Fund-specific revenue sharing allocation
Plan fiduciaries have the responsibility to determine the reasonableness of plan fees and to understand the compensation structure of their retirement plan. Plan fees generally consist of service fees from each vendor plus the expense ratio of the underlying plan investments. Within these fee structures, fees can be paid directly by the plan sponsor or paid from plan assets.
This piece focuses on the revenue sharing dollars that are paid back to JULY who then allocates the dollars to plan participants. It is important to understand this process as not all vendors are transparent in describing revenue sharing payments and often keep the payments for services – clouding the client’s understanding of how much is being paid for services.
- Revenue Sharing Basics
Part of the inner workings of certain mutual funds is revenue sharing—a portion of the fund’s expense ratio that is paid back to the broker/dealer, custodian, TPA, or recordkeeper.
There are two forms of revenue sharing (1) 12b-1 – the annual marketing and distribution fee generally paid to the plan’s broker-dealer and (2) sub-transfer agency fees – the fee for participant accounting and the execution of transactions – generally paid to the plan’s recordkeeper.
- JULY’s Allocation Practice Prior to 2017
Throughout the year, different funds pay their stated revenue sharing dollars at different times—monthly, quarterly, and other.
When JULY receives revenue sharing dollars, we allocate them back to plan participants on a pro-rata basis in proportion to a participant’s account balance.
This method of allocation has been determined as reasonable; however, as the mutual fund industry has become more competitive, there has been a direct focus on fee levelization.
Fee levelization is the review and allocation of revenue sharing to ensure that each fund in the plan rebates the same percentage so that fees and rebates to participants are equally distributed.
- JULY’s Allocation Practice as of 2017
Beginning in 2017, JULY is modifying our practice of allocation of revenue sharing dollars to improve the levelization of fees. As revenue sharing dollars are received, we will allocate the dollars back to participants in the fund that generated the revenue sharing. The practice has several benefits:
- Allocations to funds that generate the rebate
- Participants that generate the revenue sharing will receive the allocation
- Fund selection and monitoring will be easier
- Fair practice of allocating fees and rebates
This modification is in line with industry trends but plan sponsors have the option to continue allocating on a pro-rata basis.
FREQUENTLY ASKED QUESTIONS
- 1. When does the first credit back under the new methodology take place?
JULY will begin the new revenue sharing allocation process on February 15, 2017. Revenue sharing dollars received on or after this date will follow the new process unless the employer chooses otherwise. If you choose to keep revenue sharing allocations on a pro-rata basis, please notify your Client Service Manger by January 15, 2017.
- 2. What frequency will JULY use for crediting the revenue sharing?
Revenue sharing will be allocated on a quarterly basis from the fund companies and custodians. Different companies and funds pay at various intervals
- 3. Do ERISA and DOL require fee levelization?
Fee levelization is not a requirement under the Employee Retirement Income Security Act (ERISA) and the Department of Labor (DOL) has said that pro-rata allocations are “generally” acceptable. What we must consider based on the regulations is what is fair and equitable for each participant.
- 4. Are other companies changing how they allocate revenue sharing dollars?
Yes, JULY has seen an industry-wide movement to fund specific allocation of revenue sharing. Putting all the fees and revenue sharing down on paper and looking at it holistically, this allocation method is the most equitable.
- 5. How can I find out how much revenue sharing is paid on the funds in my plan?
You can review each fund’s prospectus to determine the amount of 12b-1 and revenue sharing the fund pays, or you may reference the plan sponsor (408(b)(2)) or participant (404(a)(5)) fee disclosures.
- 6. Are both forms of revenue sharing credited back to the funds in our plan?
There are two scenarios in which revenue sharing is allocated back to the plan. The scenario for each plan depends on the compensation structure of the advisor
- Scenario 1 – The 12b-1 fees are paid directly the broker/dealer of record (which is often the advisor’s home office) and the sub-transfer agency fees are paid back to the plan.
- Scenario 2 – The 12b-1 fees and the sub-transfer agency fees are both paid back to the plan. The advisor’s fee is either allocated to the plan or paid by the plan sponsor.
- 7. If the company pays the plan expenses, how will this reflect on the invoice?
If the plan sponsor pays all invoices related to the administration of the plan, then the revenue sharing will be allocated as mentioned in the one-page document. If the plan sponsor offsets their invoice by revenue sharing before allocating any excess (positive or negative) then this process will remain unchanged.
- 8. What if a participant takes a distribution or transfers from a fund before the allocation?
If a participant takes a distribution or transfers out of the fund before the allocation, then the participant will not receive the allocation for that period. JULY will allocate revenue sharing as it is received from the fund companies and to participants who are in the fund on the date of allocation. Because of the timing differences by fund, it is not administratively feasible for us to allocate on a weighted average based on timing of the payments.
- 9. What if the plan closes a fund before the revenue sharing is allocated?
If the plan makes a fund change and removes a fund that remits a revenue sharing payment, the payment will be allocated to the new fund or fund in which the proceeds were defaulted.
- 10. How will the participant see the revenue sharing credits on their account / statements?
Participants will be able to view revenue sharing allocations on their online accounts and on their participant statements.
- Online Accounts – Under Account History, the transaction can be viewed and is reflected as a positive fee allocation.
- Participant Statements – Allocations will be included in the “Investment Earnings/Fees” column in addition to a line item under the “Fees and Expenses” section.
- 11. Are these credits reflected on the participant and sponsor fee disclosure reports?
The current language in the Plan Sponsor Fee Disclosures, 408(b)(2), and the Participant Fee Disclosure, 404(a)(5), currently supports this allocation method. Please keep in mind that JULY continuously updates language and content in our fee disclosures.