Revenue sharing is on the decline, as it should be.
The use of revenue sharing in retirement plans is on the decline, and this is a good thing.
Plan sponsor surveys by both Callan and the Plan Sponsor Council of America highlight the decline in use of revenue sharing from over 21% of plans to about 15% in 2019. However, revenue sharing still runs rampant in smaller 401(k)s, and among 403(b) plans.
Revenue sharing is an additional cost, tacked onto the expense ratio of a mutual fund or insurance product to pay for (typically) either the advisor’s services (aka 12(b)(1)s) and/or recordkeeping services (sub TAs). It ranges between 5 and 75 basis points and basically represents indirect and sub-surface payments from one service provider to another.
The model is fraught with problems. For example:
- Uneven revenue sharing among different funds in a given plan means that some participants are paying more (in the form of a higher expense ratio) than others for the same service.
- Poorly disclosed revenue sharing leaves participants and many plan sponsors in the dark about what they’re paying. Indeed as many as 30% of plan sponsors admitted to not knowing if revenue share agreements were in force. Given all the recent fee litigation, sponsors should want to know, and advisors should want to disclose, exactly what fees are being charged for what services.
- Revenue sharing is most often asset-based. So as plan assets increase, so too does the revenue sharing, a questionable arrangement when services rendered are essentially the same for all plans regardless of assets.
- Reliance upon revenue sharing paying funds limits the universe of funds available to participants. For example, super low-cost Fidelity or Vanguard index funds do not pay revenue sharing. Should participants really be denied the use of these funds?
The solution is simple: plans should use all institutional shares (which despite misinformation to the contrary, are readily available to plans both small and large) and assess fees to participant account in a thoughtful, equitable fashion. Or have the organization pay plan fees itself and promote the policy as an additional employee benefit.
After all, no plan sponsor has ever been sued when paying plan fees from corporate assets.