In some industry circles, revenue sharing has negative connotations. In the past, when some providers tried to hide their fees — telling plan sponsor prospects and clients that their plan was free, for example (which it actually was to plan sponsors who no longer had to write a check) — revenue sharing was the means by which record keepers seemed to be paid under the table by fund partners. Now that most plan sponsors (and even a few participants) understand how providers get paid, revenue sharing is an acceptable way for fund firms to pass along to participants the cost of record keeping and administration, as well as some advisory services, in the form of Sub TA and 12b-1 fees. The question now is whether each participant should be charged the same fee.
The consulting firm Cammack LaRhette reviews the issues and protocol for levelizing fees for participants. Fund families charge shareholders different 12b-1 and Sub TA fees, so a participant in one fund may pay more than another in an index fund, for example, which generally charge less. Technology allows record keepers to set the revenue sharing amount based on what’s needed to run the plan and then charge participants who are paying less while crediting those who are paying more. The article raises the question of whether participants should pay a flat fee rather than a percentage of assets.
Not covered in the article is whether fund families that pay the record keeper higher revenue sharing enjoy greater exposure on their platform — which assumes that record keepers have an influence on which funds get selected. Also not covered is the fact that business owners and upper management may be paying less revenue sharing because they tend to select index funds or other low cost investments. Shifting to level participant fees may be fair — but be careful about complaints from decision makers.
