In an attempt to help advisers and plan sponsors comply with new fee disclosure rules — and get in front of looming 12(b)-1 reform — J.P. Morgan Asset Management last week introduced a share class for 401(k)s that is free of 12(b)-1 fees.
Other fund providers are expected to follow suit, experts said.
“The certainty of fee disclosure and the uncertainty of 12(b)-1 reform would make this share class worth launching,” said Jason C. Roberts, chief executive of Pension Resource Institute LLC and an attorney specializing in the Employee Retirement Income Security Act of 1974. “Fund companies are sophisticated enough to see the impact of both.”
Last Monday, J.P. Morgan launched its R6 share class, a variation of the R shares fund companies sell to retirement plans through financial advisers. While the R6 share class, which includes 18 funds, has an investment advisory fee and other expenses, such as fund accounting fees, it doesn't have 12(b)-1 or shareholder-servicing fees.
The firm joins at least two other providers that have made available their own versions of the share class: American Funds, which launched an R6 share class in May 2009, and Principal Financial Group, which now offers the Principal Trust Target Date Collective Investment Funds in the R6 share class.
Experts said fund company executives are considering offering the R6 class in anticipation of the Securities and Exchange Commission's proposal to revamp 12(b)-1 fees.
The regulator has proposed limiting fund companies to a “marketing and service fee” of up to 25 basis points; anything over that amount would be considered an “ongoing sales charge” and limited to the highest fee charged by the fund for shares without marketing and service fees.
The SEC is in the process of sifting through more than 1,000 letters received during the proposal's comment period, which ended Nov. 5.
“[R6 is] a class that seems to be making accommodations for what could be the elimination for 12(b)-1 fees,” said Tom Modestino, associate director at Cerulli Associates Inc. “Advisers should get paid on the work they do with the plans, and if that needs to change in an environment that's becoming more fee-only, then clearly, the direction will go that way in the marketplace.”
But 12(b)-1 reform isn't the only engine driving this share class. Experts also point to the new plan fee disclosure rules released by the Labor Department in July.
They argue that R6 shares allow employers to see clearly what they're paying in investment advisory fees, apart from record-keeping fees and other servicing costs. In turn, plan sponsors will have an easier time complying with a recently issued DOL rule requiring them to explain such fees to employees.
“You want participants to see what they're paying in an easy fashion; this makes it easier to translate fees,” said Stephen D. Wilt, a senior vice president and adviser with Captrust Financial Advisors. “R6 gives you an alternative to the plan sponsor, so they choose how they want to pay.”
At American Funds, the R6 share class has grabbed advisers' attention. The company had about $30 billion in plan assets in its R6 share class as of the end of the third quarter, according to the Financial Research Corp. and Strategic Insight.
“In terms of interest, the R6 garners flows,” said Veer Virkar, a research analyst with FRC.
Fund companies are likely to release their own versions of the R6 shares, said mutual fund consultant Geoff Bobroff.
“Creating the R6 without record-keeping fees is a simpler disclosure,” Mr. Bobroff said. “From J.P. Morgan's standpoint, this is a response to competitive pressures in the marketplace.”
J.P. Morgan spokeswoman Charlotte Powell said: “We wouldn't specifically link the launch of the R6 share class with any forthcoming participant disclosure regulation, nor would we speculate on pending rules.”
Others noted that the new share class highlights the growing presence of fee-based registered investment advisers in the 401(k) market.
“This is a combination of two things: RIAs serving the retirement plan space, versus the traditional broker adviser who is used to getting through 12(b)-1 and the regulations to disclose fees,” said Gerald Wernette, director of retirement plan services and a principal at Rehmann Financial.
The stripped-down fee structure may sound appealing to plans of all sizes, but advisers noted that the R6 isn't a panacea. Some plan sponsors can't afford to pay the plan's costs out-of-pocket.
“The big hurdle for plan sponsors is always, "If I don't have the budget to pay for this, then I have to charge the participants,'” said Bo Bohanan, director of retirement plan consulting at Raymond James Financial Inc. He added that plans below $1 million likely will not be able to afford the shares.
Mr. Roberts added that the introduction of R6 shares won't completely kill off 12(b)-1 fees.
“This is definitely helpful, but it won't phase out the 12(b)-1 fee structure,” he said. “The endgame is to get more people into savings plans. If you cut off 12(b)-1s and do something hastily, you're risking your distribution.”
E-mail Darla Mercado at [email protected].
