Share Class Warfare

Concept of business competition.

As Nevin Adams on wrote about a few weeks ago in his article “Excessive Fee Suit Comes From a New Direction,” an excessive fee lawsuit was filed in Colorado on behalf of a participant whose company 401(k) plan’s recordkeeper and investment platform was Vanguard Group Inc. Yes, you read that correctly, Vanguard. For those of you who know a bit about investing, Vanguard is almost synonymous with low cost. So how is it that they found themselves the defendants in a fee lawsuit? It all comes down to share class.

Share class questions

In the 401(k) world of investing there are often one or two letters or numbers that follow the name of the investments that are meant to distinguish the internal expenses of the investment. They include (but are not limited to) all of the following: A, I, K, Y, R1, R2, R3, R4, R5, R6, Z, Adm, Instl, and Srv. Confused? Of course you are because it is confusing and pretty much meaningless to the average investor. A, for instance, typically indicates that the investment will pay the investment adviser a commission of 0.25%; whereas, R6 usually has no commissions built into the investment. To add to the confusion, there are also internal investment expenses that compensate the recordkeepers for maintaining participant records. In the case of the Vanguard complaint, the plaintiff claims he was overcharged because there were lower cost share class options available for the same investment. This is very common; where the same investment has multiple share classes all with different internal expenses and therefore different total expense ratios.

Why does it matter?

The simplest reason for why it matters is that every dollar you and your plan participants pay in fees and/or expenses is one less dollar that goes to retirement savings. Why regulators and attorneys care is much more complex. It has been common practice for plan advisors and plan providers to use the internal investment fees to completely pay for or to subsidize the cost of providing advice or administrative services to the plan; creating what the industry sold as a “free plan” or one where there was not a billable expense to the plan sponsor because all fees were covered by the investment revenue sharing. This is not necessarily wrong or a bad practice and in some cases it can be shown that it actually creates a lower overall cost to the plan to use investments that carry a higher expense ratio, but completely pay for plan expenses. However, this approach carries with it the potential for confusion and complaints for a couple of reasons. First, as plan assets grow the cost to operate the plan will also increase as much if not more right along with it. As noted in the Vanguard complaint, the plaintiff’s attorney claims that between 2012 and 2015 plan assets increased by 40.5%, but the direct compensation paid to Vanguard more than doubled. Second, the fact of the matter is that if your plan is using a share class that has internal fees, there is a chance there are lower cost investment options out there and the trend in the market today is to use those lower cost options. In many cases, the same investment will have multiple share classes and your plan may be able to keep the same investments and just change the share class.

What to do from here?

Document, document, document! Again, it is not necessarily wrong to use the investments with the built-in fees, but your plan needs to be able to show why those investments were selected and how they were monitored. Additionally, challenge your plan providers to investigate whether it would be more cost efficient to use a non-revenue sharing investment and bill for their fees. The common misconception with billable fees is that it is going to be a cost to the company, but in reality the billable fees can be paid in much the same way as revenue sharing was done, through participant accounts. Also, when you have a better understanding of what everyone is being paid, there may be a better opportunity to negotiate fees.

If you would like to discuss how share classes may affect your plan, please give me a call at 205-970-9088 or email me at


Three Potential Unintended Consequences of the DOL Fiduciary Rule

Time is money

It’s official! As of June 9, 2017, the Department of Labor Fiduciary Rule, as was written into law in April 2016, started its initial applicability phase with a final enforcement date of January 1, 2018. Quite honestly, to this point the DOL rule has mostly been a “monster in the closet” for financial services professionals; we have been unsure of exactly what to do, how to do it, and who will be on the hook for it. What is becoming more clear is that there may be a large number of advisors who chose to run away from the business completely rather than to adjust and adapt to the new regulations. If that happens, then it is estimated that we may see the financial advisor industry cut in half. If you are a non-advisor reading this you probably are asking yourself “what’s the big deal if a few financial advisors lose their jobs?” Here are three unintended consequences that plan sponsors should be aware of in the coming months.

  1. It may become more difficult to roll money out of the 401(k) plan                      The traditional advisor model for accepting 401(k) rollovers under a certain monetary threshold, $100,000 for instance, has been to use investment products that pay an upfront commission and trails through the investment product itself. This business model will no longer be allowed in retirement accounts, like rollover IRAs. Therefore, I believe it is going to be increasing difficult for participants to find financial advisors that are willing to work with “small” retirement accounts – there is too much risk and not enough reward for the advisor. The participant will still be able to rollover his account into a brokerage account that he will manage, but without the encouragement of an advisor this may be unlikely to happen. As a plan sponsor or other fiduciary to the plan, you remain responsible for all participants in the plan, even if they are terminated, which means you must keep sending those terminated participants with a balance in your plan all of the same notices you would a currently employed participant. Furthermore, plan sponsors need to place increased importance on making sure that the investments in the plan meet the needs of all participants, including the terminated with balances.
  2. Participant education may look different                                                                There is a thin line of distinction between participant advice and participant education drawn out in the Fiduciary Rule. If the advisor offers education, there is no fiduciary relationship created; however, offer advice and the advisor is now a fiduciary to that specific participant or group of participants that the advice was rendered to. Again, this blurred line can put advisors in an uncomfortable position of wanting to help participants without taking on undue liability. Plan providers are also caught in this crosshair. In fact, Fidelity, the largest record keeper of defined contribution plans, has taken the drastic step of making their call center representatives fiduciaries to plan participants in some cases. More than likely this continued focus may lead some advisors to stop offering participant education all together while some plan providers may start to offer more comprehensive participant advice.
  3. You may be forced to change advisors                                                                         With the potential shrinking of the number of financial advisors in the business, your plan may find that you are forced to change advisors. Additionally, some broker-dealers are becoming more restrictive in the type of professional that they allow to work on retirement plans. For instance, a broker-dealer may require their advisors who work on retirement plans to earn certain industry designations that reinforce the advisor’s ability to serve in a fiduciary capacity. The Accredit Investment Fiduciary® (AIF®) offered through FI360 and the Certified Plan Fiduciary Advisor (CPFA) offered through the National Association of Plan Advisors (NAPA) are just a few such designations. In any case, it is critical that the plan sponsor understands their advisor’s qualifications.

If you are unsure if any of these unintended consequences may impact your plan, please give me a call at 205-970-9088 or send me an email at