401(k) - What's your opinion on revenue sharing?

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401(k) - What's your opinion on revenue sharing?

Postby fcirullo » Mon Mar 04, 2013 9:13 am

What's your opinion on revenue sharing?
Is it a good thing or a bad thing for the plan sponsor (employer)?
Is it a good thing or a bad thing for the participant (employee)?

Links to wiki articles:
Setting up a 401(k) plan
Mutual Funds and Fees

Note: Revenue sharing is money that plan providers receive from many of the 401(k) plan's mutual funds. Typically, the Third Party Administrator (TPA) will decide how the fees that are paid to them by the mutual funds will be used. For instance, the TPA can decide to give certain fees back to the plan participants who paid it. Or the TPA can use the fees to help lower the cost that the employer pays for the 401(k) plan. Fiduciaries should consider the consequences of failing to disclose how revenue sharing is used.
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Re: 401(k) - What's your opinion on revenue sharing?

Postby MN Finance » Mon Mar 04, 2013 12:51 pm

I don't think that there's much choice. If there isn't a revenue sharing agreement, then the TPA will need to either 1) limit investment choices to their funds only, or 2) bill the plan or participants to cover their costs. #1 means more limited investment choices. #2 is more transparent, but often irritates the investors. Typically, if the plan is forced to include low lost options like VG (who doesn't revenue share) then the lack of revenue presented by using those funds, means in aggregate the plan will recover those costs from other investors. As such, someone who chooses the non-revenue shared or proprietary funds may have a lower all in investment cost which is supported by the other, less informed investors. I don't know if this is good or bad overall.
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Re: 401(k) - What's your opinion on revenue sharing?

Postby krayzbone227 » Mon Mar 04, 2013 3:18 pm

MN Finance wrote:I don't think that there's much choice. If there isn't a revenue sharing agreement, then the TPA will need to either 1) limit investment choices to their funds only, or 2) bill the plan or participants to cover their costs. #1 means more limited investment choices. #2 is more transparent, but often irritates the investors. Typically, if the plan is forced to include low lost options like VG (who doesn't revenue share) then the lack of revenue presented by using those funds, means in aggregate the plan will recover those costs from other investors. As such, someone who chooses the non-revenue shared or proprietary funds may have a lower all in investment cost which is supported by the other, less informed investors. I don't know if this is good or bad overall.


FYI, open this article then Control + F "revenue sharing" re: Vanguard. They do use Revenue Sharing. http://fiduciarynews.com/2012/02/due-di ... d-reviews/

The point being...it may make sense for some employers to consider something like going through Scottrade for SIMPLEs where they can offer up the same exact investment options but at direct costs. Furthermore, a giant concern here is the Fiduciary risk as it pertains to the employer. He can be held liable whether or not he's even aware of all the fees, as Revenue Sharing specifics are still not required to be disclosed. If he went with SIMPLEs, that goes out the window. Of course there are limitations to SIMPLE's, but that's not the point of this, as "limitations" don't apply to all cases.
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Re: 401(k) - What's your opinion on revenue sharing?

Postby LadyGeek » Mon Mar 04, 2013 4:59 pm

This thread is now in the Personal Finance (Not Investing) forum (401(k)).
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Re: 401(k) - What's your opinion on revenue sharing?

Postby MN Finance » Mon Mar 04, 2013 6:33 pm

Interesting article. When I said revenue share I was referring to VG funds being offered on other plans, not the reverse. The question is really who pays for administering the 10,000 accounts. There's a cost to that; and it won't be paid for by the ERs of low cost index funds
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Re: 401(k) - What's your opinion on revenue sharing?

Postby Majormajor78 » Mon Mar 04, 2013 8:56 pm

I've always felt that it creates a conflict of interest and am a little suprised that it does not create ERISA violations more often. The firm has a fiduciary duty to operate the plan in the interest of the participants and then they accept revenue sharing which essentially amounts to kick-backs for offering funds that more typically more expensive. Personally I thinks the participarnt should either be charged a modest administrative fee for the plan or the business should eat the cost of the plan themselves (my wife's plan does this).
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Re: 401(k) - What's your opinion on revenue sharing?

Postby fcirullo » Tue Mar 05, 2013 11:07 am

The wiki article, Setting up a 401(k) plan , now has a link to this thread. You can find the link under Under Forum Discussions.

Note: The idea of the wiki article is to show employers how to set up, manage, and monitor a truly low cost 401(k) plan. But the idea is also to show employees what a low cost plan really looks like so that they can communicate to their employer ideas on how to improve their current 401(k) plan. Your Input Is Greatly Appreciated!
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Re: 401(k) - What's your opinion on revenue sharing?

Postby Beelzebozo » Sun Mar 24, 2013 6:03 am

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 8:46 pm, edited 1 time in total.
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Re: 401(k) - What's your opinion on revenue sharing?

Postby tj » Sun Mar 24, 2013 11:24 am

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.


The Acscensus plans do have the 10bps discount for investor share classes.
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Re: 401(k) - What's your opinion on revenue sharing?

Postby Beelzebozo » Sun Mar 24, 2013 6:30 pm

Are you referring to Vanguard's branded product which they hire Ascensus to run or to Ascensus's direct-sold product? The former does offer the 10bps but I'm pretty sure the latter does not.

Disclosure: I work within the retirement plan industry and over just the past year have analyzed more plans that 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.
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Re: 401(k) - What's your opinion on revenue sharing?

Postby tj » Sun Mar 24, 2013 6:32 pm

Beelzebozo wrote:Are you referring to Vanguard's branded product which they hire Ascensus to run or to Ascensus's direct-sold product? The former does offer the 10bps but I'm pretty sure the latter does not.

Disclosure: I work within the retirement plan industry and over just the past year have analyzed more plans that 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.


The former.
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Help from a knowledgeable Boglehead.

Postby Taylor Larimore » Sun Mar 24, 2013 6:37 pm

Beelzebozo:

Thank you for sharing your knowledge and expertise on the subject of Revenue Sharing.

Best wishes.
Taylor
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Re: 401(k) - What's your opinion on revenue sharing?

Postby fcirullo » Mon Mar 25, 2013 8:58 pm

Beelzebozo wrote:My opinion on revenue sharing is that it is wholly unnecessary in this day and age.

I have read your posts on 401(k) and 403(b) plans and appreciate your input. Your ideas will be helpful to anyone who wants a better 401(k) or 403(b) plan. Thank you, Beelzebozo!

Best wishes,

Frank R. Cirullo
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