That was the consensus from a webinar hosted by retirement plan provider Diversified, on “New Fiduciary Exposure: Unfair Fund Revenue Sharing.”

The question is whether investors in higher-cost, actively managed funds that reimburse a revenue-sharing fee back to the plan recordkeeper should be subsidizing plan administrative costs for investors in lower-cost money market or fixed income funds, or those who hold company stock that does not have revenue-sharing, said Fred Reish, an ERISA attorney and partner with Drinker Biddle & Reath. A proportion of the revenue-sharing fees that funds in a plan charge investors commonly are reimbursed to a plan’s recordkeeper to pay for such services as transaction processing, call centers and investment statements.

There are “egregious cases,” Reish noted, such as when as much as 50% of a fund’s assets may be held in individual company stock or in low-cost, passively managed funds. In such cases, Reish said, it would appear unfair for investors in the higher-cost funds with revenue-sharing to subsidize the cost of administering the other investments in the plan.

Recordkeepers today are increasingly able to precisely account for the amount of revenue sharing paid for by each investor, Reish said. This growing practice is known as Fund Revenue Equalization (FRE), he said.

Because the Department of Labor requires a plan fiduciary to conduct a “prudent process” on revenue sharing, it is incumbent on a plan’s investment committee to run an FRE analysis to determine whether “a precise allocation back to the account where it came from, will be prudent,” Reish said.

The only cases where FRE is not prudent are when the cost of calculating the reimbursement outweighs the reimbursement sum, Reish noted.

“Most plan sponsors are not engaging in a prudent process—and are merely accepting what a recordkeeper can do,” he noted. Thus, Reish advised that a plan’s investment committee first gather revenue-sharing information from its recordkeeper, and if they are not knowledgeable about what the data means, hire an adviser to assist them.

“Secondly, the fiduciary must weigh the burden of the different participants, what they are paying and whether those paying the revenue sharing fees have a significant interest in the cost-effective recapture of those fees being credited to their accounts,” Reish said. “In recent times, there are more providers who can allocate revenue sharing back to the source in a precise or a relatively precise fashion.”

Reish said he believes precise allocation, if not cost-prohibitive, is the right way to go, especially now that 408(b)2 requires “all recordkeepers to disclose revenue sharing, and sponsors are going to know what revenue sharing they are getting and what the recordkeeper’s charges are. Furthermore, benchmarking services are available for sponsors to see if the revenue sharing” fees participants are paying and that are being reimbursed back to the plan are reasonable, Reish said.

Joe Masterson, senior vice president and chief sales and marketing officer at Diversified, added that he believes Fund Revenue Equalization has come of age. “The technology exists to more equitably allocate revenue sharing, and we believe FRE is now a best practice,” Masterson said. Diversified, for one, accrues the figures daily and assesses the money to each defined contribution account monthly.

“There are many benefits to this approach,” Masterson said. With FRE, there is no annual reconciliation required. This means that the plan sponsor will not be receiving a bill, and there will be no ad-hoc plan service fees to the participant or to the expense budget account due to any potential revenue shortfall."

“If a recordkeeper cannot do pro rata, they need a reasonable alternative—if not, the sponsor needs to consider changing recordkeepers,” Masterson said.