has been published in order to share general information with our professional contacts. The information presented in this newsletter should not be relied upon without first seeking the advice of a CPA, Attorney or other benefit professional.

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