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The Risks of Revenue Sharing

ERISA attorney Fred Reish notes that he’s been primarily focused on three issues of late: the DOL’s new fiduciary proposal, capturing rollovers from retirement plans, and the use and allocation of revenue sharing in 401(k) plans.

With regard to revenue sharing, Reish notes that while the traditional view was that revenue sharing was paid by mutual funds to 401(k) recordkeepers for services provided, that perspective is changing — at least in part because the 408(b)(2) regulation treated those payments as compensation to the recordkeeper for services to the plans.

Because of that change, he maintains there is a growing perception that the revenue sharing payments belong to the plan, and not to the provider, and if the total compensation from revenue sharing exceeds the reasonable cost of recordkeeping services, the plan sponsor has a fiduciary obligation not only to be aware of that, but to recoup the excess compensation for the benefit of the participants.

An emerging, and perhaps related, trend among some providers and some plan sponsors is allocating all of the revenue sharing back to the participants and then charging participants’ accounts for the recordkeeping costs. Reish notes that when plan fiduciaries delve into the matter (in order to understand the issues and fulfill their fiduciary responsibilities), they often determine that the equitable allocation of revenue sharing, and then proper allocation of plan costs, produces a result that is fair and also manages the fiduciary risk.

That said, Reish cautions that there is no guidance from the DOL on the proper use and allocation of revenue sharing: “In other words, plan sponsors, advisers and ERISA attorneys are operating in a vacuum,” making “educated guesses” about what will ultimately happen in terms of DOL guidance or litigation.

In the absence of this clarity, Reish says it is often preferable to take a relatively conservative position — in this case, to allocate the revenue sharing back to the participants.

What do you think? What are you doing with revenue sharing and your plan sponsor clients?

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