Compliance

Revenue-Sharing Fee Analysis Now Available at Participant Level

July 31, 2012 (PLANSPONSOR.com) - It is up to a plan’s investment committee to determine whether the cost of reimbursing revenue-sharing fees to each participant is effective—or prohibitive. 

By PLANSPONSOR staff editors@plansponsor.com | July 31, 2012
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That was the consensus from a webinar hosted by retirement plan provider Diversified, on “New Fiduciary Exposure: Unfair Fund Revenue Sharing.”

The question is whether investors in higher-cost, actively managed funds that reimburse a revenue-sharing fee back to the plan recordkeeper should be subsidizing plan administrative costs for investors in lower-cost money market or fixed income funds, or those who hold company stock that does not have revenue-sharing, said Fred Reish, an ERISA attorney and partner with Drinker Biddle & Reath. A proportion of the revenue-sharing fees that funds in a plan charge investors commonly are reimbursed to a plan’s recordkeeper to pay for such services as transaction processing, call centers and investment statements.

There are “egregious cases,” Reish noted, such as when as much as 50% of a fund’s assets may be held in individual company stock or in low-cost, passively managed funds. In such cases, Reish said, it would appear unfair for investors in the higher-cost funds with revenue-sharing to subsidize the cost of administering the other investments in the plan.

Recordkeepers today are increasingly able to precisely account for the amount of revenue sharing paid for by each investor, Reish said. This growing practice is known as Fund Revenue Equalization (FRE), he said.

Because the Department of Labor requires a plan fiduciary to conduct a “prudent process” on revenue sharing, it is incumbent on a plan’s investment committee to run an FRE analysis to determine whether “a precise allocation back to the account where it came from, will be prudent,” Reish said.

 

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