401(k) charges could shift

A Lancaster County pension adviser will not accept commissions from mutual funds when he recommends 401(k) investments to his clients, and he predicts the industry will shift toward his model to ensure fair advice.

Many actors in the sprawling 401(k) industry are pocketing the commissions,

"I'm gonna sit on the same side of the table as you. My revenue is neutral regardless of the funds we deal with," Jewer said.

Regional pension advisers are divided on the best alternative. Jewer will accept the commissions, but use them to offset, dollar-for-dollar, the investing fees that 401(k) owners pay mutual funds and other intermediaries.

Other firms in the region decline commissions altogether, saying they developed historically as a way to shift costs from sponsoring companies to employees.

Employers and workers in Central Pennsylvania frequently pay the commissions, which were intensely scrutinized in the past year.

But many people still do not fully understand them, Jewer and other advisers said.

"Everyone's paying to play, and the clients aren't getting all the fees disclosed to them," Jewer said.

He was referring to deals in which mutual funds give a broker a small percentage of the money the broker places with them. Such arrangements came under regulatory review last year. The U.S. Securities and Exchange Commission is investigating their impact on the 401(k) marketplace and the U.S. Department of Labor is studying whether they are adequately disclosed.

The practice of taking commissions is widespread, said Chris Barker, a manager at Comprehensive Financial Associates in Harrisburg.

"Virtually everyone that we work with is either doing it or unrolling a platform for doing it shortly," Barker said.

CFA keeps records for 401(k) plans, but does not offer brokerage or investment advice. CFA accepts commission payments itself, for its recordkeeping work, but returns some of that revenue to its clients.

The biggest problem with commissions is that they often are invisible to clients, said Rick Meigs, president of 401khelpcenter.com, The Portland firm provides consulting services to small and mediumsized pension managers.

"The key is transparency and disclosure," he said.

When investment advisers are paid commissions, a conflict of interest potentially could taint their counsel, Meigs said.

Ultrasound Services Inc. did not want to take that chance. The Bucks County provider of mobile diagnostic medical tests is Jewers first 401(k) client.

Chief Financial Officer Beth Coffey said Jewers model made her more confident that she is meeting her fiduciary duties as a trustee of Ultrasound's 401(k) plan.

"He's enabled us to put all these checks and balances in place. We're doing everything right," she said. "We can go into a meeting with employees and feel confident that this is the right thing to do."

Jewers approach is not unique in Central Pennsylvania.

It works like this: Certain mutual funds pay Jewer a reward when he entrusts them with Ultrasound employees' investment cash.

Instead of keeping that reward for himself, Jewer applys a credit to the employees' bill for management fees. His compensation remains at a pre-determined level.

Jewer said the key principle is that his investment recommendations have no bearing on his compensation, which assures his objectivity. A side benefit is that his clients save the money that he returns to them, Jewer said.

Also, Jewer is avoiding allegiance to a particular family of mutual funds, which is uncommon among pension managers.

Typically, allegiances often go hand-in-hand with commission payments. Without them, Jewer said he can offer clients a much broader pool of investment choices.

Because he intends to assume fiduciary responsibility for the 401(k) plans he manages, Jewers system is not just a voluntary gesture - it is a legal requirement. Pension managers with fiduciary responsibility are prohibited from pitching investments that boost their own bottom lines.

But there is some confusion in the industry over how the fiduciary rules should be interpreted, local pension advisers said.

Conrad Siegel Actuaries, an employee-benefits consulting firm in Susquehanna Township, already has been using Jewers model for years, said Robert J. Dolan, its president and chief executive officer.

Dolan said that since mutual fund fees became a matter of public controversy last year, his firm has received queries from clients and competitors about the passthrough model.

"It's been good for our business," he said.

Other firms advocate an even stricter line, eschewing the commissions entirely. PennRock Financial Advisers and FMA Advisory Inc. do not accept commissions.

Fulton Financial Advisers is considering such a prohibition.

James Walker, a vice president of PennRock, a division of PennRock Financial Services Corp. in East Earl Township, Lancaster County, said it was hard to generalize about cost savings.

Walker said the mutual funds that offer commission payments also may have higher management fees. in that case, even if the plan manager returns the commission to investors, the fund is no cheaper.

"I don't view it as reducing the cost," Walker said of the plans that use commissions to offset fees.

Peter J. LaBella, a partner at FMA in Harrisburg, said commissions could be used to give plan sponsors a discount on their 401(k) expenses.

But in that case, employees were footing the bill because the commissions are siphoned from their assets.

"I find that offensive. It's an employer's way ... of hiding his cost and shifting it to employees. The employer has abdicated responsibility for even the administrative costs," he said.

Jewer said his commissions were being used to reduce costs that are typically borne by employees anyway, so they would be the ones to benefit, not their employers.

He also said if a company wanted to assume all costs for its employees, he would continue passing on the commissions and bolster employees' returns further.

Mutual fund commissions became popular in part because they allowed pension fund managers to offer companies with 401(k) plans apparent price discounts, even if costs were simply being obscured, according to several advisers.

Fulton Financial Corp. generally uses the pass-through method Jewer is proposing.

But it might decide to eschew the commissions and bill employee accounts directly instead, said Stephen Armbruster, executive vice president of the Lancaster company's investment subsidiary, Fulton Financial Advisers.

Pension advisers initially depended on the mutual fund commissions because they could be used to offer plan sponsors an apparent discount, Armbruster said.

The problem was that competitors were using the hidden commissions - ultimately paid by the individual investor - to reduce the visible costs of their services, he said.

"In order for us to compete, to get in the door, to get time with a plan sponsor, we had to find a way to get pricing that on its surface would be competitive with what they were hearing from others," he said.

Armbruster emphasized that Fulton always outlined the arrangements in detail to its clients. He also said that for bankbased pension advisers, using commissions to recover management expenses was administratively easier than billing charges directly to employees.

By the time he joined Fulton in 1999, that was the bank's primary reason for sticking with commissions, Armbruster said.

Now, though, Fulton is weighing whether to abandon them. The chief motivation: Fulton wants to give its clients direct investment advice.

The company does not offer advice now because of worries that it could run afoul of legal or even ethical standards by doing so at the same time that it accepts commissions, even if they are passed on entirely to clients, Armbruster said.

"We're examining this subject. It's really a major tactical decision that we're looking at right now," he said.