(b)lines Ask the Experts – What Is Revenue Sharing?

The experts answered:  

Simply put, revenue sharing is a practice where an investment company shares a portion of the revenue it receives for fund expenses from plan participants with a third party that performs a function the investment company would otherwise have to provide. A common example of this is a sub-transfer agency fee, or sub-ta, where the fund company compensates a recordkeeper for providing participant-level recordkeeping services which the fund company itself would ordinarily be required to provide.    

Revenue sharing was a hot topic at the 2012 PlanSponsor National Conference due to increased efforts by the DOL to make certain that all forms of revenue sharing (there are many types) are disclosed via the 5500 and directly to plan sponsor via the new 408(b)(2) service provider fee disclosure requirement. The prudent plan fiduciary will review the disclosures to make sure such revenue sharing is reasonable relative to the service provided. If not, the fiduciary should negotiate a  reasonable reimbursement, with any excess revenue sharing credited to the plan in the form of an expense reimbursement account, which can then be credited back to participants or be used to defray legitimate plan expenses.  Until recently, expense reimbursement accounts were a rarity in 403(b) plans due to lack of plan sponsor knowledge of expenses. However such accounts have become increasingly commonplace, especially in larger 403(b) plans.    

The experts also noted that, though expense reimbursement accounts can be established in church and governmental plans that are not subject to ERISA, private tax-exempts with elective-deferral arrangements meant to comply with the ERISA exemption under Reg. §2510.3-2(f) should consult counsel well versed in 403(b) plans before attempting to address any revenue sharing or other expense issues, since such involvement presumable would violate the ERISA exemption.  

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.