Retirement Watch

Litigation calls for more transparency in the retirement industry

Updated accounting processes and technology are within reach — and could help stem disputes

Mar 22, 2016 @ 2:24 pm

By Bob Ward

Litigation is taking the retirement industry to task, exposing questionable administration of fiduciary duties and inequalities within fee structures.

A core allegation of these lawsuits is that financial institutions are violating fiduciary responsibilities by entering into revenue-sharing arrangements with mutual fund providers for their own benefit — essentially running “pay-to-play” schemes in which the firm receives payments from mutual funds through various fees. Other claims charge inequitable fee payments for the amount of time a position is held in a particular fund.

Are these improprieties illegal? Not exactly. In fact, many cases have been settled before a verdict could be reached.

Are they unethical? You bet.

Yet, after digging a little deeper, market watchers are quick to realize these firms are not out to swindle the little guy. In fact, most would agree that the retirement industry is incredibly serious about holding itself accountable to the highest standards, and protecting and growing client assets fairly and equitably.


Then why is it so hard for these service providers to be fully transparent about the fees they charge?

The problem, quite simply, is that much of the industry runs on antiquated technology that can't deliver the level of fee specificity required by today's investors. Market priorities have shifted gears, leaving firms exposed to the technology debt they have acquired since the late 1980s, and rendering it extremely challenging — and costly — to adapt their systems to new requirements.

As the industry prepares itself for the final version of the Labor Department's fiduciary rule, observers are watching closely to see how the industry plans to respond.

While waiting for the courts to determine whether or not laws have been broken, investor confidence in the retirement industry has been shaken. Regardless of how these cases are adjudicated, investors are taking a closer look at how their investments are being managed.

Therefore, now is the time to examine and implement new ways to level the playing field for retirement investors. Some ideas gaining traction within the financial services industry revolve around more equitable fee levelization, including the establishment of accounting processes capable of tabulating mutual fund fees on a daily basis.

Specifically, advisers should charge a disclosed, asset-based fee for their services directly to each participant, rather than getting paid for their services by fund companies, as is often the case. Charging based on assets is a fair solution. Participants with small balances, therefore, would not be paying a disproportionate amount of money compared to those with larger accounts. Tiered asset-based pricing schedules can also be instituted, allowing participants with large balances to qualify for price breaks as their account sizes grow. This would require that participant-level calculation and billing features are built into the technology of recordkeeping systems.


Reconciliation of 12(b)1 and shareholder-servicing fees also warrants closer inspection. If a participant holds a position in a fund for only 10 days out of a 30-day accrual period, he should be responsible for paying only 10 days' worth of fees. Allocating fees on a periodic basis, such as end-of-quarter or end-of-year, is unfair since not every participant held each fund in the same proportions or over the same periods of time. Service providers should have the functionality to fully disclose fee and mutual fund revenue sharing at the individual participant account level.

Another approach to fairly distributing fees is a technique used by insurance companies for their group annuity plans. This solution involves creating a unitized account (often called a separate account) that behaves similarly to a '40 Act Fund or ETF, in that a net asset value is calculated and published for the account every day. The account then holds one or more positions in any desired mutual funds. Shareholder servicing, 12(b)1, and other distribution fees to be received on these mutual fund positions are accrued on a daily basis as receivables of the unitized account. Participants then own units in these unitized accounts, and thus receive their portion of the fee accruals each day.

While all these solutions require advanced accounting processes and technology solutions, they are within reach, and would provide the level of transparency demanded in today's market.

Bob Ward is chief revenue officer at Vertical Management Systems.


What do you think?

View comments

Recommended for you

Upcoming Event

Apr 30


Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video


Cybersecurity: Fears and opportunities for every adviser

Phishing schemes and financial hoaxes put advisers and their clients in the line of fire everyday. Joel Bruckenstein, the godfather of FinTech, offers some solutions for every firm.

Latest news & opinion

Nontraded BDC sales in worst year since 2010

The illiquid product's three-year decline is partially due to new regulations and poor performance.

Tax reform debate sparks fresh interest in donor-advised funds

Schwab reports new accounts up 50% from last year, assets up 33%.

Nontraded REITs to post worst sales since 2002

The industry is on track to raise just $4.4 billion, well off the $19.6 billion it raised just four years ago, as new regulations hinder sales.

Broker protocol for recruiting a boon for clients

New research finds advisers whose firms have joined the agreement take better care of customers.

Meet our 2017 Women to Watch

Introducing 20 female financial advisers and industry executives who are distinguished leaders, advancing the business of providing advice through their creativity and hard work.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print