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What You Thought You Knew About Revenue Sharing

Adam C. Pozek 06/26/12

Ever see the movie Men In Black?  One of my favorite lines is when Tommy Lee Jones says to Will Smith, “Fifteen hundred years ago, everybody knew the Earth was the center of the universe.  Five hundred years ago, everybody knew the Earth was flat; and fifteen minutes ago, you knew that humans were alone on this planet. Imagine what you'll know tomorrow.”

If you sit through enough plan investment committee meetings, eventually the conversation turns to whether to select ABC Fund that pays revenue sharing or XYZ Fund that doesn’t.  After all, why not defray the employer’s cost of running the plan?  We all know revenue sharing is no problem as long as it is recaptured and used to cover allowable plan expenses.  At least, we thought we knew that.

In March of this year, a federal district court in Missouri issued a ruling that challenges what many thought they knew about revenue sharing.  The case is Tussey v. ABB, Inc.  ABB (the plan sponsor) was found to have committed numerous fiduciary breaches, several of which were directly related to its handling of revenue sharing.  Not surprisingly, the court took issue with the fact that ABB allowed revenue sharing payments to Fidelity Trust (the plan’s recordkeeper) that were far in excess of the market value of the services being provided.

What has taken some aback, however, is the court’s determination that selecting a fund with higher revenue sharing because it reduces the employer’s out-of-pocket expense may be problematic.  Specifically, the court noted,

Because the decision to map the Wellington Fund to the Freedom Funds was not made in the best interest of the Plan, the benefits reaped by ABB, Inc., are not merely "incidental." They are inconsistent with Mr. Cutler's duty of loyalty. The Wellington Fund was removed and mapped to the Freedom Funds so that ABB, Inc., could reduce its out-of-pocket costs for recordkeeping fees, and at the same time influence employee retention and recruitment, by offering a low cost or "free" retirement plan.


…Mr. Cutler's recommendations to the Committee and the Committee's decision to adopt those recommendations caused the Plan to engage in a transaction with Fidelity Trust whereby ABB, Inc., would have reduced fees for the Union PRISM Plan. Thus, Mr. Cutler committed a prohibited transaction under ERISA. Mr. Cutler is head of the Group and a staff member of the Committee. Thus, Mr. Cutler's violations are also violations by the Group, the Committee, the Employee Benefits Committee, and ABB, Inc., as co-fiduciaries.

As with all litigation, the outcome of this case was dependent on the specific facts; however, it is very instructive.  Does it mean revenue sharing can never be used as a factor in selecting funds?  Of course not.  Does it mean plan sponsors and other fiduciaries should reconsider “accepted knowledge” about selecting funds with higher revenue sharing primarily to defray employer costs or to get that “free” 401(k) plan?  Absolutely.

Imagine what we’ll know after a few more of these cases make their way through the system.

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Topics: 401(k) Plan, ERISA, Fiduciary Responsibility, Prohibited Transaction, DWC, Retirement Plan Design, Retirement Plan Investment Menu


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The views expressed in this blog are those of the authors and do not necessarily represent the views of any other person or organization. All content is provided for informational purposes only and is not intended to be tax or legal advice.