Insights


Revenue Sharing, Simplified

As I was preparing once again to speak about revenue sharing, I encountered my recurring fear that almost everyone was going to completely lost. Because, let’s face it, revenue sharing is NOT an easy concept to understand, and one about which most people do not care to learn!  

However, in my prep, I stumbled upon an idea of how to explain revenue sharing simply – and, after using it in a meeting, it appeared to be effective.  So, here it is:

Think about the idea of a rebate.  Remember them?  After purchasing something from the grocery store and jumping through the hoops of filling out a form, collecting proof(s) of purchase, and mailing the form and proof(s) of purchase to the manufacturer, you would receive cash back.  Rebates still exist, but most are electronic nowadays, and simply require you to click on a webpage or take a smartphone picture of your receipt and scan it into an app and the rebate money will be automatically credited to your account.

Revenue sharing is a lot like this modern version of rebates.  Now, not all investments provide a rebate. And, sometimes, the cash back does not go directly into a participant’s retirement plan account. It may first be used to offset plan expenses, such as recordkeeping and administrative expenses.  In some plans, the remainder is then returned to an individual’s retirement plan account. Let’s use a simple example where a participant is 100% invested on one fund:


In this example, the fund costs 0.5%, or $50 per $10,000 invested (also referred to as 50 basis points). The fund’s total revenue sharing, or rebate, is $15 per $10,000 invested; however, the total administrative costs that are paid by the plan only amount to $10 per $10,000. Thus, in theory, the participant’s “net rebate” or “cash back” to his/her retirement account is $5 per $10,000 invested. The more the participant has invested, the larger the dollar amount of the rebate.

Of course, in reality, things can become much more complicated.  Some plans don’t return the net rebate, or cash back, to participants, and some plans (mostly smaller plans, or public K-12 403(b) plans) do not even have defined total administrative costs.  And, as previously mentioned, some funds do not provide a rebate at all.

However, the idea of a rebate illustrates the basics of revenue sharing.  And if you can grasp this concept, the complexities can be more easily addressed.  Next week, I will attempt to simplify one of those complexities - the concept of fee leveling.

Is this an excellent method of explaining revenue sharing?  Or is it just terrible?  Provide me with your feedback via Twitter or at info@cammackretirement.com.  

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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