401(k) Plan Sponsors Still Struggling with Revenue Sharing. Lockton, a national retirement plan consulting firm, outlines the revenue sharing arrangements common in most 401k and 403b plans yet not known to most plan sponsors, which has led to lawsuits alleging that fees were excessive. So what should plan sponsors do to protect themselves and make sure they are getting a fair deal?
The first step is to understand how much is actually being paid out of plan assets to third parties like record keepers, advisors and TPAs. If the company pays the vendors directly, there is no duty to monitor or ERISA liability. Embedded in the expense ratio of many investments is extra revenue used to pay third parties which plan sponsors have to track carefully. Sometimes providers will share additional revenue with TPAs or an advisor’s broker dealer which also needs to be monitored.
In 2012, the Department of Labor promulgated fee disclosure rules requiring all parties receiving direct or indirect payments above a certain amount to disclose their fees. Except many of these 408b2 and 404a5 disclosures are incomprehensible to most plan sponsors.
Once the actual fees are determined, plan sponsors have to determine if they are reasonable either through benchmarking comparable plans receiving comparable services or through an RFP. Best practices dictate that plan should benchmark annually and conduct an RFP every three to five years because the market and the plan are constantly changing.
Provider and advisor costs are generally based on the number of participants in the plan and the services offered but asset based fees are most common. Which means that when the market or plan assets rise, fees go up even if the services and number of participants are static. The opposite is true when the market drops.
One of the results of the DOL’s conflict of interest rule is the movement away from commissions embedded within the investments paid to advisors. Many plans and firms are moving to so-called no-rev sharing funds giving the plan the option to charge each participant in the plan a fee to subsidize the costs of running the plan whether asset based or fixed.
One issue with revenue sharing is that one participant may be carrying more of the load because of higher revenue sharing within the funds they select compared to someone, for example, using index funds which generally have lower revenue sharing
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