Further, because some “prudent” investors select funds from one fund family, this Plan’s selection of funds from a single fund family must also be prudent is an argument I would not be satisfied with as a participant. A plausible argument might be, “in utilizing a singular fund family we were able to decrease participant costs and we felt those cost decreases outweighed any potential increased return from having multiple fund families, along with the higher costs that would be involved, and here is the evidence from our study.” In my experience this kind of dynamic would come into play only on much smaller plans but wanted to provide an example of something that would seem to fit the definition of Plan fiduciaries acting with prudence.

I have come across so many plans where fees appear egregious to me. Some broker is making 75 or 100k in commission where our hard fee might be 25 or 30k, and the Plan Sponsors just couldn’t care less. This case will only embolden those Plan Sponsors to care even less than they already do, which is really unfortunate.

Also the fact that a self directed brokerage window is available seems irrelevant. In fact, I think one reason self directed brokerage is harful is that it unfairly burdens the particpants remaining in the core options with the costs of the Plan.

Will the DOL jump in at some point with an audit or suit?

It’s getting so complicated that I aggree with the comment that funds with revenue sharing ought to be illegal in qualified plans.

One nice trend I am seeing is record keeping and trust/custodial companies that offer hard fee contracts – it seems like a particulalry good time to peg costs to an absolute dollar, so when the market recovers, fees remain low.

2. Yes, judges are smart. But one has to giggle at the ever-so-politely phrased commentaries from ERISA attornies when remarking on questionable rulings, since it is an ariticle of faith among attornies that one never bad-mouths a judge. Remember Jenkins v. Yager?

3. Just because the judge is clearly wrong in the sense that conservative fiduciary opinion is squarely against him on granting 404(c) to a firm that didn’t meet the regulatory requirements, doesn’t mean that he’s not right. After all, there is a statute, and some attorneys (e.g., Sheldon Smith, ASPPA President) have said for years that statutory compliance is possible even if you don’t meet the nitpicky requirements of the 404c-1 regulation. This court brings the statutory vs. regulatory compliance debate into the open.

4. The biggest news in this case is one that no one seems to notice, so I wonder if I’m wrong in thinking it’s the big news: this is now the fourth or so case where a court has granted leniency in a big way, suggesting that the nitpicky view of 404c compliance just doesn’t impress most judges. One gets the sense that if one went to court with tales of prospectuses not delivered, notice language errors, proxy notices not delivered, and similar egregious breaches of the 404c-1 regulatory requirements, the judges would brush it aside and say, “They got to make their choices, so they can just take their own medicine.” Very American, and very contrary to how we fiduciary puritans have always viewed 404(c) compliance. DOL has always strenuously maintained that regulatory compliance is the only path to protection, but here comes Deere, Jenkins v. Yager, in re Unisys, and a handful of others where the judges gave a free pass. It almost appears that the courts will view as protected any participant decisions regardless of what the regs say.

5. Austin said, “The second mistake is that for a fund to quality as an investment option under 404(c), it must be “diversified within itself.” ” Actually what the regulation says is, “Where such portion of the account of any participant or beneficiary is so limited in size that the opportunity to invest in look-through investment vehicles is the only prudent means to assure an opportunity to achieve appropriate diversification, a plan may satisfy (the broad range rule) only by offering look-through investment vehicles.” Also it says that there must be at least three alternatives “each of which is diversified.” [29CFR2550.404c-1(b)(3)] Offering a brokerage account that allows access to individual securities does not invalidate the broad range requirement so long as the conditions are met (e.g., three other look-through options meet broad range and brokerage is extra). Only three options are required. Brokerage accounts can qualify for 404c-1 relief.

To summarize:
1. courts are being lenient, inclined not to nitpick on fiduciary compliance and lean toward what they see as common sense
2. rev share as plan asset not resolved, but a blow has been struck in favor of those who don’t want it to be a plan asset.
3. will there now be a rush to add brokerage accounts because they are incorrectly perceived to offer more protection when included, just because of this case? What a wierd and counterproductive twist that would be.

Revenue sharing is paid to a third party. It’s not kept by the fund manager. Do you see the logic? The fund manager keeps enough to be profitable – otherwise they would charge and keep more if needed. Revenue sharing is not kept by the fund manager.

Thus, unless the fund manager is not acting in its own best interest – and we can assume it does act in its own best interest if it is a legitimate enterprise – anything charged over and above what the manager keeps is excess, meaning the fund manager doesn’t need it or they would keep it for itself.

The Judge blew the decision because she totally ignored the DOL’s opinion on the matter. The DOL stated unequivocally that all revenue sharing must be disclosed to participants as relevant. Further, Deere admitted (and Court recognized) that it had been lying to participants about it. ERISA forbids misleading participants at any time. The Court turned a shameful blind eye to that. I presume you liked that about the ruling, too?

Further, Deere’s investments were retail funds. If you have ever read ERISA – it states that fiduciaries must behave according to prevailing standards. Are retail funds in Multi-Billion dollar 401(k) plans the prevailing standard? Nope.

If this ruling were to stick, it would destroy all confidence in a participants ability to seek remedy for fiduciary breaches caused by blatant disregard for generally accepted fiduciary standards.

Finally, one thing that really bugs me about revenue sharing…why exactly have fund managers, once revered and respected, become the bill paying agents of record keeping firms’ bills? Don’t they have any self respect for who they are professionally?

Reish is only correct in concept. There’s no practical way to monitor and evaluate value for each revenue sharing dollar spent. Reish’s example is clear, but I’d like to see him diligenty track increasing revenue sharing against increasing value of services like Fiduciaries are required to do. So revenue sharing is always a bad idea in plans governed by ERISA for those and many other reasons.

Maybe we should just get rid of the fiduciary standard and let it be a free for all.

Austin says revenue sharing is excess beyond what the fund manager needs to be profitable. Says who? How much profit is too much? As a participant trying to select between funds, one thing I want to know is how much is going to be taken from the fund for whatever reason, and my returns net of expenses. What the fund manager does with the money, while certainly interesting, is not material to my decision. If 1 fund has 1% taken for expenses, and uses half of that for revenue sharing, and another has 1.25% taken, but no revenue sharing, which am I going to pick if gross returns are the same?

Looking at the issue from the point of view of the fiduciaries who pick the funds to be offered, I agree with Fred Reish that they need to be aware of the details of the revenue sharing agreements and their fairness to participants. I think there is a real risk that dumping all these notices, disclosures, prospectuses, etc., on participants will result in analysis paralysis and hurt participation. I hope the DOL will allocate the responsibilities appropriately.

The first mistake they made was suggesting that making broad selection of funds available was part of 404(c). That is and has always been incorrect. Selecting the underlying funds is a fiduciary act. If those funds have revenue sharing – the fiduciaries are exercising fiduciary discretion to select revenue sharing. That act does not fall under 404(c).

The second mistake is that for a fund to quality as an investment option under 404(c), it must be “diversified within itself.” That means a mutual fund, collective trust, etc. Open brokerage windows permit the investment of single securities that are not diversified within themselves; just the opposite.

Third, the Court failed to realize that revenue sharing is entirely material, as it is excess revenue beyond what the fund manager needs to be profitable. Its meaning to participants (economically and financially speaking) is absolutely relevant and material – as it is money extracted from their account for something Fidelity admits has nothing to do with managing the actual investments. It goes without saying therefore it must be viewed and measured separately.

Judges are smart. There’s no argument there. Just not smart enough to figure out ERISA.

Looks like BrightScope has done it, though. Good job.

I’m still a little surprised by the court’s stance on revenue sharing. Isn’t a potential conflict of interest always material by its very nature?