Are Mutual Fund Share Classes a Ticking Time Bomb?

The risk associated with using investments that “revenue share” with service providers is heating up.

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Are Mutual Fund Share Classes a Ticking Time Bomb?

The risk associated with using investments that “revenue share” with service providers is heating up. Multiple courts across the country are hearing lawsuits that accuse thosewho run retirement plans of improperly selecting mutual fund shares classes that pay differing levels of revenue sharing. These new cases follow on the heels of Tussey v ABB wherein ABB was hit with a judgment of over $10 million for failure to use the cheapest share class available. Ultimately, ABB was unable to justify the use of a more expensive share class when a lesser cost of the same investment was available.

The selection of investment alternatives is a fiduciary decision. Inherent in that decision is the selection of the mutual fund share class or cost structure of the investment. Prudence dictates that where multiple investments with the same risk and return are available the one with the lowest cost should be selected, but is that always the case?

Although a plan fiduciary should seek to acquire the investment with the lowest cost structure, different share classes abound to provide for revenue that is shared with a service provider to reduce the amount of fees directly invoiced to the plan sponsor or against plan assets. While there is no statute or regulation prohibiting the use of an investment with a higher cost structure than the lowest available, a fiduciary selecting an investment that shares revenue with service providers must monitor those payments as assets increase to avoid paying too much. A plan fiduciary has a responsibility to avoid the plan paying unreasonable fees.

Employers who sponsor retirement plans and the responsible parties that manage the plan become “fiduciaries” to that plan. Fiduciaries have an obligation to put the interests of plan
participants ahead of those of the employer. Personal liability is the consequence for failing to do so.

A retirement plan fiduciary has many important responsibilities, including:

  • Avoiding imprudent decisions
  • Avoiding conflicts of interest
  • Avoiding unreasonable fees
  • Diversifying assets to minimize risk of large losses
  • Making decisions for the solebenefit of the participants
  • Following the plan document

© 2014 FRA PlanTools – For Exclusive Licensed Use of Gordon Asset Management, LLC.  The opinions expressed are either those of Gordon Asset Management, LLC (GAMLLC) and subject to change without notice, or were developed from sources believed to be providing accurate information. This material is not financial advice or an offer to sell any product. Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. GAMLLC reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Gordon Asset Management is an SEC-registered investment adviser. Registration does not imply a certain level of skill or training. More information about the adviser, its investment strategies and objectives is included in the firm’s Form ADV, which can be obtained, at no charge, by calling (866) 216-1920. The principle office of Gordon Asset Management, LLC is located at 1007 Slater Road, Suite 200, Durham, North Carolina, 27703.

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Todd Zempel, known as "Z", has over 12 years of extensive industry experience. Prior to taking over retirement plan operations for the Gordon Asset Management, Z spent a decade as a TPA and record-keeper. Z holds the Accredited Investment Fiduciary Analyst (AIFA) designation Qualified 401(k) Administrator (QKA) designation, and is a Certified Plan Fiduciary Adviser (CPFA). Z was voted one of the nation’s top 50 retirement plan advisors under the age of 40 in 2015.