Fiduciary Friendly

Understanding the unintended implications of revenue sharing
and best practices to eliminate them
Kent Peterson, Ted Schmelzle

The regulatory environment over the last 10 years has made fee transparency—especially investment fee transparency—all the more important, with notable regulatory action for both plan-level and participant-level fee and expense disclosures. Regulations, coupled with increased scrutiny from the Department of Labor (DOL) and prominent lawsuits, have led many plan sponsors and advisers to examine the revenue sharing in existence in their plans. To discuss this issue, PLANADVISER sat down with two Securian Financial Group executives, Ted Schmelzle, director of plan sponsor services, and Kent Peterson, director of investment services, to address the current fee environment and best practices for plan sponsors and advisers.

PA: Kent and Ted, what are some of the challenges that plan sponsors face in administering their retirement plans, specifically in administering and benchmarking fees in their retirement plans?

Peterson: Plan sponsors have an ongoing responsibility under ERISA to understand the fees that they pay for their plan. And when it comes to investment-related expenses, it continues to be more complicated than necessary to discern what fees are being paid. That complexity is partially related to the concept of revenue sharing. Revenue sharing has been used to pay all sorts of plan expenses over the years—in particular recordkeeping and advisory fees. Plan sponsor awareness of revenue sharing choices has grown, which, coupled with recent litigation, has created a sense of urgency for plan sponsors to be more focused on it, but the requirement to understand the revenue sharing better has always been there.

PA: Absolutely, the stakes are high. What are some of the risks that plan sponsors face if they’re not approaching fees the right way?

Schmelzle: The largest risk in my estimation is participants paying elevated fees which affects their retirement readiness. The risks to the plan are litigation and regulatory scrutiny.

On the litigation front, the fee and expense litigation started 10 to 12 years ago against plan sponsors and recordkeepers continues to focus on revenue sharing and fee transparency. As for regulatory scrutiny, the Department of Labor is now actively monitoring plan sponsors to assure that they are complying with the obligations under 408(b)(2).

Peterson: Another key element here is that revenue sharing can oftentimes make it very difficult to apply fees on an equitable basis across participants. When plan sponsors select a core investment lineup, share class selection amongst those investments can also create the unintended consequences of some participants paying more, some paying less and some paying maybe none at all of certain plan expenses. This is due to the fact that some funds pay revenue sharing and others do not.

Plan sponsors have not appeared to appreciate that fairness issue historically, but sponsors need to rectify the situation because ultimately they do not have a good answer for why one participant would pay more versus another for those sorts of plan expenses.