PLANADVISER - May/June 2018 - 43

structure wouldn't work, but it is something people should
be aware of. "
Jessica Sclafani, director of Cerulli Associates' retirement
research practice in Boston, says, according to Cerulli's
definition, " The clean share class aims to separate distribution
fees from investment management fees. There are
no 12b-1 or sub-TA fees and no embedded commission. " In
other words, it is a true " triple zero " share class.
When There Is No Revenue Sharing
Cerulli research found that, among retirement plan
specialist advisers-defined as those who generate at least
50% of their revenue from retirement plan business-40.2%
of assets under management (AUM) are in R-share classes,
25.5% are in institutional shares and 20.5% are in what is
called zero-zero share classes-i.e., having no 12b-1 or
sub-TA fees.
" Based on Cerulli's definition of clean shares, the zerozero
share class is not necessarily synonymous with a clean
share class; however, in most cases it would be, assuming
there is no commission attached to it, " Sclafani says.
Cerulli continues to see retirement specialist advisers
in the small- and micro-plan markets use revenue sharing
to subsidize plan administration costs, she says. " I would
anticipate there will not be a complete shift to zero-zero
share classes until we address how small plans can pay for
administration. "
Both Szaprio and Sclafani note that if a plan does not use
revenue sharing, the adviser can suggest the sponsor pay
for administrative, recordkeeping and advisory fees itself,
out-of-pocket, or pass the costs to participants. Some plan
sponsors use forfeitures from participant accounts to pay
for such fees.
But, Sclafani says, small-plan sponsors generally will not
want to do that. " We are still working on greater access to
retirement plans for small-business employees, so revenue
sharing encourages that-and encourages plan sponsors to
offer employer contributions, as they won't have to pay for
all administration costs. "
According to PIMCO's 2018 Defined Contribution
Consulting Support and Trends Survey, for plans with assets
greater than $1 billion, consultants almost evenly recommend
that the employer pay out-of-pocket (29%) or use a
flat-dollar charge per participant (28%). For smaller plans-
i.e., those with less than $50 million or with $50 million
through $200 million in assets-the majority of consultants
recommend a basis point (bps) charge pro rata across plan
assets-30% or 47%, respectively.
For plan sponsors that pass costs on to participants,
deciding which is fairer-flat fee vs. asset-based fee-
depends on the plan, Szapiro says. " A flat fee seems inherently
fairer, but a $40 flat fee is high for new employees with
low asset bases, " he says. " When the fee is based on assets,
more tenured employees pay more, but as the plan matures,
fees based on assets may go higher than the actual costs
for managing the plan. " It definitely requires monitoring, he
adds, observing that 408(b)(2) fee disclosures from providers
have helped plan sponsors see what was being paid for and
made them consider moving to flat-dollar fees.
John Faustino, chief product and strategy officer at Fi360
in Pittsburgh, says some advisers may think clean shares
are less relevant now, in light of the DOL conflict of interest
rule being vacated. However, he says, " Notwithstanding the
movement by the Securities and Exchange Commission
[SEC] to create new standards, I still feel that clean shares
are the way of the future. "
Szapiro points out that the preamble to the proposed SEC
rule about fiduciary standards for advisers mentions clean
shares as an appealing way to eliminate conflicts of interest.
Faustino views introduction of this new share class
as part of the broader fiduciary movement-putting the
emphasis on disclosure and the importance of being clear
to clients about the mechanics of compensation. " This will
be a market demand. Even if some broker/dealers [B/Ds]
aren't interested in pushing for clean shares, now that the
DOL rule has faltered, there is still the broader industry
competition pressure to be transparent and fair about the
compensation infrastructure, " he says.
The introduction of the new shares is also tied into
adviser fee compression, Faustino believes. " We see that
the same fiduciary advisers who are happy to be charging
explicit advisory fees rather than commissions are the same
ones who are happy to talk about and use clean shares, " he
says. " When you have commissions and revenue sharing,
there can be the perception that this muddies the water,
and there is less clarity and transparency about what is
being paid for investments versus advice and other services. "
Matt Wolniewicz, Fi360's president, makes a broader
point. " If you think about the challenge the DOL was-
and now the SEC is-facing to clean up who is and who is
not a 'financial adviser' versus who is a broker-and what
the different client treatment standards are for these
two groups-another massive area of investor confusion
surrounds this topic of share classes, " he says.
" There has been a proliferation of share classes in recent
years. Even if you are an expert institution, you're faced
with such a complex array of terminology and choices. Are
you going to get R4 shares or R6 shares? Or Z shares? Or I
shares? I think clean shares could be a way to simplify a lot
of this, " he says. -Rebecca Moore
KEY TAKEAWAYS
* Clean shares, although having no set definition, generally
have no front-end load or 12b-1 revenue-sharing
fees; however, they can include sub-transfer agency
fees or other kinds of revenue sharing.
* Advisers in the small- and micro-plan markets use
revenue sharing to subsidize plan administration costs.
* When there is no revenue sharing, either the sponsor
or the participant must pay the administrative,
recordkeeping and advisory fees.
planadviser.com may-june 2018 | 43
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