In the world of 401(k) plans, there is a maze of fees that plan sponsors may not be aware of. One of the most notorious culprits in this realm is revenue sharing. Hidden within the investment options of your retirement plan, these fees can quietly erode your employees' retirement savings. In this blog, we'll delve into what revenue sharing is, why it's problematic, and how to determine if your company's retirement plan is affected by these concealed charges. Finally, we will offer some potential next steps on how plan sponsors can take action today to liberate their retirement plan offering from unnecessary fees. To begin, let's clarify what revenue sharing is.
What is Revenue Sharing?
As detailed in Eric Droblyen's article on Medium, revenue sharing is a practice in which mutual funds and investment providers compensate third parties, such as record-keepers or financial advisors, for their services. This compensation is typically a percentage of the assets under management, often hidden within the expense ratios of the funds offered in a 401(k) plan.
The Problem with Revenue Sharing
In one of my previous Forbes articles, I explain in detail how revenue sharing creates a host of issues for both employers and employees. Here are just a few of the reasons why this practice can be problematic:
- Lack of Transparency: One of the most significant issues with revenue sharing is its lack of transparency. Unlike the direct fees charged by plan providers at the participant level, revenue sharing can not be easily identified by reviewing your plan's fee disclosure [408(b)(2)] or participant fee disclosure [404(a)(5)]. Employees often have no idea that these fees are being deducted from their retirement accounts at the fund level.
- Conflicts of Interest: Revenue sharing can create conflicts of interest among plan providers and brokers, as they may prioritize investment options that offer higher revenue sharing agreements rather than selecting the best options for the plan participants.
- Increased Costs: Revenue sharing can significantly increase the overall cost of a 401(k) plan. These costs are ultimately borne by employees and can substantially impact their retirement savings over time.
- Legal Implications: The hidden nature of revenue sharing can lead to legal action taken against the plan sponsor as the named fiduciary on the plan. Employers have a fiduciary duty to act in the best interests of their employees, and failing to disclose these fees can result in legal liabilities.
Identifying Hidden Fees in Your 401(k) Plan
Now that we understand why revenue sharing is problematic, it's crucial to know how to identify if your company's retirement plan is affected by these hidden fees.
- Review Plan Documents: Start by reviewing your 401(k) plan's documents. Look for any mentions of revenue sharing arrangements. If there's a lack of transparency in the documentation, that could be a red flag.
- Ask Your Plan Provider: Don't hesitate to reach out to your plan provider or record keeper. Ask them directly about any revenue sharing agreements and how they impact your plan.
- Analyze Expense Ratios: Analyze the expense ratios of the investment options in your plan. High expense ratios may be indicative of revenue sharing agreements. Consider seeking lower-cost alternatives.
- Consult with a Fiduciary Advisor: Having a fiduciary investment manager perform an in-depth fee analysis on your 401k plan. The insights garnered from this type of analysis can help you identify whether there are hidden fees in your plan and determine a plan of action to eradicate them from your plan. As 3(38) fiduciary investment managers, our retirement plan advisors are obligated to act in your employees' best interests and can help you identify and mitigate the impact of revenue sharing within your plan.
Revenue sharing in 401(k) plans is a hidden menace that can undermine the financial well-being of employees and expose employers to legal risks. To protect your employees and ensure compliance with fiduciary responsibilities, it's essential to be vigilant about these concealed fees. By understanding what revenue sharing is, recognizing the problems it poses, and following the steps to identify and address it in your plan, you can create a more transparent and cost-effective retirement plan that serves the best interests of both your company and its employees.
This information was developed as a general guide to educate plan sponsors but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.