Revenue sharing

What revenue sharing is

Some fund share classes build in fees, such as 12b-1 fees and sub-transfer agency fees, that the fund company passes on to the plan’s service providers. The plan receives no invoice for these amounts. They are part of the fund’s expense ratio and reduce participants’ returns. The alternative is to pay providers directly, through a fee billed to the employer or a flat fee charged to each account.

Why it matters to employers

Revenue sharing is legal, but it makes costs harder to see. A provider must report it to the plan fiduciary as indirect compensation in its 408(b)(2) disclosure, and the fiduciary has to decide whether total compensation is reasonable. Because it is a percentage of assets, it grows as the plan grows. It can also fall unevenly, since participants pay different amounts depending on which funds they hold.

Example

A fund has a 0.90% expense ratio, and 0.25% of that goes to the recordkeeper. A participant with $100,000 in the fund pays $250 a year toward recordkeeping through it. A coworker with the same balance in a fund with no revenue sharing pays nothing that way.

Common mistakes

• Believing the plan is free because the employer never receives a bill.

• Not asking whether share classes without revenue sharing are available.

• Not rechecking fees as plan assets grow.