A recent ruling by the Securities and Exchange Commission (SEC) indicates approval for mutual funds to be sold without servicing costs already built into the cost of the fund. In other words, the SEC ruling states that mutual funds can be sold the same way stocks, bonds, and ETFs are currently sold.

Currently, mutual fund companies bundle asset management fees, broker commissions, and recordkeeping fees into the fund, which is then distributed by the servicing entity to the customer. The bundled fees can vary and are set by the servicing entity; for example, under the current system, the same mutual fund may be sold with lower bundled fees to institutional investors and higher bundled fees to individual investors.

The SEC’s ruling signals that mutual funds can be sold without servicing fees built in, making such fees subject to negotiation between the servicing entity and the customer. The ruling could change the way mutual funds are sold in the future, and in particular, make fund servicing fees much more transparent. If more mutual fund companies begin selling their funds without bundled servicing fees, plan sponsors and fiduciaries may be able to simplify and reduce plan cost. Provided that fiduciaries respond appropriately to this development, it could also put an end to the recent 401(k) and 403(b) plan fee litigation, which we have written about in previous alerts, because plan sponsors would be able to obtain the lowest cost share classes and negotiate appropriate servicing fees directly with servicing entities on behalf of plan participants.