July 31, 2012
--- It is up to a plan’s investment committee to determine whether the cost of reimbursing revenue-sharing fees to each participant is effective—or prohibitive. ---
That was the consensus from a
webinar hosted by retirement plan provider Diversified, on “New Fiduciary
Exposure: Unfair Fund Revenue Sharing.”
The question is whether investors in higher-cost, actively managed funds that
reimburse a revenue-sharing fee back to the plan recordkeeper should be
subsidizing plan administrative costs for investors in lower-cost money market
or fixed income funds, or those who hold company stock that does not have
revenue-sharing, said Fred Reish, an ERISA attorney and partner with Drinker
Biddle & Reath. A proportion of the revenue-sharing fees that funds in a
plan charge investors commonly are reimbursed to a plan’s recordkeeper to pay
for such services as transaction processing, call centers and investment
There are “egregious cases,”
Reish noted, such as when as much as 50% of a fund’s assets may be held in
individual company stock or in low-cost, passively managed funds. In such
cases, Reish said, it would appear unfair for investors in the higher-cost
funds with revenue-sharing to subsidize the cost of administering the other investments
in the plan.
Recordkeepers today are
increasingly able to precisely account for the amount of revenue sharing paid
for by each investor, Reish said. This growing practice is known as Fund
Revenue Equalization (FRE), he said.
Because the Department of Labor
requires a plan fiduciary to conduct a “prudent process” on revenue sharing, it
is incumbent on a plan’s investment committee to run an FRE analysis to
determine whether “a precise allocation back to the account where it came from,
will be prudent,” Reish said.
The only cases where FRE is not
prudent are when the cost of calculating the reimbursement outweighs the
reimbursement sum, Reish noted.