Invesmart, a retirement financial services firm in the US, has come out in strong support of the Department of Labor’s (DOL) recent hearings on retirement plan fee disclosure, citing the need for regulation that compels defined contribution plan providers to fully disclose all revenue sharing agreements, as well as investment management fees charged in retirement plans. Invesmart believes that if the DOL mandates complete fee transparency, plan sponsors and participants could finally evaluate the fairness and competitiveness of the fees they’re paying.
“There’s been much needed fee disclosure reform in the retail mutual fund industry, but many retirement plan participants are still in the dark when it comes to how much they’re paying in plan fees and what the fees are for,” says Christian Echavarria, Founder and SVP of Investment Services for Invesmart. “Our analysis of 3,000 quality mutual funds earlier this year revealed a surprising level of hidden service and marketing fees embedded in mutual funds expense ratios paid by participants in addition to service fees paid by plan sponsors. Retirement service providers have an obligation to fully disclose all fees so that plan sponsors and participants know what they’re paying for.”
Earlier this year Invesmart launched the Retirement Portfolio Cost Barometer to help plan sponsors and participants break investment management fees from other marketing and services fees embedded in the mutual fund expense ratio. Through its Barometer, Invesmart determined that 65 basis points or less represents a fair benchmark for the investment management fees that a plan participant should pay annually for a well diversified portfolio. For example, if fund fees for the plan average 1.25%, the participant is paying at least 60 basis points for marketing and services in addition to the service fees that are paid directly to the service provider by the sponsor or the Plan Trust.
To calculate the Retirement Portfolio Cost Barometer, Invesmart considered the investment management fees of 60 best-of-breed institutional quality mutual funds selected from a universe of 3,000 funds representing 150 fund families. The investment management fees were calculated by netting from the fund expense ratio the revenue sharing for service and marketing available in the funds in the form of finder’s fees, 12b-1 fees, dealer concessions, shareholder servicing reimbursements and sub-transfer agent arrangements. The 60 funds represent the range of investment style, managers and asset categories that allow a participant to build a well-diversified portfolio appropriate for investing retirement assets.
As a service to plan sponsors and participants, Invesmart earlier this year launched its Investment Fiduciary Standards Scale to help sponsors move beyond the minimum “safe harbor” requirement of Section 404(c) of the Employee Retirement Income Security Act of 1974, as amended, (ERISA) and adopt higher standards of retirement plan participant advocacy. The scale has three color-coded tiers – orange, yellow and green – each representing a specific participant advocacy standard. The green standard is the highest and indicates a retirement plan that is operated on every level in the best interests of the plan participant.
“Retirement plan fee disclosure reform conforms to the green standard of our scale,” said Mr. Echavarria. “It means plan sponsors and their service providers are doing everything they possibly can for participants, from complete fee transparency, to providing plan participants with independent professional advice. It’s where the retirement industry has to migrate to ensure that Americans are saving properly and managing their portfolios professionally so that they can have the best opportunity to retire comfortably.”