It is a fundamental responsibility for ERISA plan sponsors to make sure that fees are reasonable. Many of the recent rash of lawsuits have been based on excessive fees paid because plan sponsors were not diligent and vigilant. It can be hard as many fees are paid indirectly through revenue sharing arrangement. ERISA expert Fred Reish explains what plan sponsors should do with excess DC plan fees that are recaptured.
Revenue sharing fees, usually 12b1 or sub-transfer agency (Sub TA), are embedded within the cost of investments paid by participants. These fees can be used to pay the record keeper, advisor and TPA and other so-called “settlor” fees. Once recaptured, Reish suggest three prudent ways to handle the money:
- Internal Recapture Accounts – The plan’s record keeper creates a recapture account on their books to offset legitimate settlor fees. But what happens to money in these accounts when the plan moves to a new record keeper?
- External Accounts – Excess fees are paid into an external account managed by the record keeper as directed by the plan.
- Participant Allocation – Remit the excess money back to participants.
Which raises an interesting question. Because the revenue sharing fees within investments can vary widely with index funds allocating no or very low percentages, participants may pay different percentages depending on which investment their select, not just based on the size of their account. Some experts recommend what is known as “fee equalization” where a plan determines what percentage of assets need to be allocated to pay the desired expenses and then charge each account a similar amount after stripping out revenue sharing for all participants.
Without fee equalization the 3rd recapture option provides excess fees to accounts that might not have paid any revenue sharing at all. For this reason, and just based on fairness, many plans are looking at participant fee equalization. Another option is to use so-called “zero revenue sharing” funds and then charge each participant’s account.
There’s an insightful overview of revenue sharing and fee equalization by TPSU Adjunct Lecturer Joe DeNoyior on 401kTV as well as a thoughtful white paper by TIAA.
