Coming to Grips with Excess Revenue Sharing

US defined contribution (DC) plan fees have been hit with heavy scrutiny recently—from Department of Labor (DOL) disclosure regulations to a rash of lawsuits that have cost several large plan sponsors millions of dollars in settlements and judgments. But perhaps one of the most interesting fee issues today focuses on revenue sharing.

Long-Standing Practice Now Under the Microscope

Revenue sharing is the long-standing practice of using payments associated with a plan’s investments to pay for plan recordkeeping or other services. For example, a mutual fund (or its transfer agent or distributor) might pay a recordkeeper a fee of 0.10% (10 basis points) of the fund’s assets that are invested in the plans of the recordkeeper’s clients. Sometimes these payments are held in a separate bookkeeping account by the recordkeeper, or they are held in an account within the plan. In either case, these payments are generally applied toward the recordkeeper’s fees for operating the plan or are used to pay other plan service providers.

Revenue sharing is certainly legal, and a significant number of plans do use it. But the prevalence of revenue sharing is decreasing as more plans rethink their strategies for making plan fees more transparent.

Making a Considered Decision

As plans mature and become larger, the problem of excess revenue sharing enters the picture. That’s when the revenue sharing coming from fund providers exceeds the amount necessary to pay for the plan’s expenses. And plan fiduciaries have to decide what to do with the excess revenue-sharing amounts—how the plan will use that money. If an investment policy statement or other plan documents state how excess revenue sharing is to be used, plan sponsors must follow those rules.

Another issue with excess revenue sharing is whether it is allocated among participants, and if so, how it is allocated. The DOL allows fiduciaries a fair amount of latitude in allocating plan expenses, and has noted on a few occasions that ERISA doesn’t specify any particular way. Consequently, we believe the same latitude would apply to revenue sharing as well, which amounts to a type of rebate of fees.

Ultimately, how excess revenue sharing is handled is a fiduciary decision. If that decision is a considered decision—made with sufficient information and without being arbitrary or capricious—then it will likely be deemed reasonable and acceptable under ERISA.

There is, however, an evolving concern that you should keep down the costs that participants pay directly, and that something may be wrong (or appear to be wrong) if a plan has a lot of excess revenue sharing. Oftentimes, revenue sharing is not equivalent among all funds; some funds pay no revenue sharing and others pay different revenue-sharing rates. The issue then arises that it may not be fair for some participants to pay a higher expense ratio because revenue sharing is built in.

Another concern is that plan participants who invest in more expensive, revenue-sharing funds are bearing a disproportionate amount of the plan’s administrative costs compared with their coworkers who have chosen funds without revenue sharing.

DC plans and their fiduciaries might be better served if they modify or change their plan design a bit, and it might be wise to consider removing excess revenue sharing altogether. One route to that solution would be to consider share classes or investment vehicles with lower—or no—revenue-sharing rates.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Richard A. Davies

Senior Managing Director, Global Head of Defined Contribution and Multi-Asset Business Development
Richard A. Davies is Senior Managing Director and Global Head of Defined Contribution, responsible for the overall leadership and strategic direction of AB’s global defined contribution and multi-asset businesses. He previously served as co-head of Institutions for the firm’s North America Client Group while leading its US defined contribution activities. Davies rejoined AllianceBernstein in 2013 after spending several years leading Russell Investments’ institutional defined contribution business. During his earlier, 16-year career with AllianceBernstein, he led the firm’s institutional defined contribution, sub-advisory, and retail retirement and college savings businesses. Davies also served as head of global marketing and product management and led several business lines and distribution channels for the mutual funds group. He joined Alliance Capital in 1995 from First Chicago Corporation, where he served as president of retail investment services and was a managing director of First Chicago Investment Management Company. Prior to joining First Chicago in 1989, Davies was a strategy consultant and manager with The Boston Consulting Group. He worked in brand management for Procter & Gamble before attending graduate school. Davies holds a BA in economics, with honors, from the University of Wisconsin, Madison, and an MBA from Harvard Business School. He chairs the Advisory Board of the University of Wisconsin’s economics department. Davies is a Trustee of the Employee Benefit Research Institute and was a founder and continues to serve on the Executive Committee of the Defined Contribution Institutional Investment Association. Location: New York

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