Important Decisions about Revenue Sharing

Revenue sharing is the sharing of fees from one service provider (e.g., an investment fund manager) to another service provider (e.g., your record keeper). Revenue sharing may be built into a fund’s asset-based expense ratio if a plan utilizes a higher cost share class. The revenue sharing is often used to offset plan-related expenses rather than having the plan sponsor or participant making direct payment for specific plan services.

A growing number of lawsuits allege that fiduciaries breached their duties of prudence by utilizing investment share classes with “excessive” revenue sharing. It is important to understand that ERISA does not prohibit plans from using revenue sharing to pay plan fees, but plan fiduciaries must be prepared to verify that their compensation arrangements are reasonable and prudent, as these fees are being paid from plan assets. Plan sponsors should be ready to show the prudent process utilized to justify the use of revenue sharing and the ongoing monitoring they undertake to ensure they do not become excessive with the growth of a plan. In the event that a plan sponsor cannot show the prudence of using revenue sharing it is important to know that the Department of Labor (DOL) may find issue with its use and issue directives to plan sponsors to make a plan “whole” via threatened legal actions. In addition, plan participants may initiate class action lawsuits against plan fiduciaries as well.

According to a recent survey from Vanderbilt University, the National Bureau of Economic Research (NBER); and the Board of Governors of the Federal Reserve System more than half the plans surveyed utilize revenue-sharing arrangements with at least one fund on the menu*.The strongest position for a fiduciary is to have a documented and deliberate decision-making process that considers all relevant factors documenting prudence and the rationale for utilizing revenue sharing.

*A copy of the research paper is available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3752296