The 401(k) industry calls it revenue sharing. The mutual
fund industry calls it 12b-1 fees, subtransfer agency fees,
shareholder servicing fees, and profit-sharing payments.
The Department of Labor (DoL) calls it indirect payments.
Plaintiffs' attorneys call it "hidden and
By now, everyone in the 401(k) community must have some
understanding that almost all plan providers and many
advisers receive indirect payments from the investments in
The DoL has taken the position that fiduciaries have a
duty to know and evaluate indirect payments. In performing
that evaluation, fiduciaries need to consider whether the
total amounts received, directly and indirectly, by their
service providers are reasonable. Further, fiduciaries must
evaluate whether the payments cause potential conflicts of
interest and, if so, whether the plan and participants are
protected from those conflicts.
The failure to evaluate those issues is a fiduciary
breach. With that "big picture" introduction,
let's look at two types of revenue sharing, and the
potential conflicts of interest.
fees/shareholder servicing fees
These fees are paid by mutual funds to 401(k) providers
who perform the recordkeeping function for 401(k) plans.
They are charged against the mutual funds and thereby
reduce the participants' investment returns and,
ultimately, their benefits.
Purpose: The payments are intended to support transfer
agent and shareholder servicing activities by the
recordkeeper. That ordinarily would include keeping track
of share ownership at the plan and participant account
level, conveying information about the mutual fund to the
plan and participants, and so on.
Since mutual funds are required to provide those
services, in most cases, the funds would have borne those
costs (or perhaps similar, but lower, costs) in any event.
However, these payments can vary from mutual fund to mutual
fund and from share class to share class; as a result,
fiduciaries need to be attentive to the amounts being
Potential conflicts and reasonable compensation: There
may be several potential conflicts, but let's focus on
one—the possible reluctance of the recordkeeper to disclose
its revenues from those sources, and what it otherwise
would charge for its services.
For example, if a recordkeeper is receiving $50,000 in
revenue sharing, and if a reasonable charge for its
services is $50,000—the same amount—there is no conflict.
However, if the plan grows with time and the revenue
sharing grows to $85,000, but a reasonable charge only
increases to $60,000, the fees have become excessive. At
that point, the responsible fiduciaries have three jobs: to
know about the amount of the revenue sharing, to know the
reasonable cost of the recordkeeper's services, and to
reclaim the difference for the plan and the
Purpose: These fees are paid by mutual funds to
broker/Âdealers, and a part of those fees is passed on to
financial advisersÂ for their services to 401(k) plans.
Under the securities laws, the technical purpose is for the
sale or "distribution" of mutual funds. From the
perspective of the 401(k) community, the paymentsÂ are for
assistance in the selection and monitoring of the mutual
funds, enrollment meetings, investment education for
participants, and so on.
Potential conflicts: The potential conflict should be
obvious; that is, the broker/dealer and financial adviser
may recommend mutual funds that pay higher compensation (or
12b-1 fees). In other words, they may place the benefit to
themselves ahead of the best interests of the plan and the
Determining the reasonableness of fees and compenÂsation
is difficult, even under the best of circumstances. In many
cases, fiduciaries are not receiving complete information
about costs and compensation. However, there is relief on
the horizon. Much of the needed information will be
required to be disclosed by guidance recently proposed by
Fred Reish is Managing Director and Partner of the
Los Angeles-based law firm of Reish Luftman Reicher &
Cohen. A nationally recognized expert in employee
benefits law, he has written four books and many articles
on ERISA, IRS and DOL audits, and pension plan disputes.
Fred has been awarded the Institutional Investor Lifetime
Achievement Award and PLANSPONSOR's Lifetime Achievement
Award. He is also one of the 15 individuals named by
PLANSPONSOR magazine as "Legends of the Retirement