ERISA Budget Accounts: Part 2


401kWire.com -- December 08, 2006 -- Revenue sharing money generated from retirement plans seems to go everywhere. Providers, brokers, advisors, TPAs, and plan auditors, in addition to the asset managers to whom such money is nominally paid in the first place, might all see revenue sharing dollars, but now there's a new interest group with its hand in the trough: plan participants themselves. But is the practice legit?

Last week we looked at the ERISA budget account, a new tool gaining traction in the mid and large plan markets, which helps plan sponsors control costs by recapturing some revenue sharing dollars and using them to pay plan expenses (see "ERISA Budget Accounts: Part 1""). Some advisors and providers are taking the logic of the ERISA budget account a step further by giving revenue sharing dollars back to participants.

Participant revenue sharing, advisors told The 401kWire, has not been universally embraced by providers, but some reportedly are coming around to it. Names mentioned as participant revenue sharers include American Funds' Plan Premier, BenefitStreet, Diversified Investment Advisors, Inveslink, Invesmart, M&I Trust and the former Ceridian (Newport did not come up). Perhaps the trend towards fee transparency and the continued improvements in technology are nudging participant revenue sharing along.

"Putting the excess [revenue sharing] back into participants' accounts is becoming more popular," revealed Bob Paglione, an advisor with NRP in Capistrano Beach, California. "Technology is making it easier to track."

Advisors themselves are of many different minds on the practice. An advisor in Michigan insisted that participant revenue sharing, also known as concession crediting, constitutes a prohibited transaction, while many others simply don't know if it's ok or not and want help.

"It's nuanced," admitted a wirehouse broker in Massachusetts. "Frankly, it'd be ideal if we could get some guidance [from the IRS or the DoL]."

Others advisors just don't see participant revenue sharing as useful. A wirehouse rep in New York found the practice unnecessary and complicated, while Bud Green with Fortress Wealth Management in Santa Monica, California and many others simply suggested changing share classes to reduce expenses.

"If you go about the negotiations properly," Sentinel Financial Services founder Stephen Lansing explained to The 401kWire, "you shouldn't have to resort to that kind of thing."

A broker in Ohio also came down staunchly against the practice.

"That doesn't make any sense to me," the broker said. "You should never have taken too much to begin with."

>However, according to Mark Gutrich, president and CEO of ePlan Services, the problem of revenue sharing can't be eliminated by simply switching share classes.

"There's still a component of revenue sharing," Gutrich insisted, citing 12b-1, sub-TA, and finder's fees, "even on institutional share classes."

Gutrich's Denver-based company just started doing its own version of participant revenue sharing 10 months ago (see "ePlan Services Takes New Path on Concessions""). While most recordkeepers credit concessions pro rata, ePlan credits them back to the specific fund that generated them.

One potential problem with participant revenue sharing is that it may have less appeal to the plan sponsor--instead of reducing expenses like a regular ERISA budget account would, concession crediting simply gives participants a little money back. But ePlan's new service has already lured in about 110 plans, Gutrich said, by focusing on the small and micro market where the owners themselves have a significant stake in the plan.

Such transactions are not prohibited, Gutrich argues, because they treat participants equally, effectively reducing expenses across different investment options to the same level. In fact, Gutrich goes further and alleges that using ERISA budget account money for plan expenses, at least in an open-architecture plan, would itself be a prohibited transaction.

"If all revenue sharing is the same, ok," Gutrich explained, "but in an open-architecture plan [with an ERISA budget account], you're effectively making concession-paying fund holders pay for the entire plan."

Gutrich admits that ERISA budget accounts in bundled plans, where revenue sharing is equal across all investment options would technically be ok, but points out that most plans and providers are moving to open-architecture platforms.

And there are advisors who, despite the lack of clarity, are jumping into participant revenue sharing with both fee. An advisor at an RIA-TPA firm in Michigan insisted that "all revenue sharing back into the plan assets" in the plans he works with, and a registered rep in Massachusetts agreed with Gutrich that revenue sharing "can't go to the company."

"These are monies that are being generated as a result of the participants' decisions," the rep said, "so that's the best place for it to go."