Trust—perhaps—but, by all
means, verify
Revenue sharing, which allows for the transfer of
fee-based compensation from investment fund providers to
recordkeepers or plan administrators, often obscures the
level of fees that plans are paying and what those fees
actually cover. Beyond that, sponsors might be overpaying
for the products or services they are receiving from
vendors and investment managers. In fact, the 2004 Annual
401(k) Benchmarking Survey by Deloitte indicated that,
while 90% of plan sponsor respondents claim to have a good
understanding of their plans' fees, and 84% say they
understand the normal fund operating expenses, less than
60% claim to understand the revenue-sharing agreements in
place at their mutual fund companies.
Many believe that plan sponsors have the fiduciary
responsibility to their participants to ensure the fees
they are paying for their plans are appropriate for the
products and services they are receiving from vendors.
"Many," by the way, seems to include the
Department of Labor, which, on a Web site dedicated to
Understanding Retirement Plan Fees and Expenses, notes:
"Among other duties, fiduciaries have a responsibility to
ensure that the services provided to their plan are
necessary and that the cost of those services is
reasonable."
"Plan sponsors are required to make decisions on
investments that are in the best interests of the
participants," says Ted Benna, president of 401k
Association, "but how can you do that if you don't know how
much you're paying?" During the past few years, providers
have become far more open about the fees they charge
plans but, often, they still need to be asked before they
will volunteer such information.
Fiserv Investment Support Services, for example, says
that, as part of its normal business, it provides its
recordkeeper clients with a quarterly accounting of all
revenue-sharing data. "So, if the plan sponsor asks for it,
the recordkeeper can give it," says Skip Schweiss,
executive vice president of Fiserv ISS. "We provide a
database showing what every fund pays," he adds.
That is another reason why it is important for plan
sponsors to obtain such information. Participants often do
not realize that they are paying fees, or how much they are
paying in fees, based on the fund lineup they have.
As a plan grows in size, it might be able to negotiate
with its vendor for a different share class that offers a
less expensive fee. Yet, again, sponsors must understand
the nature of these funds, or hire a consultant who can
help them understand, if they are to enter into such
negotiations. "The class of share is the easiest way to cut
back on fees," suggests David Katz, a partner with Rocaton
Investment Advisors. "Many plan sponsors can qualify for a
class of share other than retail, once their assets are
large enough."
Katz also says that sponsors sometimes do not realize
that certain fees can be rebated back to the plan or its
participants. That can happen under revenue sharing when a
fee from a nonproprietary investment product goes directly
to the recordkeeper. Those revenue-sharing fees can
vacillate depending on the fund. "Should all of that fee
really go to the vendor, or should some go back to the
client?" asks Katz. The sponsor will be able to recoup
those dollars only if it asks. Some plan consultants say
that, once they have looked into the books on
revenue-sharing deals, they have been able to discover tens
of thousands of dollars in payments that the sponsor, or
its participants, can gain back. "However, they have to
ask," says Katz (see "
Fare Share
," PLANSPONSOR, March 2006).
Schweiss says it is difficult to set up in advance a
template that would pinpoint revenue-sharing fees because
funds frequently change, and the revenue-sharing payments
can go up and down. Fiserv is attempting to develop such a
template, but the variation of fees and funds has made it
difficult.
There is, nonetheless, a clear, pervasive trend toward
openness and disclosure on the part of service providers.
"We've had a lot of success when clients are hiring us to
look at their overall fee structure," says Katz. "We've had
success in the willingness of providers to be transparent.
Part of that is because plan sponsors are forcing them to
be open, and because they don't want to lose business."
Revenue-sharing fees are assessed and passed on not only
on mutual fund investments, but also on group variable
annuity contracts. In addition, as with mutual fund
companies, some institutional investment managers that
offer group variable annuities to 401(k) plans have become
more open regarding their fee arrangements with
recordkeepers. However, some group annuity providers—which
remain a dominant force in servicing smaller retirement
plans—remain reluctant to disclose the fee the
institutional investment manager is being paid.
Because services frequently are bundled in today's
401(k) environment, other fee arrangements exist that plan
sponsors also can seek to have explained and delineated.
Among these fees that also sometimes come under the
revenue-sharing rubric are 12b-1 fees, sub-agency transfer
fees, and recapture fees.
However, so long as disclosure stops short of spelling
out the exact remuneration on one fund versus the next,
investors will not understand fully the conflicts of
interest, Cerulli asserts in its 2005 report titled "Mutual
Fund Revenue Sharing: Current Practices and Projected
Implications." In fact, Cerulli says, "The situation may be
more serious in the 401(k) world, where 85% of plan
sponsors say that disclosure is not enough—they want their
providers to be free of conflicts of interest
entirely."
Still, plans frequently pay a provider a single bundled
fee for services and are not aware of the various
components of that fee and how investment fund expenses and
revenue-sharing agreements can have an impact.
"Most plan sponsors and participants don't understand
fees from the investment community," says Ward Harris of
McHenry Consulting Group. "It is clear to us they don't
know how much they are paying their providers." McHenry
recommends a series of steps that sponsors can take to
understand pricing arrangements. They include writing an
investment policy statement that addresses revenue-sharing
issues; determining the cost of all services paid by the
sponsor, the plan, and the participants; demanding full
disclosure from providers; getting a grasp of hard-dollar
costs for the plan and expenses as a percentage of assets;
benchmarking costs; and keeping up on issues involving
costs and expenses.
Cerulli's report cautions that small retirement plans
stand to lose if revenue-sharing or 12b-1 fees are
"compromised"—a situation that Cerulli notes would be "a
widespread problem, as 75% of plans have less than 50
participants." Moreover, sponsors of small plans wear many
hats and are much less sophisticated than their large-plan
counterparts—and, thus, "are more susceptible to pricing
increases," according to the report. "[Both] quality of
service and investment choices stand to suffer as many
vendors would seek to shed themselves
of unprofitable small plans," according to Cerulli.
Benna says that, as a consultant, he strongly counsels
advisors to disclose fully any revenue-sharing deals to new
clients. "If they don't disclose," he explains, "they might
end up being embarrassed or challenged on the grounds that
they're abusing their clients. So, they're better off to
disclose."
He adds, however, that he doesn't think that all
advisors are taking such advice. That is why plan sponsors
should be asking questions regarding their fees and
demanding responses if they are being
stonewalled.
top
—Louis Berney