Retirement plan advisers and record keepers should have an out, the groups contend
Retirement plan advisers and record keepers are asking the Securities and Exchange Commission to give their industry an out from the proposed 12(b)-1 fee reform.
The rule would raise costs for retirement plans and cause some record keepers and advisers to stop catering to small retirement plans, observers said.
In separate comment letters to the SEC, the American Society of Pension Professionals and Actuaries and The Spark Institute Inc. wrote that the proposal would be too costly and burdensome for the retirement plan industry.
Under the proposal, firms would be allowed to charge a “marketing and service fee” of up to 0.25%. Anything above that amount would be deemed a continuing sales charge, which would be limited to the highest fee charged by the fund for shares without such a sales charge.
But in the retirement plan market, many fund companies charge more than 25 basis points in 12(b)-1 fees to compensate advisers for the work that goes into serving these plans.
Furthermore, the proposal would require retirement plan record keepers to track how sales charges got paid on an individual level, which is impossible in the retirement plan market because firms hold omnibus accounts, observers said.
“The fact is that this really doesn't work for retirement plans,” said Brian Graff, executive director of the ASPPA. “In theory, you could do this, but it's going to cost the industry hundreds of millions of dollars.”
The burden of creating systems that would track fund charges on an individual level would force some record keepers to stop offering mutual funds through small retirement plans, or those with $1 million to $5 million, said Larry H. Goldbrum, general counsel at Spark.
“Our members are saying that for smaller plans, it's going to be too much trouble,” he said. “That could mean that small retirement plans get pushed into other products that are more expensive and not regulated by the SEC, like insurance and annuity types of products.”
In its Nov. 2 letter to the SEC, Spark requested that the SEC allow funds in retirement plans to charge up to 75 basis points, provided that the fund didn't pay more than 25 basis points on sales and distribution costs.
Similarly, the ASPPA is asking the SEC for a safe harbor for retirement plans from the mandatory conversions in the proposed rule. Instead, the ASPPA proposes that funds in the retirement plan space be able to charge up to 65 basis points annually, 40 basis points of which would be a continuing sales charge, and the rest would be the 25-basis-point marketing and distribution fee.
Since the average 401(k) plan participant stays in a fund only for eight years, mandating a conversion doesn't make sense, according to ASPPA.
“Ultimately, if this proposal goes through, what will happen is that advisers — who want to get paid and play a key role in delivering retirement plans in the small-plan market — will go into insurance products and collective trusts to ensure they get paid,” Mr. Graff said.
The deadline for comments on the proposal is Nov. 5.
