If sponsors are hesitant about these other investments, outside forces may force their hand because revenue sharing has become catnip for plaintiffs' lawyers and a flashing red light for providers of fiduciary liability insurance.
"You can tip your hat to the plaintiff's bar" for encouraging sponsors to reconsider, revise or remove revenue sharing, said Michael J. Francis, president of Francis Investment Counsel LLC , Brookfield, Wis.
Revenue sharing plays a frequent role in ERISA lawsuits that often attack plans for failing to use or investigate institutionally priced mutual fund shares or other options that can be cheaper.
Revenue sharing is "highly endangered in qualified (DC) plans," said Mr. Francis, adding that ERISA plans account for only a small percentage of the revenue-sharing universe. The big markets are private wealth management, endowments, foundations and corporations, he said. As for DC plans, "there's no reason to keep it."
Litigation risk is tied to an increasingly tough market for fiduciary liability insurance as sponsors are faced with paying more, receiving less and answering far more detailed questions than they once did. Revenue sharing ranks high among plaintiffs' allegations in ERISA fee cases. "There are more questionnaires" from insurers to sponsors, said Mr. Smith of Fiducient Advisors. "Most questions are about fees."
If DC plans use revenue sharing, consultants say they should negotiate a per- capita record-keeping fee for participants rather than a fee based on plan assets.
If sponsors go with the plan-assets approach, they should negotiate a cap with their record keeper. Otherwise, a big gain in plan assets over time will cause a corresponding increase in fees. "This puts the onus on the sponsor to manage it," said Mr. Levinson of Willis Towers Watson.
And sponsors are getting the message, according to surveys conducted by Willis Towers Watson every three years.
In a survey of 464 DC sponsors last year, the firm reported that 67% charged participants a per-capita fee to cover ongoing record-keeping expenses, 23% used an asset-based approach and 10% used a combination of the two.
The firm's 2017 survey said 53% of respondents used the per-capita strategy, and the 2014 survey reported that 37% took the per-capita approach.
Although these surveys didn't specifically ask about revenue sharing, sponsors' changing attitudes about per-capita fees reflect their approach about retaining revenue sharing, Mr. Levinson said.
Sponsors that offer revenue sharing must make sure any excess beyond the fees negotiated with record keepers be rebated to the plan for additional services, he said. "You have to have a policy in place," he said. "Any excess should go back to the plan."
These sponsors establish so-called ERISA accounts to capture the excess fees to be returned to the plans. "It's a safety net," Mr. Levinson said. "It's the right thing to do. But why do revenue sharing in the first place? Why take on the added risk or dedicated staff to do this?"