By Joseph C. Faucher

The Issue: What do plan fiduciaries need to know about revenue sharing?

The Solution: Fiduciaries need to understand that revenue sharing is a common practice in the investment industry. They must be aware if revenue sharing payments are being made and the amount of those payments, determine how those payments are used, and evaluate whether the overall compensation of the party that receives them is reasonable.

Analysis: “Revenue sharing” occurs when an investment company, like a mutual fund company, issues compensation to another service provider – a recordkeeper or a third party administrator. The payments are typically made in exchange for services that the mutual fund company might otherwise have to provide itself. Service providers who expect to receive them are obligated to disclose the anticipated payments and how they are calculated to the responsible plan fiduciary. Fiduciaries need to understand what the service providers who receive revenue sharing do with the money they receive. In some cases, service providers “offset” or reduce their fees by these payments, or credit the payments back to the accounts of the participants. Others simply retain the payments. Since fiduciaries are obligated to know how much compensation their service providers receive, and to determine whether that compensation is reasonable, it is imperative that they understand who is paying revenue sharing, who is receiving it, how much it is being paid and how it is being used.

Source: California HR Newsletter