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READER POLL: A Shift to Shearing Revenue Sharing?

A NAPA Net reader recently commented, “While I have an inkling of the trends with respect to revenue sharing, I'd like to understand what's really happening.” Here’s what NAPA Net readers told us.

Asked if the plans they worked with use/participate in revenue-sharing, a plurality – 37.5% – noted that “some do.” However, more than one in five (21.43%) noted that “most don’t,” and one in eight said “most yes, not all.”

Nearly 11% replied simply “no,” 9% replied (just as) simply “yes,” and the remaining 9% commented “not anymore.”

“This is a hot topic and I review detailed considerations annually with Committees who have elected to continue with rev share,” noted one reader. Another commented: “I hate revenue sharing. We offset against fees and billing is a royal pain to accommodate.”

However, one reader noted that “some plans don't have a choice with the fund lineup,” and another explained that, “Using funds with revenue sharing often times is more efficient than zero rev. When you remove the revenue sharing amount, the investment expense is higher. You still need to pay for the record keeping, and when you add back in that cost, it ends up being more expensive for the participant, usually by about 10 bps. Until the fund companies' zero rev share funds are actually neutral, we will continue to use the more efficient share class. Most record keepers can return the excess revenue to the participants.”

“There is no point in putting more fiduciary burden on the plan sponsor to prove the 12b-1 and sub-TA fees are coming in.”

“Many of our plans still have funds that pay a small sub-TA to the record-keeper,” noted another. “But we only use RKs that rebate the revenue sharing to the participant holding the paying fund.”

“In the 403(b) world in which I operate, many plan sponsors are forced to use revenue sharing since some of the underlying contracts – which are owned/controlled by the individual plan participant and not the employer, contain revenue sharing.”

Trend Lines

Asked if that had changed in the past two years, 44% said it had changed in that the plans had “moved on” from revenue sharing, though a quarter said it was “a bit of a mixed bag.” For the rest, things hadn’t changed – but from different starting points:

14% - No, revenue sharing remains part of the program.
6% - No, most haven’t relied on revenue sharing – ever.
5% - No, haven’t relied on revenue sharing in some time.
4% - No, most haven’t relied on revenue sharing in some time.
2% - No, haven’t relied on revenue sharing – ever.

One reader noted, “Whomever the adviser receives the fees from, is whom they represent.”

Another explained that in their plans, “Yes, but revenue sharing goes back to participants and only use if advantageous to participant.”

But, as several readers commented, revenue sharing isn’t necessarily “bad,” nor is the lack of revenue sharing necessarily “good” for the plan and its participants. “We focus on placing the most efficient share classes. In many cases going R6 would result in higher participant expenses,” cautioned one.

“For some plans, revenue share makes sense. I think some plan sponsors still don't quite understand the need to change to zero rev share funds then wrap the plan with a fee. Just because you go to zero rev does not mean plan costs are lower.” Another commented, “Some funds have share classes that are very much more cost effective than the lowest expense ratio shares.”

“Some clients are reluctant to do it and the recordkeepers are all over the board with this,” noted one reader. Comments that were echoed by another who said, “Still getting resistance from some clients about getting rid of revenue sharing to record keeper.”

‘Clean’ Sheen?

The use of “clean” shares – share classes that carry no loads and no 12b-1 fees, commonly referred to as R6 shares – has become quite common among respondents to this week’s reader poll. For just under 44%, most of their clients were using those class shares, and another 11% said all were, while another one in five noted that their clients were doing so, but “only some.” The rest split between “no” and “not yet.”

“Most are,” commented one reader, who went on to explain that “some are using the debit/credit model where we seek out the ‘most efficient’ share class, which is not always the zero revenue share class.”

Another explained, “Not all funds are available in clean shares. We work around that by crediting the revenue to the participant.”

Meanwhile, another reader noted, “For new plans, this is easy. We start with ‘clean,’ zero rev share funds. For older plans, it can take time to turn the ship.”

It’s little surprise, however, to find that, at least among this week’s respondents, 60% were actively promoting change away from revenue sharing. Of course, about one in eight were not, and 24% were only in some cases, and the rest were in a “not yet” mindset.

Other Comments

And then – while we got a lot of comments throughout the survey itself, readers also shared some closing comments. Here’s a sampling:

  • If it's cheaper for the client, we have duty to utilize revenue sharing.
  • The plans that use share classes that have revenue sharing all have "fee leveling" that credits the revenue sharing back to the participants. We do not have any plans that have revenue sharing pay for recordkeeping expenses.
  • My guidance to Committees is to go zero rev share. There are some situations where the rev share class is a better alternative than the zero rev share at face value. In this case, it takes looking at alternatives and emphasizing the possibility that rev share is discretionary not a promise and that there may be a time when rev share evaporates. In the meantime, fee equalization and documented discussions are in place.
  • It is incredibly frustrating that fund families have not made their zero revenue share class the most efficient share class. We have shared this feedback with many families and recognize it is a matter of economics but fund families should bite the bullet and revise their fund pricing.
  • In many cases, going full R6 is the easy way out, and not the most prudent approach.
  • I would gladly give up revenue sharing if all would agree to stop it! Charge fees where appropriate. Get rid of all of the hidden kickback games and let my client know what they pay for or don’t charge it. I spend too much time explaining fees, service agreements, invoicing, etc. Just let me do my work!
  • Over the past few years we have been actively engaging our clients to consider either using zero-rev share class or fee equalization (where all rev share gets credited back to the applicable participant) and simply disclosing an applicable pro-rata charge against all accounts to cover whatever plan related expenses that are not being paid for directly out of the client's budget. We believe this transparency and equitable distribution of plan related expenses is fiduciary sound and a reasonable/acceptable method to plan participants.
  • It always bothered me when fund companies brought the first variable rev share saying the “public” wanted more choice... when it was the greedy providers/advisors that wanted to hide fees for a longer time horizon. As long as fund companies make some rev share opportunities very lucrative, it’s impossible not to accept (we give it all back and always have). Amazing that some advisors still want to hide fees and only want to use higher rev share funds. Wherever there’s money, greed is right behind.
  • In an ideal world, not a single plan sponsor client of mine would use revenue sharing, but, of course, we don't live in an ideal world....
  • There is not one reason that any plan should use revenue sharing. More burden, less transparency.

And Now For Something Completely Different

The Super Bowl turned out to be the lowest scoring ever – and, having previously asked readers to weigh in with their picks, we asked readers to weigh in on the commercials that ran during the big game.

Perhaps not surprisingly (to anyone who watched what was, IMO, one of the most disappointing set of commercials in a while (and that’s saying something), the clear favorite was the NFL@100 (if you missed it, or just want to enjoy it again, see below). Roughly a third chose that as their favorite, followed by:

11% - Amazon - Not Everything Makes The Cut
6.5% - Budweiser - Wind Never Felt Better
6.5% - Hyundai - The Elevator
4% - Stella Artois - Change Up The Usual

The rest split pretty evenly between Avocados from Mexico - Top Dog, Bubly - Can I have a bublé?, Doritos - Chance the Rapper x Backstreet Boys, Expensify - Expensify This, Microsoft - We All Win, Olay - Killer Skin, Planters - Mr. Peanut Is Always There In Crunch Time, GOT/Bud Light crossover and Verizon - The Team That Wouldn’t Be Here.

Given to pick a second favorite, the NFL@100 still fared very well – but only tied for second with Stella Artois - Change Up The Usual, just ahead of:

10% - Amazon - Not Everything Makes The Cut
7.7% - Devour - Food Porn
5.13% - Microsoft - We All Win
5.13% - Verizon - The Team That Wouldn't Be Here
2.56% - Avocados from Mexico - Top Dog
2.56% - Burger King - Preppin'
2.56% - Pepsi - More Than OK

However, 10% didn’t watch – and another 11% said they had no second choice because “one’s all that’s worth mentioning.”

Thanks to everyone who participated in this – and every – week’s NAPA Net reader poll!

Oh – and here’s the NFL@100:

Oh, and if you’d like a little help identifying the players in the NFL video – here’s a start: https://www.youtube.com/watch?v=l22EOptjpkc

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