Fidelity to level fees for DC plan advisers

Under pressure from financial advisers who want to act as fiduciaries in 401(k) plans, Fidelity Investments plans to institute level 12(b)-1 mutual fund fees paid to advisers who sell the firm’s plans.

The change in compensation, which will begin in August, marks one of biggest overhauls that Fidelity Investments Institutional Services has made to its adviser-sold-401(k) platform since it began selling outside funds on that platform 11 years ago.

“This is a very big deal for advisers who want to be fiduciaries to the plans,” said Thomas Clark, Jr., vice president of retirement plan services at Lockton Financial Advisors LLC. “This was one of my hang-ups, and why I didn’t use Fidelity before.”

The change comes as advisers are increasingly under pressure from plan sponsors to assume a fiduciary role in overseeing retirement plans. Under the Employee Retirement Income Security Act of 1974, reps can’t do that if they are paid more to sell one fund over another.

It also comes as Congress and regulators are debating whether to redefine the fiduciary duty under the Employee Retirement Income Security Act of 1974.

“The market has changed dramatically since ERISA became law,” Assistant Labor Secretary Michael L. Davis said at the American Society of Actuaries and Pension Plan Professionals 401(k) Summit on March 14. “We want to make it clear who plan fiduciaries are.”

Just last month, the DOL proposed regulations that would prohibit advisers from giving advice to 401(k) plans, or their employer or the employer’s affiliates from receiving extra compensation if the plan sponsors bought a product recommended by the adviser.

SMALLER PLANS

“All of these regulations and discussions about what it means to be a fiduciary has made this a huge issue,” said Larry Deatherage, a partner with The Founders Group, a hybrid advisory firm that serves retirement plans and has $3 billion in assets under management.

Although this used to be an issue for plans with hundreds of millions of dollars in assets, now even smaller plans are asking him to commit to being a fiduciary to the plan, he said.

“I have a $14 million plan asking me to do this,” Mr. Deatherage said. “I have never heard of that before.”

Broker-dealers have been pushing Fidelity, which is one of the last major fund firms to not offer fee leveling, to change its compensation structure, said sources familiar with the situation.

“Fidelity is playing catch-up,” said an executive at a broker-dealer that sells Fidelity’s defined-contribution plans, who asked not to be identified. “I have been telling them for some time that we weren’t going to do business with them unless they fix it.”

For the past five years, “only a small number of advisers” — specifically, those who use institutional shares of the funds — received level compensation, said Fidelity spokesman Stephen Austin. Fidelity is making the move now in response to adviser demand, he said.

“The goal has been to make doing business easier with advisers,” Mr. Austin said.

At this time, adviser clients of Fidelity who serve 401(k) plans get paid 12(b)-1 fees by the fund companies they choose for their plans, as well as from Fidelity. The amounts paid by fund companies differ, and thus the advisers don’t receive level compensation, said Lisa M. Smith, a senior vice president of retirement at Fidelity.

Starting in August, advisers will receive one payment from National Financial Services LLC, Fidelity’s clearing unit, which will make sure the pay is level, she said.

“It will be better for advisers because they will receive one payment rather than several,” Ms. Smith said. This will make life much easier for fee-based advisers, she said.

Fee-based advisers often charge a DC plan a percentage of the plan assets, but with Fidelity’s current compensation system, those advisers receive different amounts from different funds, and they have to figure out if the plan still owes them more money. For example, an adviser could charge 0.4% but then receive 0.32% from the fund company.

“The plan sponsor client would then have to write a check for the 0.8% difference,” Mr. Clark said.

Conversely, under Fidelity’s current compensation structure, advisers could receive too much in 12(b)-1 fees and would have to figure out how to pay the plan back, he said.

Broker-dealers applauded the move.

Not having level compensation was “a no-can-do for any broker-dealer that allows their reps to be fiduciaries to retirement plans,” said Robert L. Francis, chief operating officer at broker-dealer National Retirement Partners.

It is a smart move, too, especially if Congress requires all brokers serving the retirement plan market to receive flat fees, regardless of the funds that they recommend to plans or plan participants, said Bo Bohanan, director of retirement plan consulting at Raymond James Financial Inc.

“If legislation heads the way it looks like it’s heading, we should all be operating under best practices — which is and always has been receiving level fees,” he said.

E-mail Jessica Toonkel Marquez at [email protected].