It’s Never Really Free

by: , DCIO National Account Senior Associate, New York Life Investments

Understanding fee arrangements within retirement plans is imperative for a plan sponsor. While there is a number of ways that an employer can pay for a retirement plan, the process by which they come to their decision must be prudent and thoughtfully documented. Moving from a revenue-sharing arrangement to a fee-for-service system, for example, may offer some benefits (simplified fee disclosure, lower cost investments, etc.) but with it, may come additional questions as well.

Revenue sharing is a practice in which investment vehicles (commonly mutual funds) pay out a portion of their fees to a service provider, in order to reduce or offset administrative costs that might customarily be a function of the fund itself. In a retirement plan, for instance, many of these tasks are carried out by a service provider (for example, a recordkeeper producing daily account balances for participants). In such a scenario, the fund may pay revenue share to the recordkeeper as means of compensation for services rendered.

Numerous courts and the Department of Labor have not held that “revenue sharing” is per se impermissible under ERISA; however, despite this, there has been an increase in the level of scrutiny over revenue-sharing constructs, and as a result, momentum has shifted in recent years to move away from these types of arrangements. The investment management industry has also taken notice of this change. InvestmentNews reports on data from FUSE Research Network that more than 40 asset managers offered R6 shares as of third-quarter 2015, whereas there were only 12 in 2011. Over the same period, assets in those funds ballooned 344% to approximately $315 billion from $71 billion.

Under a zero revenue-sharing agreement, the fund company strips out fees other than the actual investment management costs and does not pay any expenses to service providers to the plan, shifting responsibility to the employer sponsoring the plan to pay the plan’s service providers under a separate arrangement. There is, however, a number of ways those arrangements could work; here are just a couple:

Employer Pays

One way is for the employer sponsoring the plan to pay for the costs of administration using company capital, not including plan assets outright. A benefit to this approach is the potential for more participant dollars being allocated specifically to retirement savings, as opposed to fees. Also, any expenses incurred by the employer are typically tax-deductible. One potential negative to this approach for the employer is that by offering to pay for some, if not all of the costs, the employer is taking on an added expense directly. Moreover, the cost of operating the plan may be variable, provided the needs and characteristics of the plan evolve, which is not uncommon, and therefore, may not be as fixed as the employer would like for business-planning purposes.

Charge Participants

An other example of how a plan can pay for expenses is by delegating fees to the plan participants. This can be done in a variety of ways, for example, account debits at stated frequencies (monthly, quarterly, semi-annual, annual, etc.). Account-based fees can be a fixed-dollar cost (e.g., $15.00 per month) or based on participant’s account balance (e.g., 0.005% of participant’s balance every quarter-end) among other methods.

These are certainly not the only approaches a retirement plan can implement in order to pay plan fees. Fiduciaries may even mix these and other strategies, as they simply represent a couple of common approaches. Every retirement plan and investment menu may be uniquely designed. Plan sponsors and advisors will want to carefully examine all available options using a prudent process, including documenting the reasons for selecting one approach over the other. After selecting an arrangement, it is the plan sponsor’s fiduciary duty to continually monitor service provider performance and compensation, including the method and source of payment, be it through a revenue sharing arrangement or another approach.

This article is for educational purposes only and may not be redistributed by the recipient without prior written consent from New York Life Investment Management LLC. This communication is not intended to be an offer or solicitation of investment advisory services or products.
Neither New York Life nor its agents or affiliates provide tax, legal, investment, or accounting advice. Plan sponsors should speak to their own tax, legal, or investment advisor or accounting professional regarding their specific situation.

The information contained herein is general in nature and is provided solely for educational and informational purposes.

All investments are subject to market risk, including possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market.

Opinions expressed are current opinions as of the date appearing in this material only. The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. The MainStay Funds® are managed by New York Life Investment Management LLC and distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302, a wholly owned subsidiary of New York Life Insurance Company. NYLIFE Distributors LLC is a Member FINRA/SIPC.

Prepared for an Institutional Audience.


Jeffrey Zielinski, CRPC®, CRPS®

DCIO National Account Senior Associate, New York Life Investments

Jeffrey Zielinski is a DCIO National Account Senior Associate helping cover our home office and field relationships. He joined New York Life Investments in 2016. Previously, Jeff’s experience includes John Hancock RPS (Formerly New York Life RPS), ADP Retirement Services, and

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