Beware of Retirement Plan Revenue Sharing

Prior to the Department of Labor (DOL) requiring fee disclosures to plan sponsors and plan participants, revenue sharing arrangements were more common. A revenue sharing arrangement is when an investment manager or fund company collects fees from investments and transmits a portion of those fees to the service provider. In most cases, the plan sponsor and the participants are not aware of these fees as the fees are netted against income of the fund, thus, reducing investment returns. Certain service providers not only would receive money from the revenue sharing, they would also charge participants or plan sponsors additional fees. This situation could potentially violate the Employee Retirement Income Security Act (ERISA) if it's determined that the fees received are "excessive."

Empower Retirement, formerly Great West, recently found themselves in a legal battle over the revenue sharing. Several other retirement plan service providers have also been sued.

Pressure from the DOL, various lawsuits, and the common sense to "do the right thing" have caused more and more service providers to move away from revenue sharing arrangements. The DOL continues to focus on fee disclosures and is considering ways to improve fee transparency for participants so they are better able to make informed decisions.

What should plan sponsors do?

Recognize that not all retirement plan service providers using revenue sharing are receiving excessive fees. It is important you monitor your plan’s service providers and understand fee arrangements, including revenue sharing. Ask your service provider the following questions:

1. Do you receive any revenue sharing from the investments, fund companies or other service providers of the Plan?
2. Do you have a reconciliation on how much was received from our plan and was this amount used to offset your fees charged to the plan?
3. Did you receive any amounts in excess of reasonable fees and was the excess amount reallocated to participant accounts?

As a plan sponsor, it is essential you monitor your plan fees. Any amount received in excess of reasonable fees, should be credited back to participant accounts.  In addition, it may also be prudent to have a consulting firm review your plan’s fee arrangements.

Steve Beasy, CPA
Partner
sbeasy@klcpas.com
Phone: 574.264.2247, x333