An RSPS may be the most important document in your Fiduciary Arsenal. If you are a Fiduciary to an ERISA qualified retirement plan and you don't have a documented process in how fees are allocated to the plan participants and the employer-sponsor, you could find yourself at the wrong end of an excessive fee dispute.
New regulations under §408(b)(2) and §404a-5 require mandatory fee and compensation disclosure to Plan Sponsors and participants. Once disclosed, it is the responsibility of the plan fiduciary to determine whether the agreed upon arrangement is reasonable for the services
rendered. Two recent court cases have specifically addressed the concept of revenue sharing between an investment manager (mutual fund company) and the provider of administrative services (Recordkeeper) and how those payments affect plan participants versus benefiting the employer. In the first case (Tibble vs. Edison), the plan fiduciaries breached their duties by allowing for the investment of participant assets in higher priced retail mutual funds rather than in lower cost institutional funds. Revenue sharing payments from the higher cost funds were used to offset administrative expenses of the Recordkeeper. On the surface this appears to be in the best interest of the participants. The facts, however, show that by reducing administrative fees, the benefit was to the employer as all administrative fees were to be paid by
the employer under a separate collective bargaining agreement.
The second case, (Tussey vs. ABB, Inc.) is discussed in a previous post. This case revolved around the decision to replace an investment with one that provided higher revenue sharing payments to reduce administrative expenses albeit with significantly higher expense to the plan participants. The court in this case found no reasonable investment advantage in the replacement fund and concurred that the replacement was ultimately at the participants' detriment.
Like an Investment Policy Statement, a Revenue Sharing Policy Statement sets forth guidelines for the plan fiduciary, committee members and their advisors to follow with regard to the appropriate allocation of fees and expenses. Keep in mind that the decision in both cases discussed above was not based on the presence of revenue sharing payments, but was based on the method of allocating those payments based on specific documents in place or the lack thereof.
Below are just a few of the questions a properly drafted Revenue Sharing Policy Statement should address:
- Which entity will be responsible for payment of plan fees? The employer sponsor, the plan or both in some combination. Specific services should be identified including administrative, investment management, custodial, trustee, audit, legal, investment advice, etc.
- If revenue sharing is available, how will it be allocated? For example, by investment fund, pro-rata against assets, pro-rata per participant.
- When a new investment option is considered, what is the criteria for determining the appropriate share class?
Unfortunately, many well-known retirement plan service providers do not allow the plan fiduciary to dictate how revenue sharing payments will be allocated. In the Tussey vs. ABB, Inc. case referred to above, it was clear that the court put the burden of that decision on the plan
Fiduciary and absolved the "well-known" provider of any wrongdoing as it related to the revenue sharing issue. As we see it, there are two choices, negotiate a suitable arrangement with the help of an experienced retirement plan consultant or look for another service provider.