An element that is mentioned consistently in excessive fee litigation is revenue-sharing—and while it’s always noted that it’s not “per se” illegal…well, there’s an implication. This week we asked readers how/if it was (still) part of their practice(s).
Let’s face it, mutual funds have long had as an element of their expense structure a set aside to cover fund sales and distribution costs—and since at least the 1980s those have frequently been “shared” with the parties that provided that distribution support, typically recordkeepers and advisors. This so-called “revenue-sharing” has been trotted out in just about every excessive fee case, not as an illegal practice per se, but there always seems to be a pretty clear implication that it’s at least “unseemly,” and perhaps suggestive of other issues.
Indeed, at least one study has claimed that high-revenue-sharing funds are more likely to be added to the investment menu of 401(k) plans, are less likely to be deleted and participants face significantly higher fees.
Love it—or Leave it?
So, what did NAPA-Net readers have to say on the subject?
Well, nearly half (44%) said they didn’t like revenue-sharing—and a third (31%) went so far as to say they “hate it.” Just under 9% (8.55%) said they liked it, and only 5% “loved” it, while 11% said they had no real feeling, one way or another.
Reader Comments
Some plans definitely want to have it available to use. Most important is that you have a good policy in place on how you handle it.
Impacts fund scoring negatively causing headaches for us in the few plans that use it.
We charge a stated fee for service and have never derived compensation from fund revenue sharing. We strongly prefer utilizing lowest cost non-revenue sharing investment share classes which often results in all participants paying a levelized fee for service provider fees paid out of plan assets. It is often much more difficult to manage toward a revenue target using investment revenue sharing.
Too many share classes causing too much confusion with Plan Sponsors. Just do away with it!
Nah... hate it covers it perfectly. :-)
Despite and contrary to some recent litigation, we have a preference that zero-rev is cleaner and less litigious than potentially more efficient share classes due to the varying forms and frequency of revenue sharing collection, allocation, and crediting to those participants due the revenue sharing in question. There are too many variations leaving the door open for interpretation (sometimes uninformed interpretation) of revenue sharing.
It is a conflict of interest.
It is what it is. My real issue is with fund companies who create new share-class that has no revenue sharing, but the fund management expense ratio is more costly than the legacy share with the revenue sharing credited back to the participant. This dynamic effectively passes on the increased cost for launching the new share-class to participants, even though the fund is the same and thus money management is exactly the same.
Everything is case by case. Why I do not normally like it or use it sometimes depending upon employer it has to be looked at.
If it is credited to the participants that generate it to lower the net expense below that of zero rev shares it is a good thing
I feel it will be completely gone—or should be already—within five years!
What other business is there where the customers are told that the services are free but imbedded fees make it be anything but? You gotta love the financial services industry.
It’s a lot easier to negotiate fees with the Recordkeeper when there’s zero-revenue share classes. Also easier to lower our compensation when needed and more transparent to participants.
I think it gives our industry a bad image. Most of us do things the right way and this tarnishes the image.
We always look at the cheapest share class. Many old, A Share, mutual funds have low expenses because of their size. If we rebate the revenue back to the participant, it will be cheaper that the institutional priced fund.
Many industry professionals have moved on past revenue sharing (it’s so yesteryear) into full transparency and simplicity for the client/plan sponsor.
With access to lower cost investments and modern recordkeeping, revenue sharing really has no place in the industry. Be transparent with fees!!
We always use the lowest cost share classes, but some funds do not offer R6 share classes so there is still some revenue sharing paid. I wish every fund would offer R6/zero revenue sharing funds.
As an independent recordkeeper, I can’t tell you how many fund menus we see with differing revenue-sharing amounts. Also, really hope the money management business corrects the anomaly where net/net, revenue sharing paying funds end up costing less than revenue-sharing free funds.
Our firm offsets any revenue sharing received against our required revenue. The required revenue number does not change regardless if fees are received either via client direct billables or revenue sharing.
Fee transparency is important (although participants get a surprise on their statements when they see a fee number). We like to strip out all revenue share and go with share classes that zero that out. There are times when the net number could be slightly lower using a share class that has revenue share, but, that is more an exception than the rule.
I think it’s important to recognize there are advisors that build or “inherit” lineups that contain both zero rev and rev producing funds. That said. As long as any revenue collected is disclosed/displayed and most importantly discussed with the business owner/plan sponsor what it is, and what it will be used for, i.e. ERISA bucket, etc., OR any revenue collect is then credited back to the participant, or a combination thereof.
Like anything else, revenue sharing can be a tool to provide a competitive edge. As an industry we have varied ways in which we disclose how we use it - I would like to see more consistency.
Revenue share is never transparent to the participants and creates an environment where some participants carry a higher burden for the cost of their company’s plan than their co-workers.
There’s no need for it anymore. Record keeping platforms have the ability and flexibility to deduct necessary operating costs in multiple ways. All revenue sharing does is muddy the waters.
It all depends on how it is used and disclosed.
It distorts my investment reporting relative performance.
Revenue sharing doesn’t automatically mean that an advisor will be biased towards certain funds or attempt to be evasive about any fee structures, but we like the ability to tout our complete independence as an easy selling point to our clients when it comes to fund lineups.
However, Z shares are not available to ERISA 403b plans. So, we have R6 in there and credit-all back to the participants.
The object is maximum return mitigated by risk. If a fund has a high expense ratio and returns 100 basis points above its lowest cost competitor where is the participant better invested. Similarly if participants’ accounts receive revenue sharing credits directly benefiting the participants whose account generated those credits (buys more shares) then that fund’s performance, at the individual level, is actually higher than the investment’s SEC returns shown on the quarterly summary investment companies generate.
Compensation Structures?
Not surprisingly then, asked if revenue-sharing was part of their compensation structure:
38% - No, and never was.
31% - No, though it was once upon a time.
14% - For some plans, not all.
11% - Yes, but working to change that.
In fact, just 5% indicated it was part of their structure.
Reader Response
We have a few hangers-on. Plan sponsors who are reluctant to go zero rev and have debited fees - despite our assurances that there won’t be an employee revolt.
Our goal is to screen and find the funds that we feel are consistently the best funds for the participants. Once we select the fund, we look for the share class that creates the lowest overall expense to the participant. In a few instances, we do receive revenue sharing. However, we have always credited back any revenue sharing that we receive to the participants. (Originally as a fee reduction and then when the software allowed, a direct credit to the participants holding those funds.)
There are a few plans that I recently started working with that still have old revenue-sharing agreements
For smaller plans on certain antiquated platforms that do not offer zero revenue share classses
Not intentionally used as fee leveling exercise to negate the issues with revenue sharing is imperfect, hard to audit and impossible for employees to understand and explain. It also makes it incredibly difficult for an employee to assess return and expenses when determining a rollover in/out.
For the past few years, we are working to move all client to a zero-rev lineup.
IF, if, if - there is any revenue sharing due to the lack of availability of zero rev share, it is credited back to participants whenever possible.
Anyone who has been in the 401(k) World for any length of time well knows that revenue-sharing was the standard at one time, with few exceptions.
Only takeover plans
Some smaller, legacy plans have revenue-sharing, but we are mostly over to fee-based with zero-revenue
I’ve recently taken over some plans as is, I’m planning to remove revenue sharing as soon as feasible....
Only when I cannot find a share class of a fund I want to use that does not have revenue sharing. Then, it is refunded to the plan.
No—like pricing, our compensation is structured around required revenue.
You can still charge an asset based fee and get to the same place as a 25 bps 12(b)(1), but it is cleaner. We still take on lots of plans that have A shares or revenue share based R shares.
Our fee is our fee, we use the rev share to help shoulder cost for either the sponsor, participants, or both.
Plans we have taken over and have not changed yet.
There are plans with revenue credit accounts and when we takeover one we utilize the accumulated funds to pay our fees as the balance gets paid down before new charges are assessed.
Reasons Against
As for the reason(s) to avoid revenue-sharing:
52% - Prefer to charge flat fee.
33% - Concerned about appearances.
9% - Nervous about litigation.
6% - Plan sponsors don’t like it.
I want full transparency
We’re a fee only firm and never take indirect compensation as we don’t want to have any conflicts of interest.
It creates a conflict of interest. Originally, we just wanted to be able to say that we didn’t have a conflict. Then, when we went fee only, we had to avoid any conflicts of interest.
We charge a stated fee for service and have never derived compensation from fund revenue sharing. I would think that being paid compensation through revenue sharing without a stated fee would create conflict of interest issues when recommending new funds that could result in an increase in compensation to an advisor. There could also be issues with being limited to lower quality investment options when a specific revenue sharing amount is needed.
We charge either a flat-fee or basis points on plan assets and encourage the plan sponsor to pay our fee directly
Transparency, flexibility, etc.
Never wanted our fees buries in investment expenses. Want all fees fully disclosed.
Not the right thing to do.
We prefer to do without it.
We feel transparency is important and it should be clear what each service costs
I charge a flat + asset-based fee. Rev share is not my model. And yes, I don’t like the appearance.
Some platforms can not credit back revenue sharing to the plan participant on a participant by participant basis. They will require a menu of all no-revenue sharing funds or if there is revenue sharing they will keep it in addition to their fee. Some will accrue to an ERISA budget.
It’s much easier to adjust fees, manage cost and change out funds if the funds are not tied to the fee structure
All of the above reasons and participants (and plan sponsors) struggle to understand it.
Variable comp by fund has never been ok for a fiduciary
I believe in full fee disclosure--I’m not a fan of embedded fees.
Always prefer full transparency for the client and not having any appearance of conflicts of interests.
We believe in fee transparency.
We offset 100% of received revenue sharing so everyone is billed the same and if they get revenue sharing then they get credit for it.
Difficult to get all revenue sharing paying funds to have the exact same payout. Yes, you could return that rev sharing to the participant’s account that generated it, but that’s just extra work and confuses the participant
We are staunch believers in having all plan fees fully transparent and allocated proportionately (vs borne by the poor participants who invest in high revenue paying funds). It’s quite simple, if a participant is being charged a fee - show it and explain what it’s for!
Lack of transparency, fiduciary risks, conflicts of interest
We are only compensated through advisory fees. Revenue sharing is less transparent and adds complexities to client communication and understanding.
None of the above - revenue sharing is neither here nor there for our organization, as we know our required revenue and price off that number.
More appropriate to rebate to those who generated it and have a more thoughtful fee allocation process
I think it is more defensible to NOT have revenue sharing.
Full transparency is important.
Prefer to be fully transparent, and we use AUM fee or flat fee with zero rev share funds.
All of the above. It’s antiquated and only begs for trouble.
Advisory fee/comp. should be level.
Initially it was the DOL fiduciary rule “right to sue” that convinced me to get rid of rev sharing for my advisory fees. But now it is more about getting accurate performance results.
Simplicity when discussing our asset-based fee schedule.
We apply fee equalization per participant.
Trend is towards transparency and revenue sharing is not always transparent. it also makes it difficult to evaluate funds when they have revenue sharing then expense ratios are higher so that impacts their grade. Very difficult to manually adjust expenses, returns etc. to account for revenue sharing.
Other Comments
It is better to move away from revenue sharing, Keep it simple and transparent.
Revenue sharing needs to go the way of the dinosaur. To me, it is all about the inability to strip out the built-in revenue sharing payments from the fund performance. This to me is the real issue—the funds always look bad because of the anchor they are carrying.
Skews transparency of fees and biases on investments.
I feel very strongly that ALL fees should be transparent and all disclosed in one spot where it adds them all up. We have done this for years. It seems like, although disclosure is required, it comes in a mishmash of disclosures that the small plan sponsors (and certainly the participants) cannot figure out the total costs. They get pieces of the cost and think that they have the whole number when often they don’t.
Sponsors don’t understand it. Fees aren’t transparent.
In today’s fee litigation environment, we are more and more concerned about revenue sharing, fee disclosure, and work to ensure our clients understand all aspects of their service providers fees/revenue.
Can we stop lowering our Advisory fees. Almost every other company expense goes up each year. why should ours go down?
The very name denotes greater scrutiny and when share classes and proprietary funds generate various revenue, that immediately creates inequality among participants.
It is just so much more clean to not have revenue sharing or to have to answer questions about a court case that an Employer may have read in an article.
Revenue sharing can cause some participants to have to bear an excessive share of the overall plan expenses.
In the “old days,” it was fun for providers to tell plan sponsors that their services were FREE. While revenue sharing kept plan fees out of sight and out of mind... it of course also kept them unmonitored. Any plan sponsor that has the “old” model and not looking to change that should be concerned.
I am surprised by the number of plans that still have these issues.
Revenue Sharing is what it is. First priority is to educate plan sponsor/committee on judging the cost of a plan independent of revenue sharing. Then, judge revenue sharing as a way to either pay service provider cost or best case implement fee levelization whereby participant is credited back the revenue sharing directly. This way share-classes can be optimized for lowest cost of investment management.
Transparency is best accomplished with line item debits for the r/k fee. While the 404a disclosure is designed to illustrate rev share, most participants do not understand. Fee levelization can create debits and credits on participant statements. This is difficult to explain in workforces that are dominated by hourly workers and decentralized locations. We discuss that debiting the same amount to all participants is warranted as the recordkeeper is providing the same work regardless of the ppt’s balance.
It is part of life and doing business. You need to be up front and discuss and document it.
Fee levelization or zero revenue lineup should be the standard. Some recordkeepers don’t even have fee levelization as an option.
Revenue sharing isn’t good or bad, its use by covered service providers is where the problems arise. A well-educated consultant can assist plan sponsors in properly reviewing and allocating it.
Those considering a career in the financial services industry and especially advising on qualified plans, would be well served by going to law school prior to coming into the business.
It drives me crazy that the fee disclosure regs lead to a system that allows vendors to get ways with non-disclosure. How can a fee be “various” as so often is the listed fee on the disclosure.
Don’t like the limitation of available funds within revenue sharing structures.
We as an industry should eliminate the games and hidden fees. We have a Code of Ethics for a reason and hiding revenue should be against it.
We manage the choice of share class given the options available to us. We look for the cheapest net cost to the participant.
Most clients/plan sponsors that I talk to open up to say they no longer believe the “pay more to pay less” sales pitch from advisers, especially since the adviser does not take responsibility to track the additional revenue that they are asking the client to pay.
Revenue sharing is just a way to pay for service costs and, as long as it is uniformly allocated amongst participants, it is the same result as deducting fees from participants’ accounts. Then the main difference is about transparency.
Fee purity across all functions (advisory, recordkeeping, TPA, etc.) with full-disclosure/transparency is always preferred.
It was only a matter of time that there would be litigation related to revenue sharing.
I think if you disclose that you are getting revenue sharing and the client can see what they are actually paying then revenue sharing is okay. It is when it is hidden and the client is told they are getting things for free is when it is I think that it is shady and the client should beware.
No one likes litigation but oftentimes fear is a powerful motivator. I can understand why the revenue sharing practice exists (kinda) but as this humble advisor sees it, in an employer-sponsored retirement plan—fees should be fully transparent. If the participant is paying the fees, they should know about them. Our industry may call it revenue sharing but I side with the litigators who call them “hidden (or buried) fees.” Scary words but aren’t they what they are? I would note that there are a few instances where we do use a rev share fund but only when we have selected a fund that has that annoying anomaly whereby the rev paying share class is cheaper than the R6/Institutional share when you factor in the crediting of the rev share payments (which every one of our plans does... if there is revenue paid by a fund, it goes directly back to the people investing in that fund).
Cannot be a fiduciary without a flat fee structure, variable fees creates a conflict.
Fund families should create a lowest net cost fund. There are too many funds that offer revenue sharing that are lower net cost than a zero revenue sharing fund. This should be addressed as it is so much work for an advisor to research and make decisions. Should you use the lowest net cost even if it has revenue sharing? If so, what about the “drag” of when the revenue is sent to the plan to be reallocated? Which is better?
Net is cheaper than institutional shares in some cases.
It would be great if all investment providers would have the lowest cost share class be the one without revenue sharing.
I think it’s important to recognize there are advisors that build or “inherit” lineups that contain both zero rev and rev producing funds. That said. As long as any revenue collected is disclosed/displayed and most importantly discussed with the business owner/plan sponsor what it is, and what it will be used for, i.e. ERISA bucket, etc., OR any revenue collect is then credited back to the participant, or a combination thereof.
Revenue sharing is difficult for the average plan sponsor to understand. Charging a flat fee is easy to see, understand and compare.
No need for new regulations. Disclose in plain language how you use it and be open about it. Determine what it costs to service a plan and be profitable, charge that and offset with revenue sharing or take the revenue sharing and charge the difference.
The mutual fund industry needs to change o meet the needs of today’s fiduciaries. Retirement plans should only have CIT as an option and leave the traditional mutual funds for retail investors.
Most recordkeepers don’t do a good job with it and it leads to uneven distribution of expenses.
Often revenue sharing gives plan sponsors the impression there are no fee since they are not hard dollars and not as easily shown. We prefer a transparent fee arrangement.
There is no reason for revenue sharing. Transparency is key and what all participants and plan sponsors deserve.
Prefer to be fully transparent, and we use AUM fee or flat fee with zero rev share funds
Our society is far too litigious in general but I do understand frustration around seeing hard earned savings whittled away by fees that seem to have no real value.
I believe if you disclose it and show the client it’s part of how you get paid then it’s fair
Strip all this crap out of the plan’s fee structure and magically watch all the lawsuits disappear.
Seems as though revenue sharing has a bad connotation, but when advisors and sponsors credit it back to participants, you can actually achieve more “net” pricing. This takes effort and research, but it isn’t impossible. The more difficult part is communication with participants around the “more expensive” share classes being used. I have heard advisors just use zero revenue funds for this reason—but is that the “best interest” of the participant?
Anyone can be sued even if you run a solid organization. The litigation citing revenue sharing seems inflammatory. If the courts better understood how revenue sharing works or revenue sharing buying additional shares could be compliantly shown within performance then some of the tension could be lowered. Additionally how recordkeepers show revenue sharing on their participant statements would help. There is one major one labeling the revenue credits as “fees.” When you do the math its participant positive but your first take is: “huh”?
I do think it does not look good for a plan to use revenue sharing. In particular most participants may not realize in some cases they are rebated back the revenue sharing. In some cases, participants that have revenue sharing are underwriting the recordkeeping & admin fees of the folks using index funds with no revenue. All kinds of challenges and the appearance that you are not suing lowest cost funds even if there is a lower net cost fund but you have to defend that and explain to participants which is difficult. I do think revenue sharing has declined in usage and is certainly not transparent.
We use it only to offset fees and to offer the most cost-efficient share class.
Dirty Money, insurance companies paying TPAs excessively (and shady ones keeping the excess) and insurance companies hiding behind high wrap fees
Thanks to all who participated in this week’s NAPA-Net Reader Radar poll!
