As discussed in other articles in this newsletter, revenue sharing and indirect payments are the subject of a great deal of controversy, litigation, and new DOL guidance on prohibited transactions and reporting and disclosure.

Unfortunately, these payments—typically from mutual funds and their investment managers to other providers, such as the recordkeeper and the adviser—are not well understood and, in fact, the terminology is, in and of itself, somewhat confusing. For example, the securities industry uses language such as 12b-1 fees, subtransfer agency fees, and shareholder servicing fees. The 401(k) community has come to refer to these payments as revenue sharing. The DOL calls them indirect payments. Plaintiffs’ attorneys label them as “hidden fees.” Fortunately, the issue is much more simple than the terminology. In the DOL’s instructions for the Schedule C for the proposed 2009 changes to the 5500, it states that the following must be reported:

[M]oney or any other thing of value (for example, gifts, awards, trips) paid by the plan or received from an entity other than the plan or the plan sponsor by a person who is a service provider in connection with that person’s position with the plan or services rendered to the plan. If the proposal is finalized in its current form, plan sponsors will need to report all money and other things of value paid by one provider to another provider. Of course, it is contemplated that the providers will give the information to the employer so that the Schedule C can be properly completed. In fact, the proposed Schedule C asks that the plan sponsor report to the DOL all providers who did not supply the needed information. (In explaining the proposed filing requirements, I have left out some of the details, such as minimum amounts. But those details are not necessary for the purposes of this column.)

Why does the DOL require that information be reported? There are two reasons. First, fiduciaries have a responsibility to know and evaluate the amounts they are paying for plan services, regardless of whether those payments are direct or indirect. Secondly, fiduciaries are required to be aware of, and take into consideration, any potential conflicts of interest, such as where a provider or adviser may be financially incentivized to make a recommendation that is not in the best interest of the plan or its participants.

While the DOL’s general description of payments is broad—“money or any other thing of value,” the 5500 proposal goes on to provide additional detail about the types of payments. The following examples are given:

[F]inder’s fees, placement fees, commissions on investment products, transaction-based commissions, subtransfer agency fees, shareholder servicing fees, 12b-1 fees, soft-dollar payments, and float income.

However, those detailed examples are not limiting. The rule is that fiduciaries have to know about money or any other thing of value that is being paid indirectly to any plan provider or service provider—if a payment relates to the plan or to any plan transactions.
Source: The Report to Plan Sponsor