Many plans enter into revenue sharing arrangements with their service providers. Those service providers make available to plans a variety of investment options (e.g., mutual funds) and receive revenue sharing payments from these investments in the form of 12b-1 fees, shareholder and administrative services fees, or similar payments. In an advisory opinion issued in July (Adv. Op. 2013-03A), the Department of Labor’s Employee Benefit Security Administration (EBSA) examined a particular revenue sharing arrangement under which the service provider retains all of the payments but agrees to maintain a bookkeeping record of revenue sharing received in connection with the plan’s investments. Those revenue sharing payments may be used to pay certain plan expenses, such as for the services of accountants, consultants, actuaries, or attorneys to the plan. The service provider deposits the revenue sharing payments into its general asset accounts and does not establish a special bank or custodial account to hold the revenue sharing payments. The service provider makes no representations to the plan fiduciaries or to any plan participants or beneficiaries that revenue sharing amounts it receives will be set aside for the benefit of the plan or that they represent a separate fund for payment of benefits or expenses under the plan.
The advisory opinion offers the following guidance on this and similar revenue sharing arrangements:
• While EBSA acknowledged it is possible that revenue sharing amounts received by a service provider can, in certain circumstances, be assets of the plan, EBSA concluded that revenue sharing payments recorded in the bookkeeping account in this instance are not plan assets before the plan actually receives them. The plan’s contractual right to receive the amounts agreed to with the service provider or to have them applied to plan expenses, however, would be an asset of the plan.
- The advisory opinion points out that the responsible plan fiduciaries must evaluate whether a service provider’s revenue sharing or other fee arrangements give rise to any non-exempted prohibited transactions under the Employee Retirement Income Security Act (ERISA). If a service provider, in its provision of services to a plan, is an ERISA fiduciary by virtue of providing investment advice for a fee and uses any of that authority, control, or responsibility to cause a plan to invest in funds that pay revenue sharing or other fees, it is possible that a non-exempted prohibited transaction would occur.
- Responsible plan fiduciaries must assure the compensation the plan pays directly or indirectly to a service provider is reasonable, taking into account the services provided to the plan as well as all fees or compensation received by the service provider in connection with the investment of plan assets, including any revenue sharing. Responsible plan fiduciaries must obtain sufficient information regarding all fees and other compensation the service provider receives with respect to the plan’s investments to make an informed decision as to whether the service provider’s compensation for services is no more than reasonable.
- Responsible plan fiduciaries must act prudently and in the best interests of plan participants and beneficiaries in the negotiation of the specific formula and methodology under which revenue sharing will be credited to the plan and paid back to the plan or to plan service providers. A plan fiduciary, prior to entering into such an arrangement, must understand the formula, methodology, and assumptions used by the service provider in arriving at the amounts to be returned to the plan or used to pay plan service providers. The plan fiduciaries must be capable of periodically monitoring the service provider to assure the amounts to which the plan may be entitled under the terms of the arrangement are correctly calculated and applied for the benefit of the plan.