10/18/2016. Revenue Sharing and the Ritual Slicing of the Pie. Joseph F. DeNoyior, CPFA, CRPS, AIF, C(k)P William C. Presson, ERPA, QPA, QKA, APR

Transcription

1 Revenue Sharing and the Ritual Slicing of the Pie Joseph F. DeNoyior, CPFA, CRPS, AIF, C(k)P William C. Presson, ERPA, QPA, QKA, APR 1

2 Overview Define Revenue Sharing Types of Revenue Sharing Allocation Methods Fiduciary Issues Concerns Future Revenue Sharing Defined Revenue sharing is a simple term with a complex makeup because the terminology used isn t standard. However, examples are 12b-1 fees, sub transfer agency (sub t/a) fees, shareholder servicing fees and administrative servicing fees. 2

3 Revenue Sharing Defined Essentially, revenue sharing is compensation from the plan investments (usually mutual funds) used to pay service providers. That can include the recordkeeper, the third party administrator or an advisor. Brief History of Revenue Sharing Back in the olden days, mutual funds paid Sub- TA fees to recordkeepers since the fund wasn t having to track each account individually. This really helped the 401(k) business grow in the 80 s. 3

4 Brief History continued In the subsequent years, revenue sharing became a much more complex arrangement with some funds paying as much as 100 bps! Uses of Revenue Sharing Before discussing any allocation back to participants, remember that any revenue sharing paid by the funds CAN just be kept by the service providers. 4

5 Fee Components Recordkeeping Accounting Employer/Employee Reports Processing Payroll Deposits Quality Assurance Standards Technology Services Web-based Tools Automated Voice Response System Loan/Withdrawal Processing Online Enrollment Compliance Plan Document, SPD Discrimination Testing 5500 Filings ERISA Resources Fees Billed Fees Asset Based Fees Revenue Sharing Communications Enrollment Materials & Meetings Individual Advice Solutions Participant Statements Bilingual Support Investment Management Investment Philosophy Quantitative Analysis Qualitative Analysis Scorecard Fund Ranking Components of Plan Costs Investment Fees All costs associated with managing the investments Administrative Fees Services to operate the plan: Recordkeeping, Trustee, Compliance, Communications Plan Consulting Fees Advisory fees paid to a registered investment advisor or commission paid to a broker Always paid for by plan participant Paid for by plan sponsor and/or participant Paid for by plan sponsor and/or participant 5

6 Pieces of the Pie What is in the expense ratio? What components are revenue sharing? What is the Investment Management Fee piece? Investment Management Fee 12-b1 Fees Shareholder Servicing Fees Sub-TA (Agency Transfer Fees) Fee Considerations How much does it cost? Who is going to pay? How are they going to pay? What model is best for the organization? 6

7 Allocation of Revenue Sharing 1. Pro-rata This method is to simply take all dollars received and spread it back to the participants as an equal percentage of the plan. Allocation of Revenue Sharing 2. Per capita This method is to simply take all dollars received and give it back to the participants as an equal dollar amount to each participant. 7

8 Allocation of Revenue Sharing 3. Participant Equalization This method returns the amounts to the participants from which it was deducted. Editorial note: if a plan wants to do this, please use institutional funds instead. Allocation of Revenue Sharing ERISA Recapture Accounts Also known as ERISA budget accounts. Used to collect all revenue sharing and pay eligible expenses. 8

9 Allocation of Revenue Sharing ERISA Recapture Accounts In DOL Advisory Opinion A, the handling of the account is critical in the determination of whether the money is considered a plan asset. Be sure to know ingredients for the accounts of your clients! Fiduciary Issues In today s environment, fiduciary issues, especially related to fees, are at the top of everyone s mind. So, how to handle any revenue sharing is not just what s easy or fair. It s what is defensible! 9

10 Fiduciary Issues A fiduciary must make decisions about the amount of revenue sharing paid by the share class, how the revenue sharing will be split between service providers and how it will be allocated to participants. Fiduciary Issues All of these decisions should follow a deliberative, prudent process. And that process should be documented. 10

11 Fiduciary Issues What if the fiduciary wants to allocate the revenue sharing in a method which is unavailable with the current recordkeeper? Assuming it s a legitimate method, the fiduciary needs to find a new recordkeeper. Fiduciary Issues Frankly, many fiduciaries (working with their advisors and other service providers) are seeking to eliminate revenue sharing at all from the plan. 11

12 Transparency 408(b)(2) requires the disclosure of all fees, including revenue sharing. Employers, slowly, are becoming much more savvy about what is deducted from the plan. For those employers that aren t yet at that level, there are plenty of other advisors willing to help educate (and take the plan). Disclose Transparency Disclose Disclose 12

13 Transparency As a TPA, are you giving all the information needed for the fiduciary to make a decision? Wrap up Revenue sharing isn t bad regardless of the press. But it can be a sticking point for a plan sponsor. It can also led to excessive fees depending on the usage. 13

14 Wrap up Know what you need to charge for your services. Know what your recordkeeping partners provide. Knowledge is the solution. Thanks! William C. Presson, ERPA, QPA, QKA, APR EGPS, Inc. New York/Mobile/New Orleans/Orange County/San Diego Joseph F. DeNoyior, CPFA, CRPS, AIF, C(k)P Washington Financial Group McLean, VA