Don't Miss

Revenue Sharing – What is it Good For? Absolutely Nothing!

Revenue Sharing – What is it Good For? Absolutely Nothing! Founding TPSU Adjunct Lecturer Jim Pupillo at Hightower in Arizona comments on the role of revenue sharing which was a hot topic at a program he conducted for a group of plan sponsors at the Thunderbird Global School of Management.

As with many TPSU programs, most if not all plan sponsors have no clue on how revenue sharing works even though it is a plan asset for which plan fiduciaries must prudently oversee. Rather than paying each service provider like the record keeper, TPA and advisor directly, fund managers take a percentage of the expense ratio paid by participants which most think is being used to manage the money to pay these third parties. How much? That’s hard to determine even though the DOL has tried to make these fees transparent to plan sponsors under disclosure requirements in section 408b2 and to participants in section 404a5.

Pupillo advocates that for the sake of simplicity and transparency that plans either only use funds that do not have revenue sharing often referred to as institutional share classes or that revenue sharing is stripped out of all funds in the plan by the record keeper and then each participant is charged an equal percentage to pay the plan costs.

Today, not only are fees less than transparent putting plan sponsors in a difficult position more open to legal liability, it is not fair to the participants who might choose funds that have high revenue sharing bearing an unreasonable percentage of the plan expenses. Though not a fiduciary issue, if the trustees are invested mostly in index funds, for example, that have no or low revenue sharing expenses, it might look suspicious to regulators if the rank and file is bearing the burden of paying the plan fees.

Though not all funds have made institutional or zero revenue sharing classes available, more and more are moving in that direction with one of the largest firms, American Funds, announcing plans for lower cost funds without revenue sharing. Ask your advisor because the time is now – unless you truly understand how revenue sharing works and are willing to spend the time to keep track as new investments are added.

Fred Barstein

Fred Barstein

Founder & Editor-in-Chief at 401kTV | TRAU | TPSU
Fred Barstein is the Founder & Editor-in-Chief of 401kTV. Fred is also the Founder and CEO of The Retirement Advisor University (TRAU), a collaboration with UCLA Anderson School of Management Executive Education and The Plan Sponsor University (TPSU).Mr. Barstein was also Founder and Editor-in-Chief of NAPA Net.
Fred Barstein

Check Also

Retirement Committee Trustees Immediately Accept Fiduciary Responsibility

  Retirement committee trustees frequently accept their positions without fully comprehending the responsibility.  Therefore, new retirement committee trustees do not always realize the magnitude of the commitment they have made to the plan participants.  Learning the nuances associated with serving ...