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Revenue Sharing Spurring 401k Lawsuits with More to Come

revenue sharingWith the focus on 401k and 403b lawsuits, it may be time for employers sponsoring a corporate retirement plan to get out of the line of fire by eliminating revenue sharing altogether. And if you think that these lawsuits are going away anytime soon, think again – a major 401k plaintiff’s law firm has issued a press release aimed at participants in plans using Financial Engines as their managed account provider inviting them to join class action lawsuits. So how can plan sponsors avoid liability?

The basics of fiduciary liability under ERISA is that fees must be reasonable and that the plan must be designed for the sole benefit of the participants when plan sponsors use plan assets to pay fees. Most mutual funds bake in extra fees above and beyond the cost of managing the money to pay the record keeper and TPA (usually through sub-transfer agency or Sub-TA fees) or the advisor (12b1 fees). And most plan sponsors and almost all participants either do not know about these arrangements or who is being paid what.

For plan sponsors to avoid liability around revenue sharing, they need to:

  1. Know what the fees are.
  2. Determine if they are reasonable through a benchmark or RFP.

On the other hand, as a plan sponsor attending a TPSU program did, plans can eliminate revenue sharing altogether which does not solve the problem unless the company is willing to pay all expenses directly not using plan assets. Plans can offer participants only so-called “no revenue sharing funds” and record keepers can deduct an equal percentage from each participant’s account to offset costs. Although no revenue sharing funds offer greater transparency, plan sponsors must still determine if the fees are reasonable.

Which leads us to Financial Engines, the most popular defined contribution plan managed account provider who pays a percentage of the fee they receive from participants to the record keeper to be the exclusive managed account provider. Recent lawsuits have alleged that these fees are not reasonable leading to the press release by Keller Rohrback listing a number of plan sponsors using Financial Engines. Is your company on this list?

Do you use Financial Engines and, if so, what is the revenue sharing agreement and is it reasonable? Do you understand revenue sharing and have you determined if the fees are reasonable?

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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