Surprise! DOL Rolls Out a Second Set of FAQs and Clarifies Its Position on 12b-1 Fees

Ok Ok Ok . . . No matter how many times you’ve read information on the DOL’s new fiduciary standard, it’s still hard to decipher, right? Obviously, the DOL is aware of this, since it has released not one, but two FAQs. The most recent set of FAQs, released January 13, is 17 pages long — that’s a lot of questions, and we hope, an equal amount of answers.

After the new rule was proposed and until the release of this second set of FAQs, there had been confusion within the industry regarding the receipt of revenue sharing payments from retirement plans, including 12b-1 fees, which has been a common practice for years. In the FAQs, the DOL states that a rep who charges an asset-based fee for providing ongoing advice to 401(k) plans (and therefore, is acting as a fiduciary) may use fully disclosed revenue sharing payments, such as Rule 12b-1 fees, to offset all or part of that level fee on a dollar-for-dollar basis, without creating a prohibited transaction. This is welcome clarification for financial professionals who work with retirement plans and receive 12b-1 fees. Without this option, reps would have to use the complicated Best Interest Contract Exemption (BICE) to avoid causing a prohibited transaction.

Translation: A rep who charges a retirement plan employer 20 basis points annually for investment advice for its $10 million 401(k) plan receives an advisory fee of $20,000 per year. If the rep receives $10,000 in 12b-1 fees, the rep may use that to offset or reduce the advisory fee. Consequently, the plan only owes the rep an additional $10,000 to make up the difference.

Still confused? We hope not, but you can read more on 12b-1 fees and other issues related to the new rule on the DOL’s website here.

More information on the BICE and the ERISA fiduciary rule can also be found in the FIRE Solutions course ERISA and the Fiduciary Standard. Although it is widely anticipated that the Trump Administration will delay the April 10 effective date of the new fiduciary rule and/or revise it, no official announcement has yet been made. Stay tuned!