Regardless of the concern and issues with revenue sharing and various share classes, the financial service industry doggedly attempts to retain a system ripe with conflicts. This is understandably confusing to the market, especially 401k and 403b plan sponsors. At a TPSU program held at Valparaiso University in Indiana, a plan sponsor explains how his plan uses a 401k ERISA budget to deal with the issues.
So what is a 401k ERISA budget? It’s a way for defined contribution (DC) plans to consolidate all fees paid by participants into one account and pay plan eligible expenses. Traditionally, the account was funded by plan forfeitures – plan sponsors did not know what to do with the money so they created an ERISA budget. But more common, like the one used by the HR director at a 700-person manufacturing attending TPSU, plans will strip out all revenue sharing paid by plan participants as part of their expense ratios in the form of 12b1 or sub TA (transfer agency) fees and fund their ERISA budget to pay eligible expenses which can include the plans advisor, provider, attorney or CPA.
Having a budget makes it simpler to understand how much the plan is actually paying uncovering hidden fees and how much they are paying their vendors. Without a budget and without knowing the fees paid, providers are just paying themselves opening up plan fiduciaries to fiduciary liability because they have not determined whether fees are reasonable – excessive fees through revenue sharing are the most popular theme for 401k and 403b lawsuits.
So how did this plan sponsor create and manage their budget? Easy – their advisor did it for them and, in the process, negotiated lower fees which offset the advisor’s cost for the first six years of the relationship.
It’s close to impossible for plan sponsors to understand all the fees and how the various vendors are paid in WHAT the Indiana HR director called a “shell game.” Providers have different names for revenue sharing which makes it even harder.
Lesson learned – make sure you have a knowledgeable plan advisor who can navigate the jungle of revenue sharing and hidden fees helping you to set up and manage your ERISA budget. Because ignorance is no excuse under ERISA.
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