Is your small business retirement plan run impartially? You may believe that your small business retirement plan is being run impartially. However it may not. Look no further than revenue sharing.
Small business retirement plan revenue sharing
Does your plan use revenue-sharing? If you are like many plan sponsors you don’t understand the concept of revenue-sharing governed by an Employee Retirement Income Security Plan (401(k), profit sharing, ERISA 403(b) plan, etc.). I often hear of revenue-sharing with respect to professional sports. Monies made by one team may be shared with members of the league. This may come from monies made through TV deals of one team that are shared throughout the league.
In the arena of retirement plans revenue-sharing essentially involves monies being paid or overpaid to investment managers who then rebate that money back to other providers. In some cases, there are revenue-sharing agreements between the broker-dealer or brokerage firm that the financial advisor or broker of record for your retirement plan works for. That may induce them to pick investments that may have higher revenue-sharing as opposed to other firms with lower or no revenue-sharing. The non-partisan, Government Accounting Office, estimates that reducing fees by 1% would provide them with a 17% higher balance over a 20 year period.
Small business retirement plan fiduciary exposure
Asea Brown Boveri, a multi-national firm, used revenue-sharing in their not so small business retirement plan. A judge found they misused revenue sharing and had their employees pay higher fees in order to cover more of Asea Brown Boveri’s expenses. While a good business decision, it is a bad fiduciary one. The Department of Labor has recovered more than a billion dollars a year over the last 4 years finding poor oversight by fiduciaries.1 Watching over plan fees is just one of the issues that they are evaluating.
Small business retirement plan review
You may be alarmed by the potential that you may be improperly authorizing the use of revenue-sharing. We recommend that you get a plan review by an independent advisor, preferably one that is an ERISA 3 (21) investment advisor, a co-fiduciary investment fiduciary. Brokers and provider that do not take on a fiduciary status may have a conflict of interest regarding fee disclosure. Plan reviews come in different intensities. One review might be similar to that of an x-ray whereas another more like an MRI. I recommend starting at the x-ray level and then moving yourself up the continuum as your results would dictate. Of course, you could simply move out of using revenue sharing and move into transparency.
If you have not done an independent review of your 401(k) using your employer plan sponsor disclosure 408 B2 you may want to start there. Remember too, that is not simply the amount of the fee but the service received for the fee. Ask yourself, if a former employer asked you to explain your plan fees, how you would justify them?
I recommend working with an ERISA 3(21) investment advisor, discretionary trustee or 402a Named Fiduciary that access comparisons from independent sources. Independent providers of this data include BrightScope and Fiduciary Benchmarks. Don’t have an impartial, ERISA 3(21) investment advisor? Contact us.
- Source Department of Labor Employee Benefits Security Administration Press Releases http://www.dol.gov/ebsa/newsroom
- This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.