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What’s the Future of Revenue Sharing?

While recent case law does not suggest that revenue sharing violates ERISA, other court cases like Tibble and Tussey do suggest that fiduciaries have to select the lowest share class available to the plan. These decisions raise the question of whether participants should be paying different amounts — based not on the size of their account balances or the services they use, but on the funds they select and the amount of revenue sharing paid to the record keeper.

NEPC, LLC, a large market investment consultant, presents a case study in which a larger plan moved to a flat fee payment for each participant with analysis about alternative approaches and where the market might be moving. In the case study, the publisher Reed Elsevier, with 20,000 participants, decided to move to a flat annual $50 per participant fee after it discovered that participants could be paying 0-37 BPs, which equated to $0-$186 per participant. When doing the analysis they found it difficult to determine how much revenue sharing some funds were paying, and decided to move to share classes with no revenue sharing — which meant that some had to be eliminated.

In a separate study, NEPC found that 10% of plans have moved to level participants payments using one of three methods:
• pro rata, where everyone pays the same asset based fees (considered progressive as higher account balances pay more);
• per capita, where participants pay the same flat fee (considered to be regressive as lower accounts balances pay more); and
• a combination of per capita and pro rata.

With heightened concerns about fees, advisors and record keepers might be tempted to use funds with higher revenue sharing to lower the perceived cost of the plan. But as more plan sponsors understand revenue sharing — especially with new fee disclosure regulations — sponsors are beginning to realize the real costs of running a plan.

The obvious question is whether participants should pay based on their account balance or services used. This can be a per head fee — or it can even be based on whether, for example, they want one-on-one advice.

Will level payment by participants move down market? The technology which allows for such payment is more available, as are R6 shares, which carry no revenue sharing at all. Will advisors be able to distinguish themselves using this approach?

One caveat: Moving to a pro rata payment may actually boost fees of the owners and other decision makers who might be using lower cost index funds with little or no revenue sharing.

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