As the June 9 roll out date has passed, 401(k) providers have begun taking steps to alter their plans in accordance with the Department of Labor's (DOL) fiduciary standard. While the rule will primarily impact providers, since plan sponsors are already considered fiduciaries, sponsors still need to be aware of changes that can effect their plans and plan participants. The DOL rule has held, and will continue to hold, plan sponsors responsible for upholding the fiduciary standard and protecting the interests of their participants.
In response to the new rule, many 401(k) providers have begun issuing new agreements to plan sponsors. This is a good time for sponsors review their plans and ensure they fully understand their fee structures. Now more than ever, plan sponsors are under pressure to stay abreast of these changes. To fail to do so is to risk facing both the Department of Labor, which is responsible for overseeing plan compliance, and your participants in court. (For more, see: DOL Fiduciary Rule Explained as of July 5th, 2017.)
Replacing the Convoluted Market
With the DOL’s new fiduciary standard, there is a greater need to find new fee structures that will meet with the law’s requirements. If the law is fully passed, it is likely the result will be fewer share classes and more transparent fee structures. To this end, the fund industry is considering the addition of two new types of shares called "T shares" and "clean shares." The idea is to replace the convoluted market, currently composed of over 25,000 share classes, with fewer classes and more straightforward fees.
T shares are designed specifically to adhere to the DOL’s fiduciary requirements. They would charge a flat commission across all asset classes. This flat rate is intended to combat the incentive some advisors face of stock-stuffing their plans with equity funds that charge a higher sales load rather than bond funds. According to the director of policy research at Morningstar Inc., Aron Szapiro, the new fiduciary rule would still allow funds to charge sales fees. It merely aims to reduce the incentive plan sponsors and advisors face to prioritize high-load funds over lower-load ones. T shares will charge specific loads based on the company as opposed to the share class.
Clean shares will separate the costs of investment management from fund distribution. With clean shares, advisors would charge a separate fee from the fund distributor. By removing embedded 12(b)-1 fees and commissions, advisors negate the risk of plan sponsors breaching their fiduciary responsibility with unreasonable revenue sharing practices.
From a personnel perspective, the broad scope of the DOL’s definition of a fiduciary could mean that plan HR and call center personnel qualify as fiduciaries. If this is the case, plan sponsors will be responsible for monitoring their personnel’s interactions with participants to ensure that the fiduciary standard is upheld.
Some record keepers are choosing to become fiduciaries under the DOL’s law as well. For plan sponsors, this means facing a new decision: to use a non-fiduciary record-keeper or opt for one that has adopted a fiduciary role. The former may mean less paperwork for the plan sponsor, but a non-fiduciary record-keeper could also mean participants are missing out on beneficial services and improved fee structures. (For more, see: How the New Fiduciary Rule Will Impact Investors.)
This article is adapted from Tyler Harrison's white paper “Building An Efficient Plan: An Overview of the Evolving 401(k) Landscape." You can download the full version here.