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Retirement Plan Fund Revenue Equalization

December 10, 2014

Jessie T. Kanter, CPA
Manager

The issuance of the fee disclosure regulations related to employee retirement plans has resulted in more transparency of fees and revenue-sharing agreements. This transparency has prompted a number of questions regarding the fees being paid, who they are being paid to and how revenue-sharing agreements play a role in the administration of the plan.

Revenue-sharing agreements are typical in the retirement plan industry, especially in larger plans. Under these agreements, an investment fund charges the plan a fee and then pays part of that fee to the plan’s recordkeeper as compensation for their services to the plan. Not all investments within a plan’s portfolio pay revenue sharing to the recordkeeper, and different funds within the plan’s portfolio have different fee ratios and pay different rates of revenue sharing. This has spurred discussion and questions regarding how fees and revenues being received under revenue-sharing agreements are being allocated to participant accounts. Generally, recordkeepers are paid from the proceeds of revenue-sharing agreements and any amount received in excess of the recordkeeping fees are deposited into a revenue-sharing account, which is available to plan sponsors to pay plan expenses.

Revenue-sharing accounts, or ERISA budget accounts, are becoming more prevalent within retirement plans in an attempt to capture the revenue coming back to the plans as a result of these revenue-sharing agreements. This however, does not address the concern regarding revenue equalization. Participants who select funds that charge higher fee ratios, which, in turn, pay greater revenue sharing back to the plan, generally end up paying a larger share of the plan’s administrative fees.

Fee Equalization

The concept of fee equalization was developed as a result of this disparity of fee allocation.  Under revenue equalization, a recordkeeper would charge each participant an equal share of the recordkeeping fee.  The funds’ revenue sharing would be allocated to those participants investing in the respective funds.  Therefore, a participant who was invested in a fund that paid more in revenue sharing than the recordkeeper charged in administrative fees would receive a credit to their account, while participants who chose less expensive funds with no revenue sharing would pay their share of the recordkeeping fee with no assistance from revenue-sharing agreements related to funds in which they are not invested.

ERISA does not contain a provision mandating how expenses are allocated to participants, and therefore, plan fiduciaries would need to follow the plan document and the prudent person rule.  As more emphasis is put on administrative and investment fees, including revenue-sharing agreements, we may see a shift toward fund-revenue equalization.

Jessie Kanter is a manager in the firm’s Accounting and Auditing Department with 15 years of public accounting experience. She provides audit services to a variety of clients, including manufacturers, distributors, construction companies, investment firms, biotech companies, professional service firms and non-profit organizations. Jessie’s focus is in quality control of financial statement audits in which she provides consulting on complex technical accounting matters and internal support and review for the firm.

 

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