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Corporate & Institutional

Revenue Sharing Decisions in Retirement Plans

August 22, 2022

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Revenue sharing arrangements take a variety of different forms. Generally, the practice involves a payment of indirect compensation by one service provider (e.g., an investment fund manager) or an investment fund to another service provider (e.g., your record keeper). The cost of revenue sharing arrangements is generally reflected in the plan’s expenses. For example, certain share classes that support revenue sharing arrangements generally have higher expense rations than non-revenue sharing classes of the same fund. The revenue sharing frequently offsets service provider costs that would otherwise be reflected in direct charges.

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 the Employee Retirement Income Security Act (ERISA) does not prohibit plans from using revenue sharing to pay for the cost of plan services, but plan fiduciaries must understand how revenue sharing arrangements work to benefit the plan and determine that the compensation arrangements are reasonable and prudent. Ultimately, the plan bears the cost of revenue sharing. Plan sponsors should be ready to show the prudent process utilized to analyze and consider the use of revenue sharing and the ongoing monitoring they undertake to ensure that the costs associated with revenue sharing do not become excessive with the growth of a plan. Plan sponsors who breach their fiduciary responsibilities may face liability for any resulting losses suffered by the plan. Actions to recover such losses may be brought by the Department of Labor (DOL) or by plan participants through class action lawsuits.

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*.

A fiduciary is best positioned to demonstrate that has met its duties by having 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

If you have questions about your company's retirement plan, contact our team today.

This content is sourced by RPAG. Services provided by Wilmington Trust. N.A.

This article is for educational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.

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