One of classic retorts that we hear from potential retirement plan clients is: “We don’t pay our plan adviser/broker.”
Our response to that is that if you don’t know how much your plan broker or adviser are being paid, or better yet how they are being paid, you probably paying a lot.
What many 401(k) sponsors don’t realize is that the “broker of record” on their company’s retirement plan is often paid commissions indirectly by the mutual fund companies as opposed to advisers who charge a direct, transparent, annual fee. Therefore, a broker may have an incentive to sell/recommend a mutual fund for 401(k) with higher fees. The Department of Labor is trying to impose greater fee transparency on brokers/brokerages. Reuters noted in a recent article:
Broker-dealers are up in arms over a little-known provision of the Department of Labor’s 401(k) plan fee disclosure rules.
The issue: the proposed rules will require brokers to report how much they are paid to distribute mutual funds through brokerage windows. The trouble, brokers say, is that they offer thousands of mutual funds from hundreds of companies and often have different fee structures for each one.
Reuters presents the fee disclosure issue in a very polite fashion. However, as a fee based adviser we feel that it is safe to assume that when these fee disclosure regulations finally go live on April 1st, that there will be some sponsors/participants that are shocked to find out of what they are paying their brokers in commissions.