If sponsors are hesitant about these other investments, outside forces can force their hand as revenue sharing has become a catnip for plaintiff lawyers and a flashing red light for fiduciary liability insurance providers.
“You can take your hat off to the complainant bar” for encouraging sponsors to reconsider, revise or remove revenue sharing, said Michael J. Francis, president of Francis Investment Counsel LLC, Brookfield, Wis.
Income sharing plays a frequent role in ERISA lawsuits that often attack plans not to use or investigate institutional priced mutual fund stocks or other options that may be cheaper.
Revenue sharing is “very threatened in Qualified Plans (DC),” Francis said, adding that ERISA plans represent only a small percentage of the revenue sharing universe. The big markets are private wealth management, endowments, foundations and corporations, he said. As for the DC plans, “there is no reason to keep it.”
The risk of litigation is linked to an increasingly difficult market for fiduciary liability insurance, as promoters must pay more, receive less and answer much more detailed questions than before. Revenue sharing figures prominently among the complainants’ allegations in the ERISA fee cases. “There are more questionnaires” from insurers to sponsors, said Mr. Smith of Fiducient Advisors. “Most of the questions are about fees.”
If DC plans use income sharing, the consultants say they should negotiate a per capita record keeping fee for participants rather than a fee based on plan assets.
If promoters opt for the plan assets approach, they should negotiate a cap with their registrar. Otherwise, a large gain in plan assets over time will result in a corresponding increase in fees. “This leaves the responsibility for managing it up to the sponsor,†said Mr. Levinson of Willis Towers Watson.
And sponsors are getting the message, according to polls conducted by Willis Towers Watson every three years.
In a survey of 464 DC sponsors last year, the company reported that 67% charged participants a per capita fee to cover ongoing record keeping expenses, 23% used an asset-based approach and 10% used a combination of the two.
The company’s 2017 survey indicated that 53% of respondents used the per capita strategy, and the 2014 survey indicated that 37% had adopted the per capita approach.
While these polls do not specifically focus on revenue sharing, the changing attitudes of sponsors towards per capita fees reflect their approach to maintaining revenue sharing, Mr. Levinson said.
Sponsors who offer revenue sharing should ensure that any excess over and above the fees negotiated with the registrars are reimbursed as an additional service plan, he said. “You have to have a policy in place,†he said. “Any excess has to come back to the plan.”
These sponsors set up so-called ERISA accounts to capture excess fees to be returned to the plans. “It’s a safety net,†Mr. Levinson said. “It’s the right thing to do. But why split the income in the first place? Why take on the extra risk or have dedicated staff to do it? “