United States: What Is Buried Inside Your 401(k) Or 403(b) Plan Fees?

Last Updated: September 14 2017
Article by Larry A. Ruff

Do you know and understand what are your 401(k) or 403(b) plan's fees, and especially, what are inside those buried fees? Broadly speaking, retirement plan fees consist of fees and expenses associated with plan administration services, such as recordkeeping fees, and plan investment activities, such as investment management fees. But what are the fees buried inside your plan's investment funds?

The Department of Labor (DOL) terms those buried fees as "indirect compensation." Indirect compensation consists of compensation received by a service provider from sources other than directly from the plan or plan sponsor and that is received in connection with services rendered to the plan or the person's position with the plan. Investment management fees fall into this definition because they are deducted from mutual fund assets, as opposed to being charged directly to the plan.

Within indirect compensation or these buried fees, there likely will be a kick-back of sorts, known as revenue sharing. Although legal, you, as plan sponsor and fiduciary to the plan, ought to get a handle on what this is and how it impacts your plan participants.

What Is Revenue Sharing?
Revenue sharing are payments made by a mutual fund, or its investment manager or affiliates, to a recordkeeper on behalf of participant-directed retirement plans. These rebated payments are typically made by the mutual fund for keeping track of the ownership of the mutual fund's shares and other shareholder services.

Revenue sharing is typically paid from a mutual fund, transfer agent or distribution company out of the mutual fund's revenues. The payment really represents a rebate of shareholder services and the recordkeeping associated with the mutual fund's share ownership records. In other words, the plan's recordkeeper will perform these services on behalf of the mutual fund, and therefore, the mutual fund shares their savings from these activities.

Plan Sponsor Responsibilities
Because of how these amounts are rebated or credited, it may not be obvious to the plan sponsor or committee as to what they may be receiving from this source. Knowing and understanding all of the revenue sharing issues impacting their retirement plan are fiduciary responsibilities.

The Employee Retirement Income Security Act (ERISA) requires that those responsible for managing retirement plans, referred to as fiduciaries, carry out their responsibilities prudently and solely in the interest of the plan's participants and beneficiaries. Among other duties, fiduciaries have a responsibility to ensure that the services provided to the plan are necessary and that the cost of those services is reasonable.

These fiduciary responsibilities under ERISA make it clear that plan sponsors and committees must understand the actuality of revenue sharing and make prudent decisions about them.

Getting a Grip on Revenue Sharing
Plan sponsor and committee decisions to select funds and recordkeeping services are fiduciary decisions. Within these decisions, a plan fiduciary should grasp where revenue sharing arises in their plan, how much is it, how is it is used in their plan and how is it accounted for.

Keep in mind, not all of your plan investment fund options will provide revenue sharing. For example, an S&P 500 index fund likely will not have any revenue sharing, whereas a stable value fund may have sizeable revenue sharing.

One often overlooked fiduciary responsibility is considering how revenue sharing is being allocated to the plan. The most common methods of allocating revenue sharing are pro rata and per capita, with pro rata being the most common. One other method that might be considered is to allocate revenue sharing back to the same funds that rebated or credited these amounts. This has been suggested as the most equitable method to participants. Still other plans use revenue- sharing to pay for recordkeeping costs rather than offsetting plan investment expenses.

Both the pro rata and per capita methods are consistent with DOL guidance on the allocation of fees to participants. Plan fiduciaries, therefore, need to consider all methods of allocating revenue sharing in their plan. In their decision making process, fiduciaries should consider selection of a prudent method and one that is perceived as being fair and transparent to participants.

When you get a grip on the revenue sharing sources from all of your funds, assess how much the plan can expect to receive and when it will be received. Not all revenue sharing comes from one source and at the same time. Fiduciary responsibility dictates that you know the amount and timing, so you may establish best practices to monitor the receipt or crediting of these amounts to your plan.

Hold on Tight
If you are unsure of your revenue sharing, start by asking your plan investment advisor and administrator. Keep going until you get a tight hold on your plan's revenue sharing. Along the way, make sure you develop a process to monitor these buried rebates and credits, and most importantly, document all fiduciary decisions around your plan's revenue sharing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Larry A. Ruff
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