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Revenue Sharing in Managed Accounts Targeted by Class Action Law Firm

revenue sharingManaged accounts within defined contribution (DC) plans continue to be targeted by class action law firms with the latest filed by Schneider Wallace on behalf of three participants in the $14 billion Ford rMotor Company plan against their record keeper Xerox HR Solutions. The case involves the issue of revenue sharing, which is becoming the new four-letter word in the defined contribution space. While anyone can sue anybody for anything, Schneider, which already has filed eight lawsuits, obviously sees an opportunity with payments to Financial Engines (FE), the largest DC managed account provider, the target of recently filed suits against Voya and Fidelity

At the heart of Chendes v. Xerox HR Solutions is the claim of kickbacks of $1.8 million in 2015 alone by FE to the Ford plan record keeper which is alleged to be an illegal pay-to-play scheme violating ERISA. Plaintiffs claim that Xerox provided no services to FE yet received 31% of the $5.8 million in fees paid by Ford plan participants. And by selecting FE as the exclusive managed account provider, Xerox became a fiduciary.

Though it might seem different, the payments made by FE to Xerox are common – many money managers whose investments are offered in a plan offset costs otherwise known as revenue sharing. Because managed accounts do not have share classes with revenue sharing in the form of 12b1 or sub-transfer agency fees, the amounts paid by FE to Xerox appear more glaring.

Though revenue sharing is not per se a violation of ERISA, like any fees paid out of plan assets, they must be reasonable which is the responsibility of plan fiduciaries which may include Xerox if plaintiffs win that argument which might have a chilling effect on all managed accounts. And even if the $1.8 million paid by FE plus other fees received by Xerox to record keep the plan are reasonable, is it fair that the users of the managed account in the Ford plan are subsidizing overall costs for the benefit of all?

Which raises the obvious question of whether it still makes sense to use revenue sharing in DC plans at all with the opportunity for potential abuse as alleged in the Chendes class action lawsuit.

Fred Barstein

Fred Barstein

Founder & Editor-in-Chief at 401kTV | TRAU | TPSU
Fred Barstein is the Founder & Editor-in-Chief of 401kTV. Fred is also the Founder and CEO of The Retirement Advisor University (TRAU), a collaboration with UCLA Anderson School of Management Executive Education and The Plan Sponsor University (TPSU).Mr. Barstein was also Founder and Editor-in-Chief of NAPA Net.
Fred Barstein
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