Among
the myriad investment options that can be made available to retirement plans
and their participants, some have underlying fees built into them, such as
marketing, distribution or shareholder servicing fees. Portions of these fees might be paid to a service
provider—such as a third party administrator or recordkeeper—for the services
they provide both the plan and the investment provider. In turn, receipt of such “revenue sharing”—as
it is called—may enable these firms to charge lower direct fees to the
retirement plans they service.
In
today’s highly fee-sensitive environment, revenue sharing payments are
receiving scrutiny, right along with the commissions and fees received by those
who provide investment advice to retirement plan participants, account transaction
fees, and any other types of costs that could potentially reduce a participant
or beneficiary’s assets. That is the
world we live in, and most advisers and service providers don’t have a problem
with reasonable oversight and disclosure of fees and compensation.
Revenue
sharing, specifically, has received a great deal of attention lately, from both
the Department of Labor (DOL) and the courts.
It is a requirement to report revenue sharing payments on Schedule C, Service Provider Information, of Form 5500, Annual Return/Report of Employee Benefit Plan, filed with the DOL. Revenue sharing payments must also be disclosed
as part of a service provider satisfying the 408(b)(2) regulations issued by
the DOL’s Employee Benefits Security Administration (EBSA).
In
early July of this year, EBSA issued Advisory Opinion 2013-03A, in which the
agency provided some insight into how it views, at least in part, revenue
sharing relationships and payments in the retirement plan environment.
Adv.
Opin. 2013-03A was issued to Principal Life Insurance Company, through its
legal representatives. EBSA was asked whether investment-related revenue
sharing payments, such as 12b-1 fees, would be considered plan assets and also
when they could be retained by Principal as compensation. Briefly, EBSA advised
Principal that facts and circumstances would determine whether revenue sharing
payments would be considered plan assets and could be retained as compensation
by Principal.
EBSA
indicated that if there are no declarations or contractual terms promising that
revenue sharing payments will be used to pay plan expenses, or will be paid to
the plan itself, then such revenue payments would not be considered plan assets
and could—in this analysis—be retained by Principal. On the other hand, if—by
communication or agreement, formal or otherwise—revenue sharing payments are supposed
to benefit the plan by payment of plan expenses, or be paid into the plan, then
a plan would have an enforceable claim for such amounts as plan assets, with the
usual fiduciary obligations that entails. The Adv. Opinion went on to say that beyond any agreements or expectations regarding entitlement to revenue sharing payments, if a service provider were to influence investment selections in order to generate revenue sharing payments for its own benefit, this would be considered a prohibited transaction under ERISA.
This
EBSA guidance is helpful and provides the industry with a better understanding
of when revenue sharing payments may, or may not, be plan assets, and also how
these payments can be used. We also know
that “the rest of the story” likely remains to be written. There has been a fair amount of discussion
within the industry concerning some things NOT found in Adv. Opin. 2013-03A. Among
these is the allocation and use of revenue sharing payments that are—in fact—paid
to the plan, rather than being retained by a service provider, and how this
should occur. The complexity in addressing
this issue lies in the fact that—in some plans—not all investment options yield
revenue sharing payments and participants move in and out of various
investments options, thereby individually generating different amounts of
revenue sharing. This raises the question of what these amounts can or should be used to
pay for, and also how any “excess” should be used. Based on the current EBSA guidance, there is no mandated method to follow and plan sponsors and service providers should use a
an approach they determine to be reasonable and prudent for the use of and allocation of these amounts. It would seem that a number of different
alternatives would meet this standard until further guidance is provided. More to come on this issue in the future.
