Revenue Sharing

“Revenue sharing” generally takes the form of 12b-1, shareholder servicing and/or sub-transfer agency (“sub-TA”) fees—any/all of which are commonly imbedded in the internal costs of a mutual fund. While 12b-1 fees (aka “Distribution and/or service (12b-1) fees”) were originally conceived to pay for general marketing expenses incurred by the fund sponsor, they evolved over time to become trail compensation to be paid to licensed financial advisors/registered representatives. Shareholder servicing and/or “sub-TA” payments are also made from mutual funds to the plan provider (i.e. recordkeeper) from the “Other Expenses” fee category. These payments are made to subsidize those services that the mutual fund sponsor would normally deliver but which the plan provider is delivering for a given Plan and its Participants. These services include:

• Participant- and/or plan-level recordkeeping/account maintenance
• Production and delivery of Participant- and/or plan-level statements
• Daily transaction processing
• Participant and Plan Sponsor websites
• Shareholder call center staffing and services
• Various other similar services that are provided to Plans and/or Participants

It is important to remember that none of these payments are improper or that selecting mutual funds that pay out one or more forms of revenue sharing for inclusion in a Plan is in some way inappropriate. Plan fiduciaries simply need to be aware of the total expense of the mutual funds in their Plan; understand which service providers are receiving payments from the mutual fund (if these payments are not re-captured and used for the benefit of Plan Participants); and evaluate the reasonableness of those payments for the services rendered while recognizing any potential conflicts of interest. The propriety of these arrangements has been questioned (and legal actions taken) primarily due to the lack of disclosure that all too often accompanies these arrangements, even to this day.

The bottom line is that plan fiduciaries have a duty to know what fees are assessed against the Plan, who is being compensated and how this compensation is being paid… and to ensure that these fees are “reasonable” for services performed. We at Retirement Alliance have a deep-seated and guiding belief that the best way for them to discharge this fundamental duty is to recapture all available revenue sharing payments to be used for the benefit of Plan Participants through the use of “ERISA budget expense accounts” that are held inside the Plan (i.e. as a Plan Asset) to be used at the discretion of the Plan Sponsor for the best interests of Plan Participants.