When you sponsor a retirement plan you, or someone you appoint, are responsible for making many important decisions associated with the plan such as investment options and service providers. Informed decision making is reliant upon understanding and evaluating the costs associated with the plan. One of the costs inherent in most plans is revenue sharing which, generally speaking, refers to payments made by investment providers to other service providers. Investment providers include mutual fund companies and insurance companies while other service providers are record keepers and third-party administrators. In some instances these payments are expenses for services that the investment provider would otherwise have to provide itself, such as administrative services. While there is nothing innately unlawful about revenue sharing, the Department of Labor has proposed a regulation that will require providers to disclose any indirect compensation, such as revenue sharing, made to service providers.
In the of case Tibble v. Edison International important lessons for fiduciaries are introduced pertaining to who is responsible for payment of a 401(k) Savings Plan’s (the Plan) administrative expenses. In Tibble, it was determined that Southern California Edison (SCE) was responsible for the administrative costs of the plan, “net of any adjustments by service providers”. The selection and monitoring of the Plan’s investment options was delegated to SCE’s Trust Investment Committee and/or its Benefits Committee by the Board of Directors. Critical to this assignation is the fact that none of the members of this committee were simultaneously on SCE’s Board of Directors, which was crucial to the court’s decision.
Hewitt Associates, LLC, as the Plan’s record keeper, received certain revenue sharing payments which they, in turn, used to reduce administrative fees to SCE. The reduction of administrative expenses is a benefit that SCE received as a result of the mutual funds that were offered as investments.
In the Tibble case, plaintiffs suggest that SCE “received consideration” from Hewitt because the revenue sharing payments were used to reduce the fees that would otherwise have been charged to SCE. The court disagreed. The fact that the committees that were assigned the fiduciary obligation to select specific investments options were never simultaneously members of SCE’s Board of Directors, demonstrates that SCE did not directly receive the benefit of the transaction. There also wasn’t any evidence proving that SCE had any influence on whether to enter into the contracts with the mutual funds. Based on these two findings, SCE could not have violated 406(b)(3) which prohibits a fiduciary from receiving consideration “for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan.”
Important lessons can be learned from this case for all plan sponsors. The decision to pay all administrative expenses, while generous, may not be prudent given the arguments made by the plaintiffs and DOL in Tibble. If the Plan document stated that all expenses would be paid from plan assets, then SCE would not have been accused of benefitting from the investment selections because the plan itself would have received the benefit. Tibble is currently on appeal to the U.S Court of Appeals for the Ninth Circuit.
