Revenue Sharing In 401k Plans

The use and allocation of revenue sharing in 401k plans the dol and 408 b 2 treat revenue sharing payments as compensation to recordkeepers.

Revenue sharing in 401k plans. The practice of revenue sharing is not only common in the industry it is prevalent. The following diagram describes common revenue sharing arrangements for commission based plans. The following topics are addressed. Larger 401k plans don t have revenue sharing.

Revenue sharing can allow an organization to pay all or a portion of the plan administrative fees implicitly through payments received from the plan s investment options. Having worked on many participant directed 401 k plans i would state that more than 95 of the 401 k plans with an ips have an ips that contains no language concerning revenue sharing. As a result there is a critical need for guidance. If the total compensation from revenue sharing exceeds the reasonable cost of recordkeeping services the plan sponsor has a fiduciary obligation to be aware of that and to recoup the excess compensation for the benefit of the participants.

These investments have lower expense ratios and no revenue sharing arrangements. In the 401 k business revenue sharing serves a similar purpose but it can be used to reduce plan expenses or pay for the education of plan participants or the people who sit on the 401 k board. Revenue sharing generally refers to a compensation practice in which money is paid to plan service providers out of 401 k investments or by their managers and affiliates. An insider s view of 401k fees.

The investment manager receives the investment management fee as direct compensation. Revenue sharing components are highlighted in red in the chart below. In all cases however the payments prevent the free interchange of objective advice. Revenue sharing is limited to small business retirement plans.

The importance of revenue sharing. Excessive 401 k fees including those siphoned off by revenue sharing have received increased attention culminating in lawsuits against some of the nation s largest employers including kraft. Large employer plans have access to managed accounts and or institutional share classes. Revenue sharing from certain investment options is often used to offset plan administrative fees on an investment by investment account by account basis.