How is Revenue Sharing Handled?

Some record-keepers pay 401(k) TPAs revenue sharing to help TPAs keep plan document and administrative fees charged to mutual clients lower. Each record-keeper’s program varies in which TPAs qualify and how the amount of revenue sharing is calculated. Many TPAs have some clients where they receive revenue sharing and some where they do not. There are several ways that TPAs handle revenue sharing amounts.

Some TPAs charge plan sponsors the exact same fee whether or not the TPA receives revenue sharing. Thus, the revenue sharing just represents additional revenue for the TPA.
Some TPAs have multiple fee schedules: a fee schedule for when they receive revenue sharing and a second (higher) fee schedule for when they receive no revenue sharing. In some cases, the TPA custom quotes larger plans to better reflect the revenue sharing. In this model, the TPA is sharing the economic value of the revenue sharing with the plan sponsor but is not doing precise calculations for each client.
Some TPAs charge the plan sponsor a gross fee and then offset any and all revenue sharing, so that the TPA is completely neutral as to the amount of revenue sharing that they are paid. This involves the TPA building out a system to credit each client the revenue sharing from all of the different record-keepers.
Some TPAs charge the plan sponsor a gross fee and then have the record-keeper credit all revenue sharing to an ERISA expense account. The money in the ERISA expense account can be used to pay for plan expenses including annual administration fees, plan document fees, and plan audit fees. However, not all record-keepers have the ability to support ERISA expense accounts, particularly for micro and small 401(k) plans.
Some TPAs use a combination of approaches depending on the record-keeper and size of the plan.
A very few TPAs decline to accept any revenue sharing from any record-keeper. While this may sound noble, with many record-keepers the TPA declining the revenue sharing does not create any economic benefit for the plan sponsor.

None of these approaches are perfect in all circumstances. Nova 401(k) Associates uses a combination of approaches, but primarily reflects the anticipated revenue sharing in our fee schedules. We maintain multiple fee schedules to reflect whether or not we are receiving revenue sharing. When appropriate, Nova 401(k) Associates uses custom fees schedules and agrees for revenue sharing amounts to be deposited into an ERISA expense account.

From time-to-time, Nova 401(k) Associates is asked why we don’t charge a gross fee schedule and do an exact mathematical offset for all revenue sharing received. We have reviewed and studied this issue and determined it is not a good fit for Nova 401(k) Associates or our clients.

To do a complete and exact offset, there is a lot of clerical work that needs to be done, which would make it difficult for us to keep our fees competitive. We receive reports from record-keepers in a variety of formats – some on paper and some via email. The reports come in at different times. It would be extremely time-consuming to do all of the calculations and enter them into our billing system.
For micro and small plans, the amount of revenue sharing is too small to warrant the cost to do these calculations.
Most plan sponsors prefer certainty in billings and do not want invoices to vary as the stock market goes up and down.

Nova 401(k) Associates welcomes questions from clients and prospective clients about revenue sharing.