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.

PS: Interesting. How do these features help mitigate plan sponsor risks?

Peterson: Historically, there has been an intertwined nature to what funds and share classes are available through a particular recordkeeper or what share class has to be used because of a particular service that’s being requested by a plan sponsor. This creates the element of actual, perceived or potential conflicts of interest. When you’re a fiduciary, one of the basic principles that you need to adhere to is avoiding conflicts of interest or, if you can’t avoid them, understanding them. Now that conflicts are more visible, it’s really about helping plan sponsors manage them to achieve the most efficient process for their plans.

PS: How does Securian help plan sponsors and advisers deal with these fee challenges?

Schmelzle: Securian differentiated itself way back in 1993 by creating a structure that was fiduciary-friendly for plan sponsors. We wanted to avoid revenue sharing conflicts of interest for ourselves and for plan sponsors. In order to do that, revenue sharing had to be completely removed from the equation.

We engineered our separate account structure to remove the influence of revenue sharing by crediting it back to the participant on a daily basis without the use of ERISA accounts and all their many risks. This means neither participants nor plan sponsors are impacted by share class issues or allocation of revenue sharing.

Once we were able to remove revenue sharing, we then looked to use the most efficient share classes—the share class with the lowest net expense ratio and the highest performance if revenue sharing is put back in. That is what Securian does, and it creates additional value for clients. Not only has our efficient share class selection mitigated plan sponsor litigation and regulatory risk, but our approach helps to minimize fees and expenses which can enhance returns.

In addition, when our separate accounts reach a certain asset scale, we find that it’s actually cheaper to take those strategies sub-advised. When we do so, we find it to be material enough to actually warrant that migration.

Another benefit available through insurance companies’ separate accounts is that we’re able to capture certain foreign tax credits that would otherwise dissipate; and in capturing those foreign tax credits, Securian takes the extra step of passing those credits back to their separate accounts daily.

PS: What value does that provide to the adviser?

Peterson: Advisers find a lot of value in the Securian model. They appreciate a service provider that does things in a fully transparent and easy to understand way as benefiting them in their expert role and their clients in the long run. Advisers are looking for solutions that can mitigate risk and calm the nerves of their plan sponsors. In today’s marketplace fee expertise is as big a differentiator for advisors as investment expertise.

Another issue for many advisers in helping plan sponsors evaluate service providers is the concept of required revenue. Required revenue can be seriously understated when you’re working with service providers that use proprietary fund requirements or their general accounts to increase margins. There are other firms like Securian where the focus is on efficiency, so we fully disclose our required asset fee and help create substantial savings to clients in other ways. We’ve created an opportunity where you understand that you’re getting full disclosure on fees, and you’re also getting significant efficiency benefits that aren’t widely provided.

Schmelzle: We actively manage our open architecture investment platform, so as an ever changing landscape of fund companies come out with new revenue sharing for different platforms, we’re monitoring and actively migrating from one share class to another as those opportunities arise. I think that’s of great comfort to advisers and plan sponsors because when we tell them there’s a share class that saves them money, and they ask, “What do I need to do?,” the answer is, “We’ve already done it.”