New 401(k) Revenue Sharing and Fee Disclosures Could Re-Shape DC Plans


    If you participate in a 401(k) plan or have a role in administering one, the year 2012 will be important.

    The reason: 2012 is when administrators and plan participants will be discussing the little-known practice of revenue sharing and how their 401(k) plan providers charge for their services.

    On April 30, 2012, the Department of Labor’s (DOL) new fee disclosure regulations go into effect, largely due to the “unprecedented attention” about the need for DC plans to shine a light on 401(k) plan fees and revenue sharing, according to a new Mercer paper.

    The new regulations will affect a plan’s administrative fees, including the amount it receives in a little known practice common in the mutual fund and insurance industries known as “revenue sharing.”

    Revenue sharing is the practice of making cash payments by mutual fund companies to selling agents, who promote their mutual funds to investors.  Outside of 401(k) plans, fund companies pay brokers and financial planners revenue sharing, which historically has ranged from about 25 to 150 basis points (one-quarter of 1% to 1.5%) of invested assets per year to promote their funds over the competition.  Revenue sharing payments also vary based on a mutual fund’s share class.

    While this long-standing practice is legal, brokers commonly fail to tell their clients why they are recommending one very similar fund over another.  This failure to verbally disclose is often tied directly to the amount of revenue sharing the broker receives from the fund company to promote its funds. Critics say this failure to fully disclose revenue sharing relationships creates an ethical conflict of interest with clients, even though the practice is printed in the fund prospectus.

    The new DOL regulations specify that a plan annually disclose its types and levels of administrative expenses, including a description of revenue sharing deals.  These disclosures include a quarterly summary of revenue sharing and actual fees charged to plan participants.

    If a plan fails to do this, it will be subject to a revocation of its 404(c) protections that cover any plan losses in a participant’s account.

    (See related story, “Revenue Sharing Taints 401(k) Plans” on this Web site.)

    Shining Lights in Dark Corners

    “Plan sponsor’s awareness of fiduciary responsibility and risk, especially as it pertains to fee oversight, is at an all-time high,” according to Bill McClain, a principal in Mercer’s Seattle office.  These new fee disclosure regulations will give participants “sticker shock,” McClain said.

    In his new paper, “Fee Allocation: Trends and Strategy,” released December 2011, McClain

    Bill McClain of Mercer

    noted that the new DOL fee and revenue sharing disclosures have created two developing trends,  One is fostering an alternative method for calculating administrative fees to a per-participant approach versus the second, older method of basing fees on plan assets.

    Traditionally, plan sponsors did not focus on administrative fees since the revenue sharing payments made by the mutual funds or plan recordkeepers, which administered the plans, were applied to cover administrative expenses.  But this practice is now being scrutinized, McClain said.

    “Plan sponsors are openly asking whether a participant with a $400,000 401(k) balance should pay ten times more in administrative fees than another participant with a $40,000 balance in the same plan,” he said.  This does not make sense since it costs the same to administer both accounts, regardless of their account balances.

    Focus on Revenue Sharing

    The other key question plan sponsors are asking concerns the “unequal distribution of revenue sharing” among different funds, he added.  For example, a participant who invests in an index fund often does not generate any revenue sharing (and thus pays little or nothing in administrative fees), while an investor in a  large-blend or small-cap mutual fund can typically generate 50 basis points (bps) in revenue sharing.  (Revenue sharing is also affected by a mutual fund’s share class.)

    Plans which focus on reducing their administrative expense have a few choices about re-directing revenue sharing payments.  If administrative costs are reduced and the plan generates more revenue sharing, the excess can be used to pay attorneys and other administrative costs. Another alternative is to pay any excess back to plan participants in the form of an “added return” on their investment account.

    But in some cases, McClain said he is seeing examples the revenue sharing payments are too low, which creates a shortfall that is paid for by the company or participants.

    “This is where we are running into a dilemma because the plan understands its fiduciary responsibilities, but the participants have never had a hard-dollar fee associated with their account.  So even though the plan has cut expenses, it has to ask the participants to pay a fee to meet the shortfall.  This creates a difficult education process to make employees understand that even though they are paying a fee to administer their plan, their total fee is really lower. That is a hard concept to get across,” McClain said.

    Beware of More Revenue Sharing-Related Lawsuits

    While the new DOL regulations do not go into effect until April 2012, there have been numerous class action lawsuits related to revenue sharing which show potential problems.  Among the companies targeted have been Principal Financial, Boeing, Deere, Lockheed Martin, and Kraft Foods.

    In one lawsuit filed by a group of workers at Ameriprise Financial in federal court, plaintiffs alleged that their own company (Ameriprise) placed their 401(k) contributions in proprietary funds, ringing up $20 million in excessive costs.  Defendants in the case include Ameriprise, as well as the firm’s employee benefits administration and 401(k) investment committees.

    The lawsuit charges that Ameriprise and its committees, as the plan’s administrators, skirted their fiduciary duty to the 401(k) plan by investing in mutual funds and target date funds from Ameriprise’s subsidiary, RiverSource Investments LLC, now known as Columbia Management Investment Advisers LLC.

    The suit charges that between 2005 and March 2007, an average of $500 million in plan assets went annually into RiverSource and Ameriprise Trust Co., the trustee and record keeper of the plan.

    By investing in their own employer’s captive funds, the 401(k) plan generated fee revenue for RiverSource and its affiliates, as well as for Ameriprise Trust Co., the plaintiffs claim.  These in-house funds were also more expensive than other alternatives offered by the Vanguard Group, according to the lawsuit.

    Based on differences in expenses charged by the Ameriprise fund subsidiaries and Vanguard, the lawsuit said that it cost Ameriprise plan participants over $20 million related to excessive fees and expenses from just one plan.

    If the same cost and expense comparison methodology is used in other 401(k) plans nationwide, the numbers could be significantly higher. While making this calculation is possible, it is also very fluid because any expense calculation would be based on assets under management, which is dependent on market volatility.

    There are no official industry statistics on the extent and dollar paid in revenue sharing, but a 2006 paper from Boston College’s Center for Retirement Research found that about 34% of retirement plans were classified as defined contribution-401(k) plans (with 23% pension and 43% IRAs.)

    Looking ahead, McClain said many fee and revenue sharing lawsuits to date have been settled in favor of plan sponsors, but that could change as the DOL provides more legal guidance about disclosing total fund expenses to participants.

    With revenue sharing being scrutinized, McClain said he has seen a trend towards 401(k) plans converting to separate account structures.  This structure mimics mutual fund investments, but has less stringent requirements in terms of client communications.

    He also has not seen a push towards using more large plans using ETFs, which commonly do not use revenue sharing and have lower expenses.  “ETFs may eventually make their way into the large plan space, but we are not seeing that now,” he said.

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    Chuck Epstein has managed marketing communications and public relations departments for major global financial institutions and participated in the launch of industry-changing financial products. He also has written by-lined articles for over 50 publications, five books and served as editor and publisher of nation’s first newsletter on the topic of using the PC for personal investing and trading. (“Investing Online, 1994-1999). He also is a marketing consultant, writer and speaker on topics related to investor protection and opportunities in the very dynamic cannabis industry. He has held senior-level marketing, PR and communications positions at the New York Futures Exchange, Chicago Mercantile Exchange, Lind-Waldock, Zacks Investment Research, Russell Investments and Principal Financial. He has won national awards from the Mutual Fund Education Alliance (MFEA) and his web site,, was named best small blog in 2009 by the Society of American Business Editors and Writers (SABEW).


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