Why the Road to Zero-Revenue Sharing Can Be Bumpy
Revenue sharing refers to the practice of investment providers sharing revenue with recordkeepers in exchange for performing some of the duties that the investment provider would typically have to do. Since the concept is difficult to explain to participants and has been the focus of litigation, an increasing number of plan sponsors have looked to eliminate revenue sharing - particularly as plan sponsors migrate to a zero-revenue share fund lineup, where all recordkeeping and administration fees are deducted directly from participant accounts, rather than subsidized by plan investments.
However, in theory, while a zero-revenue sharing fund lineup sounds like a great idea, plan sponsors often face two major bumps in the road during implementation:
- Some funds don’t have zero-revenue share options: While one major mutual fund house famously has no funds that share revenue, another major low-cost variable annuity provider has no funds with zero-revenue sharing! In addition, some investment providers lack zero-revenue share versions of their most popular funds. This can create a problem for plan sponsors, since, in order to move a zero-revenue sharing array, they may need to swap some funds for alternatives that are less prudent from an investment due diligence perspective.
- In many cases, the zero-revenue share investment option is not the share class of a fund with the lowest net cost: Even when zero-revenue share funds exist, the zero-revenue share fund can actually end up costing the plan participants more than its revenue-sharing version, since the investment provider is pocketing all, or some, of the revenue sharing that came with the fund that shared revenue, in switching the plan sponsor to a zero-revenue sharing fund. Here is an example of how this works:
In this example, the net cost of the zero-revenue sharing fund is actually higher for plan participants, since the 25 basis points in revenue sharing that would have reduced the recordkeeping and administrative expenses is gone, but the gross cost of their fund was only reduced by 10 basis points. So, participants lost 15 basis points on the deal, which is presumably pocketed by the investment provider. Thus, in looking at the total plan costs in this example, moving to a zero-revenue share class of a fund might be a negative for plan participants - a situation most plan sponsors look to avoid!
Thus, if you are a plan sponsor considering a move to a zero-revenue sharing fund lineup, make sure that you do your homework and work with a trusted advisor to determine whether the bumps in the road to zero-revenue sharing are obstacles that can be overcome.
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. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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