Defined contribution plan executives are becoming more interested in trying to equalize the costs of revenue sharing among their participants, and the new fee-disclosure rules could make the practice more prevalent.
Under revenue sharing, all or most of a record keeper's fees are offset by investment management fees. Because fees for active management generally are higher than those for passive management, participants choosing actively managed investment options pay significantly more of the record-keeping tab.
Some service providers have been on the equalization bandwagon for a while. The inequality “has bothered me for years,” said Joe Masterson, senior vice president and chief sales and marketing officer for Diversified, Harrison, N.Y. “We explain to clients that they ought to apply fairness.”
Kent Peterson, director of investment services, Securian Financial Group Inc., St. Paul, Minn., said: “We always thought it was the right thing to do.”
Providers use terms like revenue leveling, equitable allocation, levelized pricing and fund revenue equalization to describe their strategies.
Muriel Knapp, a Mercer consultant in Washington, said one reason plan executives are more interested in equalization is the Labor Department's fee disclosure regulations. The regs “certainly have created more discussion,” she said. “We're getting a dramatic increase in clients seeking either actual equalization or something (close).”
The DOL rules could prompt greater efforts of “allocating revenue sharing back to the accounts of the participants who paid it,” added ERISA attorney C. Frederick Reish, a Los Angeles based partner at Drinker Biddle & Reath LLP.
“As more providers develop the technology to facilitate equitable, or even precise, allocation to participants, the cost will come down and the reasons for not allocating revenue sharing more equitably will be weakened,” he said.
DC plan executives resist because they “often hesitate to add to the complexity of already complex communications and decisions,” said Alison Borland, vice president for retirement product strategy at Aon Hewitt, Lincolnshire, Ill. Record keepers resist because “some systems are not sophisticated enough to do the calculations to rebate the revenue sharing and calculate the appropriate fees.”
The equalization strategies are most often found among providers servicing smaller 401(k) plans, such as Securian and Milliman Inc., Seattle. The typical Securian client has DC plan assets of $2 million to $10 million, although clients have plans as large as $500 million. The average Milliman client has just less than $50 million, although the firm provides services for sponsors with DC assets ranging from $20 million to $750 million.
Diversified's DC clients using its fund revenue equalization approach range from $20 million to $1.2 billion.