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Slotting Fees
So the question is: if it is good for grocers to charge fees for shelf space and their customers pay unwittingly in the cost of their groceries, does this make it acceptable practice for mutual funds trying to reach customers in 401(k) plans?
Since the advent of the 401(k) plan, the burden of responsibility for an employee's retirement benefits lies directly with the worker and indirectly with the employer. How much was saved and ultimately how well the employee did no longer was the responsibility of the company. This divide has created some serious issues that have been discussed at length here as companies divorce themselves from the future welfare of their employees providing them a bag of funds to choose from, often with little guidance and more commonly, not following up to see that each employee eligible understands the ramifications of under-investing. Too often, the default plan offered by companies is chosen by employees who are either under-educated about their options or just don't care.
Now the Securities and Exchange Commission is turning its attention along with the vigilant New York Attorneys Generals Office to a practice that is costing those enrolled in smaller company sponsored plans more than the average investor. Referred to in the industry as revenue sharing or bundling, smaller companies are especially susceptible to the offer of money from vendors who represent mutual fund families who want their products offered to the employees of the firm.
Administering a 401(k) plan can often be confusing and time consuming for a smaller company who wants to offer their employees some sort of plan. Fund families, brokers, consultants, insurers and banks can offer the company the service of overseeing the plan for a fee which is passed on to the employee, sometimes without the workers knowledge or consent. These outside administrators then offer higher cost funds to employees pocketing the additional money back and running the plan for the employer.
A particularly contentious fee associated with funds is the 12b-1 fee. The money garnered by this fee is used to pay for the cost of marketing and distribution and is paid by the fund's shareholders. Often this bundling payment is hidden in the 12 b -1 of funds that are offered in the vendors plan, adding additional costs to the employee that are unnecessary.
But can these small company plans do just as well without these hidden added fees offering their employees lower cost funds, sometimes better performing ones as well? Probably but some information and cost sharing would be needed. The cost of running these plans averages about $100 to $150 a year, a record keeping cost that employees should be paying and probably would happily, if the fees of the offered funds were lower as well. Vanguard has complained that they have not made adequate inroads into smaller company 401(k) plans largely because they refuse to participate by paying vendors to hawk their wares and because it would drive the low fees offered by many of their funds upward.
While the incentives for smaller companies are almost too good to pass by, these companies should understand the fiduciary responsibility that these plans originally intended for the employer. Employers should understand that by offering low cost funds in a portfolio and explaining the costs of these plans to employees, the cost of administration would be happily borne by the employee.
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