The article on Vanguard's revenue sharing is somewhat useful but tangential to the primary debate about revenue sharing. I'll gloss over the regular conversation and then show why what Vanguard is doing is good.
Revenue Sharing is the component of a mutual fund's Net Fund Expense Ratio that the fund provider kicks back to other service providers such as a Broker/Advisor, Recordkeeper, or Third Party Administrator. It is composed of two parts, a 12b-1 fee and a Sub-Transfer Agent Fee. The 12b-1 fee is standardized for the fund share class and it's the same everywhere that you get the fund. Typically it's .25%, .35%, or .50% and it's disclosed in the prospectus. You can even see it on Morningstar. All or some of the 12b-1 component typically goes to the broker if there is one (shockingly they get paid more by some funds than others!). Otherwise it goes to the Recordkeeper. The Sub-Transfer Agent Fee (Sub-TA) is negotiated between the fund family and the custodian (typically the recordkeeper as well). This number differs from trading platform to platform depending on how those negotiations go. Fidelity has "most favored nation" status with fund families so that means on a plan recordkept by Fidelity, they will get an equal amount of Sub-TA or possibly more than Nationwide would get for the same fund. This number is actually proprietary and only disclosed to plan sponsors & industry professionals, never participants. This distinction will be important later.
My opinion on revenue sharing is that it is wholly unnecessary in this day and age. If your plan is over $1MM there are numerous great plan providers that will allow you to have a zero net revenue sharing plan. All it does is serve to obfuscate costs and prevent folks like me from negotiating with recordkeepers to drop their costs. Basically you cannot negotiate the costs of mutual funds. The American Funds Growth Fund of America A Share (AGTHX) will always cost .71%. They won't change that for you ever. Now, if you have the American Funds Growth Fund of America R6 Share Class (RGAGX) at .34%, I can negotiate and determine whether or not I want to pay the recordkeeper & admin the full revenue sharing amount of .37%, or maybe they just deserve .30%. There's flexibility. There's also transparency because now the recordkeeper & admin has to tell me exactly how much they're charging me. If they charge .30% they can still bill it to the participant assets so the company's bottom line is unaffected. However, by negotiation you save 7 bps, with the possibility of more as the plan grows. Anyone who tells you revenue sharing is needed is either misinformed or a vested interest in saying so. The way of the future is no revshare. Everyone has to get paid for their services, but not as much and it should be transparent.
Now to Vanguard, the .10% revenue sharing referenced in the article is a special type of revenue sharing called "Internal Revenue Sharing" that only applies to their branded platform. Basically the 401(k) plan that you get from Vanguard at $5MM is exactly the same as the one you get from Ascensus at $5MM. The only difference (besides Vanguard being $750 more) is that Vanguard gives a .10% discount on their Investor Share classes only. This is roughly the difference between the Investor class and Admiral or Institutional share classes. However, you can't get other share classes for certain Vanguard funds like the LifeStrategy asset allocation funds. Basically for their platform only, they are allowing you to get institutional pricing for certain funds where you can't anywhere else. It's a discount on a fund we typically think of as having no revenue sharing because it doesn't anywhere else in the industry. It's what we call a "proprietary fund incentive" rather than a requirement. Vanguard is very up front about this .10% number and they refund revenue sharing from other non-Vanguard funds.
Corrections: Third Party Administrators are typically local firms that only do a small part of the role of what we call a "bundled provider". The custodian/RK is the one who negotiates what the revenue sharing with the fund company is. Then they determine how much of a cut they will pass on to the TPA. If revenue sharing is refundable, that's a call made by the custodian/RK
Majormajor78 - You are incorrect in thinking that the plan provider has a fiduciary duty to the plan (except in the limited scope if they custody the assets). Even if they provide incentives or try to sell them, the plan sponsor is ultimately responsible for fund selection. Every court case so far has found that plan providers are not fiduciaries. Many of their contracts explicitly state it. You are correct in recognizing the conflict of interest, but current law holds plan sponsors accountable. Unfair but true.
Disclosure: I work within the retirement plan industry and over just the past year have analyzed more plans than almost anyone in the nation. I am an Investment Advisor Representative of a fee-only Registered Investment Advisory firm and receive no compensation from plan providers nor investment companies. This post is for education purposes only and should in no way be considered investment advice or a solicitation of business.
Last edited by Beelzebozo
on Sun Mar 24, 2013 9:46 pm, edited 1 time in total.