A New Fee Challenge for Retirement Plan Sponsors: Levelization

When funds charge revenue-sharing fees, the playing field becomes lopsided.

By Lee Barney | January 14, 2016
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Plan sponsors, as a whole, are unaware that participants pay disparate fees, and service providers, particularly recordkeepers that receive revenue-sharing payments, are not going to address it, experts say. It is incumbent on sponsors, then, to ask their plan advisers and recordkeepers about fee levelization.

It is also a fiduciary responsibility that has largely escaped sponsors’ attention, notes Fred Reish, a partner with Drinker Biddle & Reath in the Los Angeles office. “While there are no requirements to charge equitable fees, in Field Assistance Bulletin (FAB) 2003-03, the Department of Labor (DOL) indicated that allocating plan expenses is a fiduciary decision that requires fiduciaries to act prudently,” Reish says. “Whatever allocation method is used, the failure by fiduciaries to engage in a prudent process to consider an equitable method of allocation of plan costs and revenue sharing would be imprudent and a breach of fiduciary duty.”

In a white paper, “Deciding What is Reasonable: Assessing Fees Using Value and Outcomes,” TIAA-CREF concurs that scrutinizing how fees are charged to each participant is a best practice sponsors need to consider: “With greater scrutiny around plan level fees, a new question is emerging around the fairness of how these fees are charged to participants. There are currently no statutes requiring fees to be assessed equitably across plan participants, but regulators are studying this closely.”

Most plans are populated with funds that use revenue-sharing payments to pay recordkeepers, says Brian Menickella, managing partner with The Beacon Group of Companies in King of Prussia, Pennsylvania, whose own firm has eliminated revenue share classes for all of its clients over the past several years. “There are not that many advisers or plan providers that use a pure revenue-sharing-neutral platform,” Menickella says. “But that is going to have to change because landmark cases like the Supreme Court case of Tibble v. Edison are all targeting revenue sharing. Fee levelization is where the industry as a whole is going to end up.” It may take one to three years for it to become a reality, but Menickella is certain this is the direction in which the retirement plan industry is headed.

The recent Bell v. Anthem lawsuit is a clarion call for advisers and sponsors to take a harder look at fees, Menickella says, noting that in this suit, the plaintiffs accused Anthem’s pension committee for breaching its fiduciary duties by selecting a Vanguard fund charging four basis points, when an identical, institutional fund charging two basis points was available.

Complicating matters further is the Department of Labor’s (DOL’s) pending fiduciary rule, which will “outlaw revenue sharing,” Menickella says. Chad Carmichael, principal consultant with North Highland in Charlotte, North Carolina, agrees: “While there already is pressure on fees, the DOL fiduciary standard will put even more scrutiny on this.”

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