What Is a Revenue Credit in a 401k Plan?

A 401(k) plan is a retirement savings vehicle offered by employers, allowing employees to contribute a portion of their pre-tax or after-tax salary to investments. These contributions and any earnings generally grow tax-deferred until retirement, or tax-free in the case of Roth 401(k)s. Operating a 401(k) plan involves various services, such as recordkeeping, investment management, and compliance, all of which incur costs. Service providers often generate revenue through these operations, and sometimes a portion of this revenue is returned to the plan, known as a “revenue credit.”

Understanding Revenue Credits

A revenue credit in a 401(k) plan is a portion of the fees or expenses paid to service providers that is returned to the plan or used to offset plan expenses. These credits often arise from the underlying costs embedded within the plan’s investment options or administrative services.

Revenue credits originate from several sources within a 401(k) plan’s fee structure. One common source is investment management fees, which are charges levied by mutual funds or other investment vehicles for professional management of the fund’s assets. Another significant source is recordkeeping fees, which cover the costs of maintaining participant accounts, processing transactions, and providing statements.

Other sources include 12b-1 fees, which are marketing and distribution fees embedded within mutual fund expense ratios. Sub-transfer agency (Sub-TA) fees are also a source, representing payments from mutual funds to recordkeepers for shareholder services, such as tracking ownership and communicating fund information. These various forms of revenue sharing are often built into the underlying expenses of the investments or services, meaning they are indirectly paid by participants through reduced investment returns.

How Revenue Credits are Applied

Revenue credits can be utilized in several ways to benefit a 401(k) plan and its participants. One primary method is offsetting administrative fees, which are the costs associated with the day-to-day operation of the plan, including recordkeeping, compliance, and reporting. By using revenue credits, the plan sponsor or participants may see a reduction in the direct administrative fees they would otherwise pay. For instance, if a plan contracts for $20,000 in annual fees but receives $2,000 in revenue credits, the net amount paid by the plan becomes $18,000.

Another application involves effectively reducing investment expenses for plan participants. While revenue credits may not directly lower a fund’s stated expense ratio, they can be used to refund a portion of those expenses back to the plan or participants. This means the net cost of investing in certain funds can be lower than their gross expense ratios suggest, improving participants’ overall returns. For example, if a plan receives a credit based on the investments held, this credit can be reinvested in the same fund, thereby increasing the participant’s account balance.

In some instances, revenue credits can be allocated directly to individual participant accounts. The allocation can be done on a pro-rata basis, based on account size, or a per-capita basis, providing the same dollar amount to each participant. Plan fiduciaries must follow a documented process to determine how these payments are managed and allocated.

Revenue credits can also fund specific plan services that might otherwise incur additional costs for the plan sponsor or participants. This could include expenses for plan audits, compliance monitoring services, or fees for third-party plan consultants who provide specialized advice or educational programs to participants. These credits are held in a “revenue credit account” or similar suspense account and are considered plan assets, which must be used for the benefit of the plan and its participants.

Accessing Information on Revenue Credits

Understanding the specifics of revenue credits for a particular 401(k) plan requires reviewing certain key documents and disclosures. The Employee Retirement Income Security Act (ERISA) mandates various transparency requirements for retirement plans. These disclosures help plan sponsors and participants understand the fees and compensation structures.

One important document is Form 5500, an annual report that most employer-sponsored retirement plans must file with the Department of Labor (DOL) and the Internal Revenue Service (IRS). This form provides financial information about the plan, including fees and expenses. Specifically, Schedule C of Form 5500 details compensation paid to service providers, including indirect compensation like revenue sharing. This schedule aims to make transparent how service providers are compensated, whether directly from the plan or indirectly through investment vehicles.

Participants also receive disclosures under ERISA Section 404, which outlines plan-related and investment-related information. These participant fee disclosures specify the fees and expenses, including details on revenue sharing arrangements or credits, associated with investment options and administrative services.

Plan sponsors receive disclosures under ERISA Section 408. These disclosures detail the services provided and the compensation received by service providers, including both direct and indirect payments. The purpose of these disclosures is to assist plan sponsors in fulfilling their fiduciary duty to ensure that plan fees are reasonable and services are necessary.

While less detailed on specific revenue credit amounts, the Summary Plan Description (SPD) offers a general overview of the plan’s operations, features, and fees. It serves as a foundational document for participants to understand their plan benefits and responsibilities.