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Revenue Sharing Payments: Some Tips for Retirement Plan Fiduciaries

Employee Benefits Law Alert David P. Olson, Sarah L. Fowles

New fee disclosure regulations (discussed in a prior Quarles & Brady alert, linked to here) require that plan service providers furnish retirement plan fiduciaries with more detailed fee information by July 1, 2012. Many service providers are sending their clients revised service agreements, and some service providers are simply sending updated fee disclosures.

Retirement plan fiduciaries must review this documentation to determine if the compensation paid to the service providers is reasonable. This alert focuses on "revenue sharing" payments - a form of indirect compensation that should now regularly be disclosed and thus easier to quantify.

Members of the Quarles & Brady employee benefits team will be providing practical tips for handling the new fee disclosures, as well as advice on other important topics, in the upcoming Fiduciary University seminars on April 24 and April 26. Please visit this link for more information about Fiduciary University.

Revenue Sharing Payments

The net direct cost of maintaining a retirement plan can be reduced by the revenue sharing payments received by plan service providers. Generally, revenue sharing payments are payments by mutual fund companies to plan service providers such as recordkeepers, broker-dealers and investment advisers. These payments "share" the revenue the mutual fund company receives from plan assets invested in the mutual fund and can reduce the amount that the plan or employer pays the service providers. A mutual fund company will share its revenue because plan service providers perform valuable services the mutual fund company would otherwise have to perform (e.g., determining the value of each participant's account).

Plan sponsors may be inclined to choose plan investments with higher revenue sharing payments in order to reduce the net direct costs, but in many instances the mutual funds with larger revenue sharing payments also have higher fees. Litigation has been increasing in this area, and plaintiffs have claimed that (i) revenue sharing creates conflicts of interest for employers who may put increasing the amount of revenue sharing ahead of minimizing investment costs for plan participants; (ii) revenue sharing constitutes a "prohibited transaction" under ERISA; and (iii) plan sponsors violated their ERISA fiduciary duties by permitting revenue sharing.

In a recent federal district court case, the court awarded the plaintiffs damages of $13.4 million for the defendants' breaches of fiduciary duty with respect to failure to monitor revenue sharing payments in a recordkeeping arrangement or to negotiate for rebates with respect to the revenue sharing payments. Tussey v. ABB, Inc., et al., Case No. 2:06-CV-04305-NKL (W.D. Missouri, March 31, 2012).

Here are some tips for addressing revenue sharing payments that may be disclosed in your service provider fee disclosures:

  • Determine how much revenue sharing is generated by your plan for service providers and whether it is used to offset or reduce the cost of those providers' services.
  • Determine the "market rate" for the plan services provided by the service provider (e.g., a recordkeeper and/or investment adviser).
  • Determine whether revenue sharing payments received by that service provider would result in compensation beyond the "market rate" for its services. If those payments would result in compensation beyond the market rate, consider requiring the service provider to "rebate" the overpayments to plan participants' accounts.
  • Consider requiring the service provider to credit all revenue sharing payments back to the plan, either directly to participants' accounts or to an "ERISA account" used to pay eligible plan expenses.

For more information contact the authors of this alert, David Olson at (414) 277-5671 / david.olson@quarles.com or Sarah Fowles at (414) 277-5287 / sarah.fowles@quarles.com. You may also contact any of the following Quarles & Brady employee benefits attorneys: Marla Anderson at (414) 277-5453 / marla.anderson@quarles.com, John Barlament, at (414) 277-5727 / john.barlament@quarles.com, Amy Ciepluch at (414) 277-5585 / amy.ciepluch@quarles.com, Angie Hubbell at (312) 715-5097 / angie.hubbell@quarles.com, Paul Jacobson at (414) 277-5631 / paul.jacobson@quarles.com or Robert Rothacker at (414) 277-5643 / robert.rothacker@quarles.com.