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 Industry
Insight from Fred Barstein
Who Needs Another R Share?
According to
industry sources, American Funds is coming out with another
R Share.
While the first reaction might
be, “Who needs another R Share” especially when American
Funds already has five others, their R 6 share might be the
most interesting class of R shares that American Funds or
any investment manager has ever introduced.
The R 6 share is
stripped of all 12(b)(1) and any form of revenue sharing
that is used to subsidize the cost of record keeping and
administration.
American Funds is only charging
for managing money and leaving it to the sponsor, advisor,
record keeper and the TPA to figure out who gets paid what
and how.
Currently, the vast majority of
fees come out of the management fee charged by the
investment manager.
Whether clever, a convenience
or a way to obscure costs, the industry has generally
accepted add-ons to fund fees to pay for all expenses when
plan sponsors decided that participants should pay for
nearly everything, whether they know it or not.
Now, American Funds, a leader
in the industry and certainly when it comes to R Shares, has
clearly set the table for the debate of who should pay and
how with their new R 6 share.
It’s doubtful that anyone
except the very large sponsors will start paying especially
when more of them are eliminating matches.
Will record keepers lower their
costs, which would be the unintended consequence if R 6
funds gains traction?
With the move to level comp,
arguably advisors will have to have all R 6 share or none
and will have to move to the pure fee based model.
No question that participants
will carry the burden, especially in smaller plans, and as
we transition towards R 6, if in fact we do, the inequities
of the current DC system will be highlighted.
Participants that select funds
that pay revenue sharing will pay for all costs and those
that select R 6 like funds or that use Vanguard will pay
nothing.
And to make matters worse, some
participants will contribute more that others depending on
which fund they select.
Makes sense to me!
In a recent article
“Defining a No Conflict 401(k) System” we outlined a
system where all providers, including advisors, submit a
contract detailing their services and defining their fees
whether hard dollar or asset based, to be paid out of an
ERISA account taken equally from all participants.
While hard dollar fees would be simpler, asset based
fees can be rolling as plans grow or change.
All participants would pay the same ratio and
everyone’s fees would be clearly defined.
Some might go farther and say all participants should
pay the same set hard dollar fee but smaller accounts might
get killed and stunt their growth just when they need the
most nurturing. In
any case, American Funds has thrown down the gauntlet and
taken the stance with their new R 6 share that they will
only charge for managing money.
What a novel concept!
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