Financial Services

Can A Fiduciary Determine If A Fund Is TOO Cheap?

What happens when the unstoppable force of retirement services recordkeeping faces the immovable object of low-fee funds? We’ll probably have to wait for the courts to decide.

Recently, Fidelity Investments, TD Ameritrade, and Morgan Stanley all announced that they will be charging additional fees to customers who invest in The Vanguard Group’s funds. While this is almost certainly a good move from a financial standpoint, it raises serious questions about whether they opened themselves up to potential class-action lawsuits from participants in ERISA plans who have the new “extra-fee” Vanguard funds in their portfolio.

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John C. Bogle, the founder of The Vanguard Group, spent decades selling the idea that individual investors and the majority of asset managers don’t consistently beat the market benchmarks. Rather than pay extravagant fees to managers, investors should just “buy the benchmark.” In other words, bet with the “house,” rather than against it. And since you’re not paying for expensive analysis and research, the loads on the funds are very low.

Let’s be clear. While I have extensive experience in retirement services, my specialization is process and technology. I am NOT a lawyer or even a compliance officer. But, over the last several years, there has been a veritable explosion in suits against Fiduciaries for choosing funds that have “high” fees compared to comparable share classes available. In many of these cases (e.g., Putnam), Vanguard is used as the benchmark of what a low-fee fund is.

In such a litigious environment where people are sensitive to fees for funds, and where fees are declining industry-wide, deciding to ADD an additional fee on top of the underlying fund fees seems ill-advised. Especially, if historically, those are funds that you’ve been offering to participants.

Fidelity, TD Ameritrade, and Morgan Stanley are excellent institutions with very smart and capable people. I’m sure they’ve already thoroughly analyzed this risk. I’m also sure they are closely watching the Mutual of Omaha suit regarding additional fees on affiliated funds. But, I am equally sure that there are law firms out there that have begun specializing in this type of suit and would love to go after companies with such large coffers. I, for one, look forward to watching how this will all play out.

About the Author

Retirement Services Lead, Financial Services, Perficient Andrew Bihl, retirement services lead in Perficient’s financial services practice, joined the company in 2013 via the acquisition of ForwardThink Group. His areas of focus include program management offices, business process redesigns, and operational design. Andrew has over 20 years of experience in corporate and consulting roles. He has successfully delivered projects in the retirement services practice for diverse clients, such as Fidelity, Prudential, and TIAA.

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