Employers design and administer 401(k) plans in a variety of ways with the objective of providing employees with investment vehicles to save for retirement, while at the same time maximizing investment returns. One arrangement many 401(k) plans use is called “revenue sharing.” While popular for many reasons, these arrangements have been a magnet for class-action litigation, and teachings from recent cases (and the accompanying sizable settlements), suggest that employers should review their 401(k) plans in an effort to stay out of the litigation “line of fire.”
“Revenue sharing” refers to an arrangement where a mutual fund, offered as an investment option in a 401(k) plan, pays either the plan’s sponsor (usually the employer) or a plan service provider (a third-party vendor) a fee for performing administrative or record-keeping services for the plan. This concerns plan participants because mutual funds typically pay such revenue-sharing fees to the employer or service provider by periodically deducting the fees from the retirement plan’s invested assets. Although plan sponsors usually have a choice in whether to self-manage or delegate 401(k) plan administrative or record-keeping services, neither option absolves employers of the fiduciary duties to monitor the plan, as mandated by the Employee Retirement Income Security Act of 1974 (ERISA).
