Rethinking Revenue Sharing

Daniel A. Notto

While revenue sharing may be a legitimate way to pay for the costs of operating a plan, both US courts and the Department of Labor (DOL) have made it clear that plan sponsors have a significant responsibility as fiduciaries to fully understand, evaluate and monitor their revenue-sharing arrangements and determine whether they are reasonable. Therefore, the most prudent response for plan sponsors may be to rethink the practice of revenue sharing altogether.

Although regulatory scrutiny is increasing, a September 2013 study from NEPC indicates that the percentage of large plans using revenue-sharing-based fee compensation or fee structures has declined over the past few years. Of those plans that continue to employ revenue sharing, their revenue-sharing rates are going down.

How should plan administration costs be paid? Is revenue sharing an appropriate way to pay for costs? Resolving these issues requires further consideration from all parties involved: retirement services providers, recordkeepers, plan sponsors, advisors, consultants and the government.

There’s no dispute over whether or not revenue sharing is legal; recent court decisions have reaffirmed that it is. But as certain revenue-sharing arrangements may contain potential inequities, plan fiduciaries and their advisors have expressed increasing interest in mutual fund share classes that don’t use any revenue sharing.

These share classes go by various names, depending on the fund complex. For example, some call their non-revenue-sharing classes “Class Z,” while others use “R-6.” Typically, non-revenue-sharing classes have a net expense ratio that’s lower than the other share classes of a particular fund. Another way to eliminate issues surrounding revenue sharing is to use collective investment trusts (CITs) as the underlying investment vehicles instead of mutual funds. CITs typically don’t engage in revenue sharing and are usually less expensive than mutual funds because they have lower compliance, marketing and administrative costs.

Advisors and consultants can help DC plan sponsors move toward greater fee transparency by opening up a dialogue with them about incorporating non-revenue-sharing classes or CITs into their investment menus. The bottom line for plan fiduciaries is to make an informed decision. Get enough information to think the issue through, work with the plan’s advisors or consultants, make a decision and document it. That is how plan sponsors—as fiduciaries—can do the right thing for their plan participants and protect themselves at the same time.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Daniel A. Notto is Senior Retirement Plan Counsel at AllianceBernstein (NYSE: AB).

2 comments

  1. Good article. I am wondering how plan sponsors will react if they need to start picking up the real costs of running a plan. We recently moved a plan of 100 participants and $10 MM in assets from A shares to I. The plan sponsor was considering moving to all index funds until 401(k) provider told us the required revenue to administer the plan was 18bps. I told him you can pay this cost or you can pass on to participants or share the cost with participants. He was not eager to do either. He stayed with the I shares and they provided enough revenue share to pay plan costs.

    • Dan Notto

      Thanks for your comment, Rick. You make some excellent points. Many plan sponsors are not likely to want to pay the costs of operating their plans, so we don’t see revenue sharing completely going away any time soon. And the fact that index funds typically do not pay revenue sharing further complicates the issue. If a plan has both revenue sharing and non-revenue sharing funds, there is a potential for inequities among participants because those that invest in revenue sharing funds are bearing a disproportionate share of the plan’s costs compared to those who don’t.

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