Retirement Solutions Now Header

Sponsor News - April 2015

Revenue sharing is on the decline in 401k plans. Three reasons why it will soon be gone altogether.

Revenue Sharing

I write to bury revenue sharing, not to bash it.

Revenue sharing is the practice of adding additional non-investment related fees to the expense ratio of a mutual fund. These additional fees are then paid out to various service providers – usually unrelated to the fund company managing the fund.

Why is this controversial? Mutual fund returns are reported net of fees, so the money collected from investors and paid out to other parties is not explicitly reported to investors, it simply reduces the net investment return of the fund. Because investors don’t see the fees being deducted, the true cost of the fees charged is often overlooked when calculating the total cost of plan services.

Revenue sharing is limited to small business retirement plans
Larger 401k plans don’t have revenue sharing. Large employer plans have access to managed accounts and/or institutional share classes. These investments have lower expense ratios and no revenue sharing arrangements. Larger employers negotiate for the best fees for all plan services, and then determine how those fees should be allocated to plan participants or borne by the plan sponsor. Revenue sharing shifts all additional fees, by definition, to the plan participants, thus limiting flexibility. Revenue sharing, therefore, is limited to smaller retirement plans and the “retail” class shares of mutual funds.

Reports indicate revenue sharing has been declining over the last few years – both in terms of the percentage of plans including it and as a portion of the expense ratio. Fee disclosure requirements have likely played at least some small part in this trend. However, I would argue that market forces have been more influential in reducing the incidence of revenue sharing. I predict these market forces will bring the practice to an end – and soon.

Key takeaway: Plans grow out of revenue sharing, not into it.

As plan assets increase, plans tend to review fees, and to move away from the retail class of shares – and revenue sharing. Cause and effect? Yes.

Here are the market forces driving plans away from revenue sharing:

Revenue sharing is no longer “invisible.” With the rise in popularity of low-cost investments – particularly index funds and ETFs, more scrutiny is being placed on the total expense ratio of plan investments. The fee baseline is now about 0.15% (or less) for index funds. Funds with a typical management fee and revenue sharing now stand out more than just a few years ago when the baseline fee was higher. And the demand for index funds is increasing. As more small employers opt for low-cost investments, the more pressure that will be placed on fund companies to be competitive on fees. Look for fund companies to dump the “ballast” of revenue sharing in order to better compete on price as market competition continues to drive fees down.

Revenue sharing is not equitable. Unless all investments in a plan are subject to the same revenue sharing percentage, fees are being applied inequitably to plan participants. We see examples of this issue every day in plans mixing funds that have and do not have revenue sharing. Investors choosing revenue sharing funds pay a disproportionate portion of plan expenses – often without their knowledge. The DOL warns that sponsors are obligated to monitor the overall reasonableness and proportionality of fees – including those paid through revenue sharing arrangements. Sponsors evaluating fees are more and more rejecting all revenue sharing arrangements – they are just too time consuming and difficult to administer equitably. Small plans will continue to move away from revenue sharing as they continue to strive to meet fiduciary standards.

Revenue sharing is not efficient. Revenue sharing adds complexity to 401k plan administration – and drag. Form 5500 filings, plan audits, participant communications and plan fiduciary documentation are all made more difficult – and expensive – because of revenue sharing. And the benefits of revenue sharing? Fees are deducted from plan assets before investment returns – little value in our internet-driven culture of transparency. As sponsors become more educated on plan expenses and fiduciary responsibilities, they continue to opt out of complex fee arrangements in favor of fully-disclosed, transparent fee arrangements. This trend is not going away.

Revenue sharing is winding down. Small businesses will be the winners when it is gone.




5 Ways to Avoid a DoL Audit of Your 401(k) Plan

July 23, 2014 by Robert C. Lawton

According to PLANSPONSOR, there were 3,677 Department of Labor (DoL) qualified retirement plan audit investigations in 2013. Settlements related to violations totaled $1.7 billion in plan reimbursements and fines. Following are some suggestions that may help you avoid a DoL audit of your retirement plan:

  1. Respond to employee inquiries in a timely way. The most frequent trigger for a DoL audit is a complaint received from an employee. These complaints can originate from employees you have terminated who feel poorly treated or existing employees who feel ignored. Make sure you are sensitive to employee concerns and respond in a timely way to all questions. Be very professional in how you treat those individuals who are terminated – even though in certain instances that may be difficult. Vengeful, terminated employees often call the DoL to “get back” at an employer.
  2. Improve employee communication. Often employee frustrations come from not understanding a benefit program – or worse, misunderstanding it. If you are aware that employees are frustrated with a plan or, there is a lot of behind the scenes discussion about it, schedule an education meeting as soon as possible to explain plan provisions.
  3. Fix your plan If the DoL decides to audit your retirement plan, statistics show that they almost always find something wrong. Many times plan sponsors are aware that a certain provision in the plan is a friction point for employees. Or worse, the plan is broken and no one has taken the time to fix it. Contact your benefits consultant, recordkeeper or benefits attorney to address these trouble spots before they cause an employee to call the DoL.
  4. Conduct your own audit. Many plan sponsors have found it helpful to conduct their own audits of their plans, or hire a consulting firm to do it for them. If management hasn’t been responsive to your concerns about addressing a plan issue, having evidence to present that shows an audit failure can be very convincing.
  5. Make sure your 5500 is filed correctly. The second most frequent cause of a DoL audit is problems which are identified on the annual Form 5500 filing. The most common 5500 errors include failing to follow EFAST 2 Electronic Filing Guidance, not attaching all required schedules and failing to answer multiple part questions. Ensure that your 5500 is being filed by a competent provider and that it is filed on time. Most plan sponsors either use their recordkeeper or accountant to file their plan’s 5500. Don’t do it yourself. The fees a provider will charge to do the work for you are very reasonable.

DoL audits are generally not pleasant. Because audits are typically generated by employee complaints or Form 5500 errors, auditors have a pretty good idea that something is wrong. As a result, plan sponsors should do everything they can to avoid a DoL audit.




Changing Employee Benefit Plan Vendors? Tips for a Smooth Transition

by Pam Cleaver, Partner, and Raquel Martinez, Manager, Employee Benefit Plan Services Practice

July 2014

Perhaps you’re seeking a lower fee structure—especially now that new disclosure requirements have exposed how much your employee benefit plan is paying for the services your plan vendor provides. Or maybe there’s been a change in your plan’s demographics or participant needs. Or it could just be that your corporate guidelines mandate a plan vendor rotation every so often.

Regardless of the reason you seek to change your plan’s record keeper, trustee, or custodian, you face an increased risk of error if the change isn’t managed properly. As a result, if you’re debating a change in vendors for your benefit plan, it’s important to consider the potential risks to both the plan and its participants.

It’s also important to remember that the plan sponsor (the employer) has a fiduciary responsibility to ensure that the change is monitored and performed properly. Plan assets aren’t guaranteed by any federal agency, and the plan sponsor is liable if assets or earnings on assets are lost. Let’s take a brief look at the steps involved in a vendor change, pitfalls to look out for, and how you can help smooth the transition.

What Happens During a Change?

Typically, the predecessor vendor provides payroll, account balance, investment, and loan information for each participant to the successor vendor. The plan sponsor (with the new vendor’s help) communicates with participants to explain the reasons for the change, how it will affect them, and the basics of the blackout period (the period of time during which participants won’t be able to make changes to their plans). Participants are informed of how their investments will be mapped to new investments, if the investment vendor has changed.

In addition, new legal documents are prepared (such as the plan document, adoption agreement, and investment policy), and the predecessor vendor begins the blackout period. The provider will then run a final tally on how much each participant has in his or her account. Blackouts typically last about 10 business days.

If the plan is changing investment vendors, the assets are sold and the proceeds are wired to the new vendor, which commonly reinvests them in similar funds, in a process called mapping. The predecessor vendor then issues a final statement based on the liquidation balance.

What Could Go Wrong?

Whenever there’s change, there’s potential for error. Here are some common issues to look out for:

1) Beginning participant or overall plan asset balances at the successor vendor don’t agree with ending balances from the predecessor vendor’s auditor.

Amounts transferred aren’t mapped to the proper investments.

Participant contributions aren’t remitted in a timely manner to the successor vendor, which could be deemed a nonexempt prohibited transaction under ERISA Section 406.

Reconciliations aren’t completed, and differences are noted several months later during the audit.

One of the vendors fails to provide the “limited scope certification,” if applicable for the period of time it held the investments, thus resulting in the need for a generally more costly “full scope” audit.

The plan administrator’s designated representative fails to go through the plan provisions, line by line, to ensure the same provisions were elected, in which case the sponsor could be administering benefits not in accordance with the plan document.

What Can Plan Sponsors Do to Ease the Transition?

In performing their due diligence, those charged with governance (generally members of management and benefits committee members) should discuss why the change is needed and ensure final decisions are documented in formal committee minutes. Designate a point person to monitor the transition from start to finish. This person will be responsible for all communications with vendors, participants, and management.

To document the process, create a timeline illustrating how the plan assets will be transferred from one plan to the other. Often the new record keeper will assist with this if the request is made during the planning phase of the transition.

If investments are transferred, make sure to:

1) Reconcile assets in total. The plan administrator should reconcile total assets transferred from the predecessor vendor to the successor vendor immediately after the transfer. Performing this reconciliation will help identify any differences, which could be caused by fees charged or interest earned when investments were liquidated. When they’re identified in a timely manner, resolution of these differences is much easier and lessens the risks of misstatement.

2)Map investments. There should be a clear mapping of original investments to the new investments being offered.

3)Reconcile participant accounts. The plan sponsor should select a sample of participants and test their transfer of funds from the predecessor vendor to the successor vendor to ensure funds were properly transferred and their accounts are complete and accurate.

Remember to plan ahead for both the audit and required year-end reporting. Prior to the transfer of assets, plan sponsors should reach out to their auditors and inform them of the transfer of assets. Audit fees are usually higher during a change year, but they can be controlled with good communication and coordination. Your auditor should be able to:

1)Provide you with templates and guidance on the reconciliations noted above

2)See that year-end reporting packages are requested from both predecessor and successor vendors

3)If the vendors provide a limited scope certification, work with both vendors to understand the time period in which they’ll certify the plan assets

We're Here to Help

Changing plan vendors can be a complex and time-consuming undertaking, but it doesn’t have to be a risky one. Adequate planning and monitoring can result in a smooth transition.





Avoiding the Hardship of Correcting Hardship Distribution Violations

Posted by Maria T. Hurd, CPA

Administering hardship distributions correctly is important to prevent the hardship of completing a correction of an error in administration. Often, plan officials assume that their third party administrator is collecting all the information necessary for the approval and proper processing of a hardship, when that is not always the case. When mistakes happen, plan sponsors should refer to the 401(k) Plan Fix-It-Guide posted on the IRS website to educate themselves regarding possible corrections through the Self-Correction Program (SCP), the Voluntary Compliance Program (VCP) application, a submission for which there is a standard fee based on the number of participants or, in the event the error gets caught as a result of an IRS audit, the Audit CAP, which allows the sponsor to correct the mistake and pay a negotiated sanction. An employer’s eligibility for each of the available programs is discussed in detail on Revenue Procedure 2013-12.

To avoid the hardship of correcting a hardship distribution mistake, plan sponsors should be well aware of the rules regarding:

  1. a) Hardship definition
  2. b) Amount of the distribution
  3. c) Eligibility for a distribution
  4. d) Backup needed and who is responsible for obtaining it

Hardship Definition

In 401(k) and 403(b) plans that permit hardship distributions, the employer can determine whether an employee has an immediate and heavy financial need based on all relevant facts and circumstances. However, most plans reference the Internal Revenue Code’s definition of a hardship, which includes:

  • Medical care expenses for the employee, the employee’s spouse or any dependents of the employee;
  • Costs directly related to the purchase of a principal residence for the employee (excluding mortgage payments);
  • Payment of tuition, related educational fees, and room and board expenses for the next 12 months of post-secondary education for the employee, the employee’s spouse, children or dependents;
  • Payments necessary to prevent the eviction of the employee from the employee’s principal residence or mortgage foreclosure on that residence;
  • Funeral expenses for the employee’s deceased parent, spouse, etc.; or
  • Certain expenses relating to the repair of damage to the employee’s principal residence.

Amount of the distribution

The amount of an immediate and heavy financial need may include any amounts necessary to pay any federal, state or local income taxes or penalties that reasonably result from the distribution.

Eligibility for a distribution

An employer may not treat a distribution as necessary to satisfy an immediate and heavy financial need if the financial need may be satisfied from other resources reasonably available to the employee. Employers generally may rely on the employee’s written representation that the financial need cannot be satisfied from other sources, other than ensuring that the participant has taken the maximum participant loan available under the plan.

Plan provisions permitting distributions

Before approving a hardship distribution, employers should ensure that the plan document includes a hardship provision. If an employer makes hardship distributions available to all plan participants, but the plan does not have a hardship provision, an employer can self-correct the operational error by adopting a retroactive plan amendment. Self-correction by retroactive amendment is not an option if the hardship distributions were not made available in a nondiscriminatory manner. In those cases, employers must file a Voluntary Correction Program (VCP) application.

Correction Possibilities

If an employer authorizes hardship distributions that don’t meet the plan’s hardship requirements, makes distributions that exceed the hardship amount, fails to obtain the necessary backup, or fails to ensure that the participant obtained the maximum available participant loan, it is possible that there may not be adequate practices and procedures in place for processing hardship distributions accurately. If controls are not in place, the Self-Correction Program (SCP) is not available to the employer, and a Voluntary Compliance Program (VCP) application should be submitted. Potential corrections that can be proposed or completed include, among others:

  • The participant paying back the amount they received plus earnings.
  • Employer contributions
  • Retroactive plan amendments
  • Obtaining the necessary backup

Preventing the mistake

Employers should take steps to ensure that hardship distributions are processed accurately, including:

  • Review the plan document language to determine when and under what circumstances the plan can approve a distribution.
  • Establish hardship distribution procedures working with your benefits professional to determine if these procedures are sufficient to avoid mistakes.
  • Obtain a clear understanding of the plan sponsor’s responsibilities and the third party administrator’s responsibilities with respect to obtaining the necessary backup documentation
  • Only allow hardship distributions that meet the plan document and IRC Section 401(k) requirements.

- See more at:




Proposed DOL fiduciary rules positive for plan sponsors

by Robert C. Lawton

APR 15, 2015
9:41am ET

Commentary: Much sooner than anticipated, the Department of Labor released its proposed new fiduciary compliance rules for investment advisers. The rules are aimed specifically at brokers who currently provide investment advice to clients under the "suitability" requirement (which currently exempts brokers from being fiduciaries).

Background: Fiduciary care vs. suitability

Investment advisers working for Registered Investment Advisory firms are required to be fiduciaries, providing investment advice that keeps their client's best interests first and foremost. Advisers who work for brokerage firms are currently allowed to exercise a lower standard of care, called suitability, when providing investment advice to their clients.

Suitability can best be defined as recommending investment options or products that are appropriate for the investor. There is no requirement that an investment adviser working for a brokerage firm put a client’s best interests before his/hers or the brokerage firm’s. Many observers believe this leads brokerage firm advisers to recommend investment products that are best for the adviser and his/her employer while only suitable for the client. The new proposed rules require that all advisers providing investment advice will be fiduciaries.

Suitability may soon be history

If the proposed regulations are finalized in a format similar to how they were proposed, the suitability standard that brokerage firms have used for decades would be eliminated. In its place would be a new set of rules that investment advisers at brokerage firms would need to adhere to requiring significant disclosures on compensation and conflicts of interest. It is thought that these additional compliance costs might force many brokerage firm advisers to convert to a RIA business model.

The impact on plan sponsors

Only positive changes are likely for plan sponsors as a result of any new fiduciary requirements issued by the DOL. The new proposal will provide greater transparency regarding fees and a uniform definition of who is a fiduciary. Many plan sponsors are currently confused about whether their investment adviser is or isn't a plan fiduciary. Should these regulations become final, this is an issue that plan sponsors will no longer have to worry about since any adviser would be a fiduciary.