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Revenue sharing and its impact on plan participant accounts continues to be a hotly discussed topic within the retirement plan industry, especially in light of recent Supreme Court rulings, class action suits and DOL scrutiny.
The bottom line for plan sponsors: know how much you’re paying for your plan, who you’re paying, and how to determine if it’s reasonable.
Fee disclosure regulations continue to shed light on the all-in costs associated with 401(k) plans. These costs fall into 2 main categories:
A closer look could reveal that the cost of plan services may not be distributed equally across all participants. Naturally, it's expected that participants pay different amounts for investment services, since we all make different investment decisions and management fees vary based on fund. What's not expected is to have participants pay different amounts towards plan services - which are equally available and accessed by all participants.
“Revenue sharing”, which subsidizes the cost of plan administration, and how it is allocated across participant accounts is not an illegal practice. However, plan sponsors, as fiduciaries, must treat participants in a prudent and fair manner. This requires plan sponsors to engage in a thorough process to understand all plan fees, how they’re allocated, and determine if they are reasonable.
In the example below, both Mary and John have identical $40,000 account balances. Mary, however, is paying a significantly higher portion of the plan's administrative expenses. Why is that?
As you'll notice, Mary is invested more heavily in funds that pass along (revenue share) a higher portion of their investment management fees to the 401(k) provider. Staying with this example, if another participant invested entirely in the index fund option, which shares zero revenue, then he/she would be paying none of the plan's administration costs - essentially, getting a "free ride."
|Balance||Revenue Share||Balance||Revenue Share|
|Total Balance||Total Revenue Share||Total Balance||Total Revenue Share|
Over time, this difference in fees paid can really add up for Mary. And while you certainly would expect the cost for investment services to vary by fund, why does the overall cost of plan services need to be allocated differently depending on an investment choice?
As you'd expect, many plan sponsors feel this is an unfair practice and are searching for a more equitable approach to covering the costs of a plan.
Recordkeepers can manage programs where each investment option has an equal revenue-sharing percentage rate, known as “fee levelization”. This allows participants to be responsible for a comparable share of plan costs.
What Is Revenue Sharing?
Payments made out of a mutual fund's management fee, or “expense ratio,” and passed onto a 401(k) provider. For example, ABC Growth Mutual Fund charges a 1.00% management fee. Some portion of that 1.00% is passed onto ("shared") with the 401(k) provider.
To help offset the provider’s cost of administering the plan. Revenue sharing payments subsidize the cost of operating a 401(k) plan, thus, allowing the provider to offer 401(k) plans to companies for less, or sometimes, no direct charge at all.
What Is The Impact?
The amount of revenue sharing varies from fund to fund. Some funds make no revenue sharing payments at all, while others make significant payments. So, depending on a participant's investment mix, he/she can be shouldering a disproportionate amount of the plan's administrative costs.
What Is My Responsibility As A Plan Fiduciary?
First, plan fiduciaries need to understand the facts and consequences of revenue sharing and how it may be impacting their plan participants. For example: What is the total cost of the plan? Is this total amount reasonable given the services being provided? How are revenue sharing payments being allocated? Then, make a prudent, informed and reasoned decision about how to allocate plan administration fees.