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401k investors, as well as company sponsors, should be told of any payments related to their retirement savings—after all, it’s their money.
In March 2016, Fidelity sent an Annual Plan Sponsor Disclosure Statement to retirement plan sponsors as required under Department of Labor regulation 408(b)(2) of the Employee Retirement Income Security Act of 1974 to assist plan administrators in meeting participant disclosure obligations.
Under the regulation, retirement plan record keepers, like Fidelity, are required to disclose changes to information or data related to the plan’s investment options, to the extent such information or data is within the control of or reasonably available to the record keeper. Examples of this information include performance, total annual operating expense and redemption fees.
The 408(b)(2) regulation also requires service providers to disclose changes to services and/or compensation on an ongoing basis. Fidelity stated that it complies with this requirement in a variety of ways including trust or service agreement amendments, letters of direction and other notices.
In a footnote to the Disclosure Statement under “Additional Information,” Fidelity stated:
“Beginning in April 2016, Fidelity may receive a fee from unaffiliated product providers to compensate Fidelity for maintaining the infrastructure to accommodate unaffiliated products. These fees are not in connection with Fidelity’s services to the plan and are not considered indirect compensation under the 408(b)(2) regulation. The fee is a fixed amount that typically equates to less than 0.05% of a product provider’s assets in all retail, workplace, and intermediary channels maintained by Fidelity and does not vary based on a plan’s offering of an unaffiliated product supported by Fidelity.”
This mind-boggling footnote disclosure from Fidelity to 401k plan sponsors gives rise, in my mind, to the following questions which sponsors, as fiduciaries, are duty-bound to ask of Fidelity.
First, are these fees properly characterized as payments for “infrastructure” or something else, such as distribution-related? Have the boards of the mutual funds paying the new Infrastructure Fee Fidelity has demanded (to remain on its recordkeeping platform) agreed that the fee is not wholly, or partially, distribution-related?
Second, since the fees are based, in part, on retirement plan assets, how is it that they are not considered paid “in connection with Fidelity’s services to the plans?”
Who says that these payments “are not considered indirect compensation” paid to a fiduciary under ERISA 408(b)(2)? The SEC, Department of Labor, the mutual funds, or Fidelity? Ask to see any related legal/regulatory opinion.
Are the Infrastructure Fees properly characterized as “fixed,” or can the fees vary based upon assets under management at the adviser? Call me crazy but if they can vary, then they’re not “fixed.”
Why is the actual dollar amount received by Fidelity, as 401k recordkeeper, from each particular mutual fund held in a plan not disclosed to the sponsor of that plan?
Is the new infrastructure fee 5 bps or, as reported in the Wall Street Journal, 15 bps of an adviser’s assets?
Does the Infrastructure Fee amount paid by a plan vary based upon a plan’s offering of unaffiliated product? In other words, if a plan offers more lower-cost, non-Fidelity funds, does it pay more (in dollar amounts) in infrastructure fees?
In my experience, when asked, financial intermediaries and mutual funds universally maintain (a) all retirement plan fees are properly disclosed; however, (b) the contractual agreements detailing the fees cannot be disclosed to sponsors or, God forbid, 401k investors.
In my opinion, this makes no sense. 401k investors, as well as company sponsors should be told of any payments related to their retirement savings—after all, it’s their money.
If Fidelity is confident that all retirement plan fees it charges are properly characterized and disclosed, including its new controversial Infrastructure Fee—and I have no reason to believe they are or aren’t—it should have no problem disclosing the underlying contractual agreements with mutual funds which provide details regarding the nature and amounts of any such fees 401k investors and plan sponsors need to consider.