There’s nothing inherently wrong with revenue sharing in DC plans. In fact, revenue sharing has been critical in making DC plans popular, especially for smaller companies that could not or did not want to write a check to pay for administrative and advisory expenses through retail mutual funds in the 1990s.
When used properly by providers and advisors, revenue sharing is a convenient and painless way to compensate all parties in a bundled service model. Some would even argue that bundled pricing in a service model where different companies must cooperate is optimal because some clients might not value certain critical services and only be willing to pay little or nothing for some, which could disrupt the entire service model.
One issue with revenue sharing is that, like broker commissions, it can allow providers and advisors to act in their own interest, rather than a client’s. For example, a money manager desperate for placement may be willing to pay high revenue sharing or commissions to obtain it, which subsidizes the pricing, or provides unreasonable revenue to one of the parties, even though that particular fund may not be the most appropriate one. A due diligence process used to justify a conclusion is tainted from the outset.
Another issue is that most plan sponsors don’t understand revenue sharing. Insurance companies have created complicated wrap fee charges — made famous recently by John Oliver — mostly disclosed but difficult to understand for the lay person. Worse could be the litany of mutual fund share classes from traditional A shares at NAV, along with six types of R shares, along with institutional shares which have different names depending on the fund company. Seriously? No wonder plan sponsors don’t get it — and why we’re seeing lawsuits based on the use of inappropriate share classes.
Until relatively recently, many plan sponsors apparently did not know how much they are paying their providers. Though advisors have done a good job of educating them (along with the DOL disclosure regs), revenue sharing is still a mystery to many, leaving them vulnerable to unscrupulous providers and advisors.
With better technology, record keepers can now charge each participant a set fee for services provided, either using zero rev share funds or stripping out rev share — with the added benefit of levelizing participant fees. Some industry apologists say that some funds with revenue sharing are cheaper than those without it, but that’s an internal pricing issue. Like commissions, revenue sharing opens up the possibility for abuse, and has a tainted history.
Let’s move forward and offer what’s best for clients and is easier to understand.
Opinions expressed are those of the author, and do not necessarily reflect the views of NAPA or its members.
