Thursday, July 11, 2013

Just who's Revenue Sharing is this Anyway? Good question Fred.....

This is a straight re-post from Napa-Net.  Original author, Fred Reish, link to follow.

Is revenue sharing a plan asset? This issue and others were addressed in a July 3 DOL opinion letter (Advisory Opinion 2013-03A) addressed to the Groom Law Group concerning a plan administered by Principal.

In the situation addressed in the letter, Principal receives payments in the form of 12b-1 fees and other revenue sharing to offset expenses and deposit excess monies in a general account. Unless there is a specific agreement to the contrary, Principal is not required to hold each plan’s excess revenue sharing in a separate account. The DOL said that the revenue sharing received by Principal is a plan asset, but not before it is received.

Since Principal is using the revenue sharing to pay for the cost of the plan, some of which is paid to itself and from funds it manages, it is incumbent upon the plan fiduciary to ensure that the services and costs are necessary and reasonable. In particular, the letter stated:

It is the view of the Department that the responsible plan fiduciaries must obtain sufficient information regarding all fees and other compensation that Principal receives with respect to the plan’s investments to make an informed decision as to whether Principal’s compensation for services is no more than reasonable. … Prudence requires that a plan fiduciary, prior to entering into such an arrangement, will understand the formula, methodology and assumptions used by Principal in arriving at the amounts to be returned to the plan or used to pay plan service providers following disclosure by Principal of all relevant information pertaining to the proposed arrangement.

While this question is not addressed, if revenue sharing is considered a plan asset just like the investments themselves, doesn’t the revenue sharing really belong to the participants? If so, it raises the question of why one participant should have to pay more than another with the same account balance to offset the cost of administration of the plan just because the funds they invest in have higher revenue sharing. Would that pass the “reasonable” test?

Good questions.....ultimately the bigger question that I have is whether any of these standard industry practices would meet a true interpretation of the Exclusive Purpose rule......perhaps that's a matter of opinion, but my sense is that the participants are the last things on the mind of the big insurance companies and big mutual fund houses......

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