Panelists suggested that many fee questions, especially those related to share classes and revenue sharing, come with considerable complexity and controversy. On the recordkeeping side, said Scott Liggett, director of Employee Retirement Income Security Act (ERISA) oversight at Lawing Financial Inc./Qualified Plan Advisors, it is easy for the lines to blur when using an ERISA account or ERISA bucket. He explains that recordkeepers can give revenue-sharing payments back to whoever generated the revenue, thereby helping to offset some of the subsidizing effect that occurs when some participants invest only in Vanguard funds (which typically have no fees beyond basic operating expenses), and others have some of their assets in different types of funds.
Revenue equalization could be one answer, Liggett said, especially as it can help address the situation of dividing revenue-sharing payments among participants in a plan who invest in funds that generate different types and amounts of fees.
“Revenue equalization is the answer,” said Ellen Lander, principal, Renaissance Benefit Advisors Group. “It makes all the problems go away.” In the past, Lander said, retirement plans used only institutional shares, separate accounts or communal trusts, and someone—usually the employer—paid a fee for the necessary recordkeeping. Then, Lander said, the mutual fund industry stepped in and said they could make all the fees disappear, but in fact they embedded fees in the investments themselves. “And we have all the problems we have today,” she said.
Lander called the shading of how fees are paid for a bit disturbing. “Revenue equalization is a way to ensure that no matter what fund you invest in, you’re paying the same fee as everyone else [for recordkeeping],” she said, admitting that it can still be difficult to get some plan sponsor clients to adopt revenue equalization.
The topic of leveling fees is an interesting one, said Attila Toth, partner and cofounder of Portfolio Evaluations Inc., as well as an interesting debate. “How do we get there?” he asked, “Do we do it per head, or according to a revenue-sharing number?” In larger plans, $300 million or higher, he said, he sees more interest in fee equalization, especially from the chief financial officer, who is often more interested in being more transparent on retirement plan fees.
Keeping it Level
A look at recordkeepers and fee levelization showed broad agreement among panel members, and Morris noted that flattening the landscape for fees could be achieved in a number of ways. For example, employers and providers could work to bring share classes down, or they could strip out revenue share in an investment lineup to bring fees down as much as possible, and some recordkeepers are coming to the marketplace that can create a fee levelization impact to participants, he said, making the revenue arrangement more neutral.
However, panelists agreed that a number of obstacles still exist before fees can be truly leveled for participants.
Fee levelization could be achieved in a number of different ways, according to Toth. “By trying to create an investment lineup that has absolutely no revenue sharing at all, which is difficult, and then just charging a per-head fee so that everyone pays same dollar amount. Another way would be applying a basis point (bps) number to a fund. For example, if you negotiate with the recordkeeper for a fee for services of 10 bps, the way it would work is that any fund in the lineup that generates more than 10 bps gets a credit back for those individuals in that fund. Any investment that has no revenue sharing would be trued up to 10 bps, so all funds are revenue sharing 10 bps.”
One difficulty is that few recordkeepers are offering funds structured this way, Toth said. “More and more are talking about it, but are not yet implementing systems to be able do it,” he said. Toth sees the accounting as another issue: of those recordkeepers that are doing levelization, most are able to do the accounting only on a quarterly basis. Some do it monthly, but just one or two do it on a daily basis, which is what the system would really require.
“If you’re a savvy investor,” he said, “you could time flows coming in and out of funds, which is unfair.”
Lander agreed that the frequency of the accounting is a critical factor. “If you're not with a recordkeeper who does it, on a daily basis, you may have a client who believes it is a great concept, but not one who believes it's worth changing a vendor for.” There simply are not a lot of providers out there doing it the right way, she said.
Enter the DOL?
Revenue sharing could be heating up as a topic for review by government regulators, panelists said. Liggett said that in the last six months, three of his firm’s clients got requests for information on fees from the Department of Labor. Two requests were: “How is revenue sharing dispersed to your participants?” and “Do you have a policy addressing revenue sharing?”
“It's clearly on the forefront for the DOL, something to be attended to,” Liggett said. In the near term, he said he would caution advisers at least to ask about revenue-sharing to see if potentially fairer arrangements are possible. “Ten years ago, if you had said you had to worry about share classes, people would have rolled their eyes,” he said. “Now the idea is getting more traction. It’s trying to keep ahead of the curve.”
The plan sponsors themselves can also be something of a barrier to adoption, Lander said, stressing that she sees it as such a simple concept. “Everyone pays the same amount of fees.” The way the industry prices plans is somewhat quirky, according to Lander. A plan sponsor should be able to ask what a plan costs and get a simple answer. Instead, she said, it depends on where the money goes in the asset allocation. Lander called this an inadequate answer.
Some plan sponsors are concerned about their employees’ reactions to potential fee levelization, even while agreeing it is the right path to take. “Some plan sponsors are just not ready to go there,” Lander said. “Then we're back to trying to get funds that allow us to distribute revenue somewhat equally.” Her firm moved four firms to revenue equalization, and the outcry has been minimal—perhaps less than half of a percent of the plan participants spoke up, and then it was usually from those participants who had been Vanguard index users and were previously paying nothing. But, she said, a neurosurgeon wrote to her—she had this letter framed—and told her he understood the arrangement, and said she had done the right thing.