Running the Fund | Published in January 2014

Fair Share

The buzz around fee equalization

By Judy Ward | January 2014
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If you haven’t heard talk about fee equalization yet, you probably will soon. Now that 408(b)(2) disclosure has given plan sponsors a better understanding of their 401(k) plans’ fees, talk has turned to follow-up issues, such as ensuring that revenue sharing gets utilized fairly across participants. “The [overall] fee discussion was great,” says Douglas Conkel, a Dallas-based senior benefits consultant at Milliman Inc. “Fee or revenue-sharing normalization is the next deep dive.”

Many mutual funds still pay revenue sharing to subsidize plans’ administrative expenses. As participants invest in different funds and funds have different revenue-sharing rates—and these rates vary across recordkeepers—that means participants subsidize administrative expenses to varying degrees. “Once a fiduciary understands that this inequality exists, a reasonable person would say, ‘Is there a way to make the administrative fees paid by participants uniform, despite the varying revenue-sharing rates?’” Conkel says.

Fee equalization, also called fund revenue equalization, credits participants for revenue sharing paid by their investments that exceeds their share of the recordkeeping fee. Or, conversely, should a fund not pay sufficient revenue sharing to cover the required revenue by the recordkeeper, a participant will have a debit to his account. This approach ensures that participants pay an equivalent share of their plan’s administrative expense. Rather than bundling the investment and administrative expenses, a plan charges each participant an administrative fee, based either on basis points or a per-head charge.

Adviser James Robison has clients that employ fee equalization. “It certainly has eased these sponsors’ minds about the appearance of disproportionate cost-sharing,” says Robison, an Indianapolis-based principal at White Oak Advisors. And for participants, he says, “There is clarity of fees and expenses. There’s nothing opaque about it. It’s right in front of participants.”

Adviser James Hageney explains how revenue sharing can lead to inequality in the amount participants may pay for recordkeeping fees. “You may have two people participating in the same plan, with identical account balances of $100,000. One person invests in all passive index funds, and these funds often generate little or no revenue sharing to offset recordkeeping fees. The other person may hold all active funds that generate, for example, a total of $250 in revenue sharing annually to subsidize the plan’s recordkeeping and administration fee,” says Hageney, a managing partner at The Centurion Group LLC, in Plymouth Meeting, Pennsylvania. In this example, the two participants with identical account balances essentially receive the same recordkeeping services, but one contributes $0 to offset fees and the other pays $250. “Is that really fair?” he says.