Revenue sharing is common in defined contribution (DC) plans like 401ks and 403bs which, as it sounds, is the practice of money managers like mutual funds sharing the revenue they receive from investors with third parties like record keepers, TPAs and advisors. Nothing wrong or illegal but a CFO at a 120 employee forensic engineering firm attending a TPSU program held at SMU in Dallas explains why he eliminated revenue sharing to gain better transparency and lower fees.
When a participant in a DC plan buys a fund, there is a cost paid to the money manager to manage the money expressed as a percentage of amount paid which can range from as low as 0.10% or 10 basis points for passive or index funds to as high as 2.0% or 200 basis points for active funds. To investors and even plan sponsors, it might seem like that entire expense is used to pay for fund management since that’s who is getting paid.
Revenue sharing means that a portion of the expense ratio paid by the investor is shared with third parties like a record keeper or advisor. It started because plan sponsors wanted to push the cost of running a DC to participants rather than write a check and it seemed like an easy and painless way to do that.
The problem is that you have to dig deeper to know who gets paid what. And what about calculating payments between the record keeper and their proprietary funds, especially target date?
So the CFO at the SMU TPSU program, for the sake of transparency, decided to shift to institutionally price funds that have zero revenue sharing while keeping the same types of investments if not funds. It’s all about share classes. As a result, everyone now knows who gets paid what and, as a result, he was able to lower overall fees.
It’s hard and confusing at times for plan sponsor to know who is getting paid which is their job as an ERISA fiduciary along with know whether those fees are reasonable for the service rendered. Eliminating revenue sharing makes that job easier.
So did the company write a check? For some services they did but for most, all participants were charged a set percentage from their account to pay the costs which again was totally transparent and also eliminated the unfairness of one participant in the 10 basis point index fund that did not have revenue sharing paying nothing to run the plan at the expense of the participant in the 200 basis point fund that might have had 75 basis points of revenue sharing. A win for all!
