Fiduciary Friendly

Understanding the unintended implications of revenue sharing and best practices to eliminate them.



From left: Kent Peterson; Ted Schmelzle

The regulatory environment over the last 10 years has made fee transparency—especially investment fee transparency—all the more important, with notable regulatory action for both plan-level and participant-level fee and expense disclosures. Regulations, coupled with increased scrutiny from the Department of Labor (DOL) and prominent lawsuits, have led many plan sponsors and advisers to examine the revenue sharing in existence in their plans. To discuss this issue, PLANSPONSOR sat down with two Securian Financial Group executives, Ted Schmelzle, director of plan sponsor services, and Kent Peterson, director of investment services, to address the current fee environment and best practices for plan sponsors and advisers.

PS: Kent and Ted, what are some of the challenges that plan sponsors face in administering their retirement plans, specifically in administering and benchmarking fees in their retirement plans?

Peterson: Plan sponsors have an ongoing responsibility under ERISA to understand the fees that they pay for their plan. And when it comes to investment-related expenses, it continues to be more complicated than necessary to discern what fees are being paid. That complexity is partially related to the concept of revenue sharing. Revenue sharing has been used to pay all sorts of plan expenses over the years—in particular recordkeeping and advisory fees. Plan sponsor awareness of revenue sharing choices has grown, which, coupled with recent litigation, has created a sense of urgency for plan sponsors to be more focused on it, but the requirement to understand the revenue sharing better has always been there. 

PS: Absolutely, the stakes are high. What are some of the risks to broker/dealers with the finalization of the DOL’s new fiduciary regulation?  

Schmelzle: The new DOL fiduciary regulation and the extremely adverse litigation environment are each working to create new and significantly higher risks for broker/dealers. Qualified plan products not engineered with these risks in mind further exacerbate the problem. 

The DOL regulation and the vast majority of fee and expense litigation have at their heart—conflicts of interest; non-level compensation and plan fees; concealed capture of revenue sharing; and the required use of proprietary investment options. 

Recordkeepers can help mitigate broker/dealer risk with products that include features such as daily pass back of all revenue sharing to participants; utilization of the lowest net share class; and pricing that does not vary based on the use of proprietary investment options.  

In fact, such features may allow advisors to operate without need of a “best interest contract” under the new regulation, providing broker/dealers material comfort in the face of a challenging new playing field.