Implicit Fees and a Fiduciaries Responsibility due to Behavioral Finance Influences.

Behavioral Finance:

Behavioral finance theories suggest that investors are not always rational and can be influenced by cognitive and emotional biases when making investment decisions. These biases can lead to suboptimal investment decisions and, in some cases, irrational behavior. Some of the common biases include loss aversion, overconfidence, and herding behavior.

Loss aversion bias refers to the tendency of investors to feel the pain of losses more than the pleasure of gains. Overconfidence bias, on the other hand, refers to the belief that one's knowledge and skills are better than they actually are. Herding behavior is the tendency of investors to follow the actions of other investors, even if it is not in their best interest.

Implicit Mutual Fund Fees:

Implicit mutual fund fees are fees that are not explicitly disclosed but are deducted from the returns. These fees can have a significant impact on the returns of the fund and can erode the value of the investments over time. Some of the common implicit fees include 12b-1 fees, revenue-sharing arrangements, and soft dollar arrangements.

12b-1 fees are marketing and distribution fees that are deducted from the returns of the fund. Revenue-sharing arrangements refer to payments made by mutual fund companies to brokerage firms for promoting their funds. Soft dollar arrangements refer to the use of commissions paid by mutual funds to purchase research and other services.

The Importance of Knowing Implicit Fees for Plan Fiduciaries:

Plan fiduciaries have a fiduciary responsibility to act in the best interest of plan participants. This includes the obligation to ensure that the plan fees are reasonable and necessary. Failure to know the implicit fees within the plan can have significant ramifications for plan fiduciaries.

If the plan fiduciaries are not aware of the implicit fees, they may be violating their fiduciary responsibility to act in the best interest of plan participants. Additionally, the lack of transparency can erode the trust of plan participants in the plan and the plan fiduciaries.

Conclusion:

Behavioral finance theories suggest that investors are not always rational and can be influenced by cognitive and emotional biases when making investment decisions. Implicit mutual fund fees are fees that are not explicitly disclosed but are deducted from the returns. Plan fiduciaries have a fiduciary responsibility to act in the best interest of plan participants. Failure to know the implicit fees within the plan can have significant ramifications for plan fiduciaries. It is therefore essential for plan fiduciaries to know the implicit fees within the plan and ensure that the plan fees are reasonable and necessary.