Many public agencies pay little attention to their 457(b) plans because the agencies are not “paying” for them out of their own budgets. See Have You Checked Your Retirement Plan Fees Lately?
Plan fiduciaries are legally required, at least in California, to make sure that plan assets are used only to provide benefits and to defray the “reasonable expenses of administering” the plan. See California Constitution, article XVI, section 17(a). Therefore, it is surprising that so many public agencies have little or no idea how much is being “taken” from their plans as custodian/trustee, recordkeeping, third-party administration, fund management, and investment advisory fees. To compound the confusion, many 457(b) plans are provided through “bundled” arrangements where various plan services are provided by a single third party (e.g., an insurance company) and the fees for those services are “bundled” together (arguably, for the convenience of the plan sponsor). Such arrangements make it difficult to determine exactly how much the plan and its participants are paying for each of the services being provided.
How does “revenue sharing” factor into the mix? Revenue sharing is a common practice where mutual funds pay some of their revenue to the plan providers who perform recordkeeping functions for 457(b), 401(k), 401(a) defined contribution and 403(b) plans. These payments are to compensate plan recordkeepers and third-party administrators for providing plan accounting and participant servicing functions that the mutual funds would normally provide. However, revenue sharing makes it more difficult for plan sponsors and fiduciaries to figure out exactly how much is being paid for recordkeeping and plan administration assistance and exactly who is paying those fees. The “how much” question arises because shared revenue is always defined as a percentage of plan assets (i.e., a set number of basis points). Under this approach, the amount of shared revenue can increase over time to a point where it bears no real relationship to the level of services provided. Sometimes, the plan provider recognizes that it has taken too much revenue out of the plan and refunds some of that revenue into a “plan expenses account.” The problem with such accounts is that the plan fiduciaries must decide how to prudently and fairly allocate these amounts among the participants. The “who” question arises because the amount of revenue shared can vary by mutual fund. In such cases, participants who have invested in certain funds are paying a disproportionate share of the plan’s recordkeeping fees.
Does your plan’s service arrangement provide for revenue sharing? And, do you really understand how it works? Are you leaving too much money on the table?
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