Rethinking Revenue Sharing

While revenue sharing may be a legitimate way to pay for the costs of operating a plan, both US courts and the Department of Labor (DOL) have made it clear that plan sponsors have a significant responsibility as fiduciaries to fully understand, evaluate and monitor their revenue-sharing arrangements and determine whether they are reasonable. Therefore, the most prudent response for plan sponsors may be to rethink the practice of revenue sharing altogether.

Although regulatory scrutiny is increasing, a September 2013 study from NEPC indicates that the percentage of large plans using revenue-sharing-based fee compensation or fee structures has declined over the past few years. Of those plans that continue to employ revenue sharing, their revenue-sharing rates are going down.

How should plan administration costs be paid? Is revenue sharing an appropriate way to pay for costs? Resolving these issues requires further consideration from all parties involved: retirement services providers, recordkeepers, plan sponsors, advisors, consultants and the government.

There’s no dispute over whether or not revenue sharing is legal; recent court decisions have reaffirmed that it is. But as certain revenue-sharing arrangements may contain potential inequities, plan fiduciaries and their advisors have expressed increasing interest in mutual fund share classes that don’t use any revenue sharing.

These share classes go by various names, depending on the fund complex. For example, some call their non-revenue-sharing classes “Class Z,” while others use “R-6.” Typically, non-revenue-sharing classes have a net expense ratio that’s lower than the other share classes of a particular fund. Another way to eliminate issues surrounding revenue sharing is to use collective investment trusts (CITs) as the underlying investment vehicles instead of mutual funds. CITs typically don’t engage in revenue sharing and are usually less expensive than mutual funds because they have lower compliance, marketing and administrative costs.

Advisors and consultants can help DC plan sponsors move toward greater fee transparency by opening up a dialogue with them about incorporating non-revenue-sharing classes or CITs into their investment menus. The bottom line for plan fiduciaries is to make an informed decision. Get enough information to think the issue through, work with the plan’s advisors or consultants, make a decision and document it. That is how plan sponsors—as fiduciaries—can do the right thing for their plan participants and protect themselves at the same time.

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.

Daniel A. Notto

Senior Retirement Plan Counsel—AllianceBernstein Investments
Daniel A. Notto provides legal support for AllianceBernstein’s retirement plan and Section 529 college savings plan businesses. He has focused on the legal matters relating to tax-favored savings plans such as 401(k)s, IRAs and Section 529 plans for over 25 years. Before joining AllianceBernstein, Notto held several positions, including vice president and general counsel and consulting practice director, with Universal Pensions (now Ascensus), a national retirement plans consulting firm. There, he helped some of the country’s largest financial-services organizations build or refine their retirement plan services, and authored retirement plan documents used by thousands of employers throughout the nation. Prior to that, Notto worked in the legal department of Investors Diversified Services (now Ameriprise Financial). He has been a frequent speaker and author on retirement plan and Section 529 plan topics. Notto holds a BS in pharmacy from the University of Minnesota and received his JD (cum laude) from William Mitchell College of Law. He has received the Certified Pension Consultant (CPC) designation from the American Society of Pension Professionals & Actuaries (ASPPA). Notto is a member of the bar of New York. Location: New York

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