Revenue-sharing disclosure sought for bundled providers

CHICAGO — Pension consultants and third-party administrators want bundled providers, including industry giants such as Vanguard and Fidelity, to disclose their revenue-sharing arrangements with affiliated service providers, but the bundled providers are balking.
The battle lines are being drawn as the Department of Labor considers new disclosure rules for revenue-sharing arrangements.
Also, on July 26, Rep. George Miller, D-Calif., introduced legislation that would require disclosure of revenue sharing to plans, whether the revenue sharing went to an affiliated or unaffiliated entity.
Revenue-sharing arrangements often are used to pay for the costs of record-keeping and other administrative services to a plan. The fees are drawn from the assets of the plan’s investment options by the money managers and distributed to other service providers.
The consultants and third-party administrators think the revenue-sharing arrangements hide fees. They want to shine a spotlight on the fees in an attempt to drive down costs for plans and, in the case of the TPAs, give them a better shot at winning record-keeping business.
“This [disclosure of revenue sharing] could result in better economics, ultimately, for the plan client, and less aggregate amounts retained by the administrator,” said Andrew Oringer, a lawyer specializing in Employee Retirement Income Security Act matters for Clifford Chance LLP of New York.
But officials at bundled providers are resisting regulations that would require disclosure of how much they paid affiliated firms. The bundled providers contend that the information is proprietary and would be difficult to break out.
“We would not support this proposal, because we have long provided plan sponsors with a detailed, meaningful disclosure of fees, which we believe is wholly sufficient for sponsors to make a sound decision and satisfy their fiduciary responsibilities,” said Rebecca Cohen, a spokeswoman for The Vanguard Group Inc. of Malvern, Pa.
“We provide our plan sponsors with full information about the fees that they’re paying to Fidelity [Investments],” said Jenny Engle, a spokeswoman for the Boston-based company.
‘A fair deal’
Existing Labor Department regulations do not explicitly require plan service providers to disclose revenue-sharing payments. But some pension lawyers said plan sponsors might have a fiduciary duty to monitor the payments under ERISA.
The issue is especially sensitive because overpaying for administrative services is a key allegation in many of the 13 class actions against major corporate 401(k) plan sponsors that are pending in the federal courts. One of the lawsuits — against Deere & Co. of Moline, Ill., and Fidelity, trustee and record keeper for Deere’s $2.5 billion 401(k) plan, has been dismissed. But that dismissal is being challenged. Another lawsuit — this one alleging that Exelon Corp. of Chicago charged excessive fees to participants in its $3 billion 401(k) plan — was put on hold by the judge in response to Exelon’s request for a delay pending resolution of the expected appeal of the Deere case.
Pension consultants and third-party administrators — who provide record-keeping and other plan services but don’t manage assets — are urging the Labor Department to require the disclosure of all revenue-sharing payments to affiliated and unaffiliated plan service providers alike. They say the information is needed to level the competitive playing field among all companies vying for the business of plan sponsors.
“We’re looking out for the best interests of participants, and we want to make sure everybody’s getting a fair deal,” Steven Charlton, managing partner of New England Pension Consultants of Cambridge, Mass., said in an interview. NEPC has publicly urged the Labor Department to ensure that all revenue-sharing arrangements are disclosed.
“We want the rules for disclosure to be uniform so that if a fund is making a payment to a service provider, the same disclosure should be made regardless of whether it’s an affiliated or unaffiliated company so consumers can make apples-to-apples comparisons in terms of costs for various plan services,” added Brian H. Graff, executive director and chief executive of the American Society of Pension Professionals and Actuaries in Arlington, Va.
That group, which represents pension consultants and other administrative service providers to retirement plans, launched a sister organization — the Council of Independent 401(k) Recordkeepers — in June, specifically to represent the interests of third-party administrators, Mr. Graff said.
Bundled providers — money managers who provide both administrative services and proprietary funds to plans — have made it clear that they would support a regulation requiring the disclosure of revenue-sharing payments to independent record keepers and other independent service providers to plans. But bundled providers oppose disclosing how much revenue sharing they pay to their internal or affiliated record keepers and other related plan service providers.
“Vanguard is an integrated provider of record keeping, investment management and education, and our costs are just that — integrated. At the end of the day, what matters most to plan sponsors and participants is the total costs they are paying and what they are getting for those dollars,” Ms. Cohen said.
Despite the disclosure concerns, plan consultants said Fidelity and other money managers have been disclosing estimates of internal revenue sharing when asked by clients. But Vanguard is not among those providing such guidance, they said.
Mark Davis, a partner with the retirement plan consulting firm Kravitz Davis Sansone of Encino, Calif., said Fidelity has cited a “rule of thumb” for internal revenue sharing at 0.35 percentage points for equity funds and 0.25 percentage points for fixed-income funds — about the same estimates provided by T. Rowe Price Retirement Plan Services Inc. of Baltimore.
Fidelity’s Ms. Engle declined to comment on the specific figures.
“We don’t provide estimates,” Ms. Cohen said. “We believe that a total cost figure is more meaningful.”
Brian Lewbart, a spokesman for T. Rowe Price, said: “We fully disclose everything to our clients, and while we don’t publicly disclose our figures for proprietary reasons, the numbers you have quoted from the consultant are too high for T. Rowe.”
Revenue sharing criticized
Lines of division are also surfacing between consultants and record keepers.
In a July 24 letter to the Labor Department, NEPC officials were sharply critical of revenue sharing itself, contending that the practice is making many plan sponsors “uneasy.”
The letter suggested that plan sponsors switch from revenue sharing to covering plan administrative costs through fees based on a plan’s overall assets or flat per-head charges. Revenue-sharing fees are asset based, but the amount of the fee varies among investment options within a plan.
In an interview with sister publication Pensions & Investments, NEPC’s Mr. Charlton said many plan sponsors don’t review revenue-sharing agreements regularly, enabling all record keepers to get a premium as plan assets grow.
“It can get very profitable for a record keeper in a relatively short time,” he said. “Participants aren’t being well served by the fee arrangements in place.”
Officials at the ASPPA, which represents record keepers who also often get paid by revenue sharing, don’t share NEPC’s concerns about revenue sharing itself.
“The problem is not the fees; the problem is, people don’t know what they’re paying,” said the ASPPA’s Mr. Graff. “Once it’s disclosed, the marketplace can operate efficiently.”
Mr. Charlton said that record keepers have a financial stake in preserving revenue sharing.
“What it boils down to is, record keepers have a pretty good deal now,” he said. “They don’t want to upset the apple cart.”
“We recognize the pain this would cause, but we don’t necessarily want to ignore the issue outright, because it would change the direction of the industry.” Mr. Charlton added.