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How to Use Revenue Sharing and Still Achieve Fee Transparency
Last Updated: November 25, 2014
There are many costs involved in successfully sponsoring and operating a retirement plan. Those costs can include paying the people who help operate the plan, including internal staff and third party administrators, record keepers, financial advisers, and more. To pay for some of these plan services, plan sponsors may reimburse certain service providers, e.g., administrative and record keeping expenses, through the use of revenue sharing. Although there is some controversy with revenue sharing as the retirement industry moves to more fee transparency, courts have continued to reaffirm that the use of revenue sharing to pay certain plan expenses is, in fact, legal. Plan fiduciaries are still obligated to understand how the record keeping arrangement is structured and what role revenue sharing plays in that set-up. They must ultimately be able to make a determination that the fees are reasonable and the services are necessary.
As DOL and IRS scrutiny increases on the arrangements that plan sponsors have with their vendors, the use of revenue sharing remains a hot issue. The first obstacle a plan fiduciary faces is making the record keeper identify the exact amount that will be paid for its services. If the record keeper states that the fees will be paid by revenue sharing but doesn’t define the amount, then the plan fiduciary cannot determine the reasonableness of the fees because the total fees have not been identified.
But once the exact numbers are provided, a clearer understanding of costs can be determined and a more consistent way of using revenue sharing facilitated. For example, if the record keeper states that it’s charging .38% of the plan asset value, then the plan fiduciary can use the revenue sharing to offset the fees. Although this set-up is much more transparent, there are still a few more steps to take before the plan fiduciary can be confident that fees are transparent and revenue sharing is appropriately used.
For instance, the plan fiduciary will want to ensure that the collected revenue sharing is not more than the paid fees. This can be accomplished through close monitoring of both the plan expenses and the plan’s revenue-sharing collection. If too much revenue sharing is being collected, the plan fiduciary will want to take steps to alleviate this issue.
Complying with the ERISA fiduciary duty of prudence requires expertise in a variety of areas related to plan administration and investments. If there are issues with fee transparency and revenue sharing and fiduciaries recognize they don’t have the expertise to resolve the problem on their own, it’s best to hire someone who has that unique knowledge.
If you have any questions regarding fee transparency or revenue sharing, contact Pension Consultants’ Vendor Services Team.
PCI’s archived blog entries are dated, the rules and statutes referenced may have changed. The analysis or guidance within these blog entries may have become stale, dated, or no longer accurate. PCI will not update or change these entries to reflect the latest analysis or development.
