When I asked how he could justify this when his firm’s costs and services were directly related to participants, not on the size of the investment assets, he merely scoffed, “But everyone is doing it.”

Indeed, everyone was doing it – and they were doing it in a way that didn’t require actual fees to come out of the plan (directly, at least).

In the mid-1990s, it became clear that the recordkeeper, even more than the plan’s custodian, was the focal point of plan operations.

Mutual funds quickly discovered that, in order to even be considered for the plan’s investment menu, it had to receive the blessing from the recordkeeper (and the custodian) that the fund “had the flexibility” to work with the provider’s chosen platform. To show this flexibility, funds had to pay for shelf space first by offering the custodian a “platform fee,” and then by reimbursing recordkeepers.

This recordkeeper reimbursement couldn’t come through commissions, since the recordkeepers weren’t acting as brokers. Furthermore, it was problematic for recordkeepers to be paid through 12b-1 fees since those were quickly being redefined as “adviser” payments and recordkeepers did not want to become subject to the associated regulatory morass in becoming an adviser.

That left only two options. Initially, recordkeepers were paid “sub-transfer agent” fees. For those not familiar, mutual funds pay transfer agents to keep track of shareholders.

While some mutual funds, to keep fund operating expenses low, continue to act as their own transfer agent, the norm is for mutual funds to contract with third party transfer agents.

In a very real sense (true today as much as it was true back then), recordkeepers perform an identical role.

The problem with sub-transfer agent fees is that they are very limited both in scope and in “fee reasonableness” range. To avoid these obstacles, and to hide these payments from standard disclosures, funds created a new type of operating expense: “revenue sharing.”

Like commissions, 12b-1 fees, and sub-transfer agent fees, revenue sharing is an asset-based fee. Because it is less defined, however, it is more fungible.

It became the preferred manner in which recordkeepers would get paid. Because these fee payments are buried deep within fund accounting statements, it gave the appearance the plan sponsors and plan participants weren’t paying anything for their retirement plan.

The 2012 Fee Disclosure Rule was intended to change that. Unfortunately, the DOL never came out with a standard reporting format, and service providers were able to meet the letter of the law while avoiding the intent of the law. This is the situation we continue to find ourselves in today.

But then along comes the fiduciary rule, and all bets are off. The blurry line of “education” between recordkeepers and investment advice has been more precisely defined.

In addition, the definition of “fiduciary” has been broadened in a way that recordkeepers will find more difficult to skirt around. For these service providers, the Sun is sabout to rise in the west.

Not for all of them, though. Let me relay this second anecdote. I was speaking to a different recordkeeper when I was doing research for my 2012 book 401(k) Fiduciary Solutions. He, too, was initially captivated in the 1990s by the business model incorporating sub-transfer agent fees.

As he learned more, however, he quickly (and well before everyone else) discovered the fiduciary liability associated with such a model. He then decided to build his firm using a flat fee/participant-based fee model. The firm grew so large he was able to sell it for a tidy sum.

Who did he sell it to? Not a broker, but a bank that offered trust services.

He understood the meaning of “fiduciary” as it applied to the recordkeeping business and, in staying true to it, he profited handsomely.