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The wedding planner in the film Monsoon Wedding is over his head, juggling far too many plates and competing distractions for his attention.  That doesn’t stop him from assuring those that depend on him that he’ll deliver for them, “…exactly and approximately.”

This kind of duplicitous reply doesn’t do much in the way of inspiring confidence and dispelling doubts.  The quote and the film are courtesy of Bollywood – a highly productive film industry operating under a prohibition on kissing.   This cultural taboo seems somewhat at odds with the reality that India’s population now exceeds 1.2 billion. 

Wall Street, on the other hand, has plenty of public displays of affection during bull runs.  It’s the behind the scenes relationships between all of these financial firms that worries regulators and investors.  The Department of Labor (DOL) has decided that 401(k) plan sponsors and participants should better understand these hidden, profitable relationships that underpin the retirement plan industry. 

The desired impact of the soon-to-be-enacted 408(b)(2) regs has been discussed at length.  A quick summary reveals that the DOL wants to identify all of the various fees in play within a retirement plan, and then quantify the amount of those fees.  Will these new disclosure regs provide a final reckoning of these hidden and overt fees? 

Putting aside the impact of the loopholes that have been woven into the regs, there is a larger issue that needs to be addressed: investment managers come up with their own numbers regarding revenue sharing and don’t have to prove that they are accurate.

Case in point: one of the larger investment managers (we’ll call them Vendor A) routinely states that their equity funds pay 25 basis points (.25%) for revenue sharing related to recordkeeping expenses.  This means that one of Vendor A’s equity funds with an expense ratio of .75% is sharing a third of that figure (.25%) back to its recordkeeping division to defray costs (if you need a refresher on revenue sharing and what it means to retirement plans please see the articles that start at this link). 

Vendor A has actively-managed equity funds with expense rations as high as 1.45% and as little as .60%.  One would expect that the amount of revenue sharing would differ with the overall expense of the fund (a fund that costs two or three times as much would share more, while a fund that costs less would share less).  One might also expect that some of these funds require higher degrees of investment management and simply might not be able to share the same amount of revenue.  The reality is that Vendor A only has one basic share class for its funds and declares the same 25bps of revenue sharing across all of its actively managed equity funds.  Vendor A knows that the figures differ by fund, but it’s more convenient for them to declare a single amount.

When Vendor A has funds within a retirement plan’s menu, but is not also the recordkeeper, their stated level of generosity declines and they only share 15 bps.  Yes, these are the same funds that pay 25 bps when Vendor A performs the recordkeeping.  Until the past few years, Vendor A actually paid very little in the way of revenue sharing when it was not also the recordkeeper.

Other large investment managers have variations on this same theme: Vendor B pays 35 bps on equity funds when it is the recordkeeper (regardless of the expense ratio of the fund) while it only remits 25 bps in situations where it is not the recordkeeper.  Vendor C pays absolutely, positively, nothing in the way of revenue sharing for its funds when it isn’t the recordkeeper, and only recently began telling its recordkeeping clients how much it declares for revenue sharing.  Vendor D recently decided that it had previously been too generous with its revenue sharing, and decreased the amount it shared for many of its proprietary funds.

Some investment managers pay different amounts of revenue sharing to different recordkeepers.  Some also pay special amounts of revenue sharing when a particular brokerage/advisory firm is involved (some of this special revenue comes in the form of a check sent to the back office of a brokerage firm based on the total sales attributable to its reps during the year).  These special amounts are paid on an aggregate basis and are not, to our knowledge, reported back on a plan-specific basis.  Insurance companies often offer investments linked to their general accounts.  What these insurers decide to declare as revenue sharing, or even an overall annual expense, is up to their discretion.

Revenue sharing is, therefore, vague.  Enhanced disclosure is a worthy idea, but is this new disclosure going to produce the actual amounts of revenue being paid for recordkeeping services?  Exactly and approximately…

Marshall J. Cobb, CRSP, is president and founder of Cobb Retirement Solutions, LLC., an independent, fee-only firm offering qualified plan analysis and oversight exclusively to corporations and organizations. Cobb’s first-hand knowledge as a veteran representative of retirement plan vendors beginning in 1990 gives him a unique perspective as he advises his clients.  Cobb runs his office -- based in Houston, Texas -- with employees and clients across the country.