One-third of sponsors of plans with 50 to 200 participants admittedto not knowing if revenue-sharing agreements were in force, andmore than 25 percent of sponsors of plans with 200 to 1,000participants said they were unaware. (Photo: Shutterstock)

Many sponsors of 403(b) defined contribution plans remain in thedark on how retirement plans are administered and paid for,in spite of a bevy of high profile fiduciary lawsuits against eliteuniversities.

According to a Plan Sponsor Council of America survey, more than30 percent of non-profit sponsors don't know if they use revenuesharing to pay for plan administration.

The confusion occurs relative to plan size. Among plans withfewer than 50 participants, nearly half don't know if planinvestments include revenue-sharing fees.

One-third of plans with 50 to 200 participants admitted to notknowing if revenue-sharing agreements were in force, and more than25 percent of sponsors of plans with 200 to 1,000 participants saidthey were unaware.

Among plans with more than 1,000 participants, only 9percent said they were unsure about existing revenue-sharingarrangements.

About 40 percent of the 250 non-profits surveyed by PSCA saidthey use revenue sharing to pay for plan expenses. The largestplans use revenue sharing with the greatest frequency–60 percent ofthe time. Of the smallest plans that were aware of how their planis paid for, only 18 percent use revenue sharing.

In a 2003 field bulletin, the Labor Department recognized thatthe Employee Retirement Income Security Act does not define exactlyhow sponsors can pay for plan expenses.

“Plan sponsors and fiduciaries have considerable discretion indetermining, as a matter of plan design or a matter of planadministration, how plan expenses will be allocated amongparticipants and beneficiaries,” the bulletin says.

But regulators go on to caution that sponsors must be “prudent”in determining how plans are paid for, and the method must beimplemented “solely in the best interests' of participants.”

Among the largest plans PSCA surveyed, participants absorb thecost of plan administration 64 percent of the time. Only 7 percentof the largest non-profits foot the bill for planadministration.

Plans can charge an asset-based percentage, pro-rata raterecordkeeping fee, or a flat fee to plan participants, regardlessof the size of an individual's account.

In the lawsuits pending against large 403(b) sponsors,plaintiffs allege that asset-based charges are imprudent, becausethe cost of recordkeeping unjustifiably increases as asset valuesincrease.

While charging a flat fee among all participants could alleviatethe potential imprudence of an asset-based fee, some argue thatstructure disproportionately favors participants with higheraccount balances.

In plans that offer a blend of investment options with andwithout revenue sharing, participants that invest in funds with thepayments can unwittingly end up covering the cost of planadministration for participants that choose investment shareclasses without payments.

To address that imbalance, sponsors can levelize fees amongparticipants when using investments with revenue sharing bycrediting payments back to participants when they choose aninvestment with revenue sharing.

In effect, that allows plans to use revenue sharing to pay forplan administration, while spreading the cost of the plan evenlyamong participants, according to a white paper from PrincipalFinancial Group, which sponsored PSCA's 403(b) survey.

While the levelization of fees is widely seen as an emergingtrend in retirement plans in light of greater scrutiny on fees andhigh profile fiduciary lawsuits, most 403(b) sponsors don't knowwhat fee levelization means, according to PSCA's survey.

Nearly half of the largest plans were unaware or only somewhatfamiliar with the option; only 36 percent of plans with 200 to1,000 participants claimed familiarity with the option; only 6percent of the smallest plans knew what fee levelization was.

“We are hearing a lot of buzz around equalizing or levelizingretirement plan administrative fees, especially as awareness offiduciary responsibility heightens,” said Aaron Friedman,non-profit national practice leader at Principal, in astatement.

“But this survey tells us there's still a significantopportunity for plan sponsors – especially smaller organizations –to work with advisors that can help them better understand revenuesharing and look into fee levelization as an option,” he added.

Another option at sponsors' disposal is to do away withinvestment options with revenue sharing. One-fifth of the largestplans said they were considering moving to a so-called zero shareplatform in the next year, according to the survey. Among all plansizes, 14 percent are considering doing so.