Rethinking Revenue Sharing

While revenue sharing may be a legitimate way to pay for the costs of operating a plan, both US courts and the Department of Labor (DOL) have made it clear that plan sponsors have a significant responsibility as fiduciaries to fully understand, evaluate and monitor their revenue-sharing arrangements and determine whether they are reasonable. Therefore, the most prudent response for plan sponsors may be to rethink the practice of revenue sharing altogether.

Although regulatory scrutiny is increasing, a September 2013 study from NEPC indicates that the percentage of large plans using revenue-sharing-based fee compensation or fee structures has declined over the past few years. Of those plans that continue to employ revenue sharing, their revenue-sharing rates are going down.

How should plan administration costs be paid? Is revenue sharing an appropriate way to pay for costs? Resolving these issues requires further consideration from all parties involved: retirement services providers, recordkeepers, plan sponsors, advisors, consultants and the government.

There’s no dispute over whether or not revenue sharing is legal; recent court decisions have reaffirmed that it is. But as certain revenue-sharing arrangements may contain potential inequities, plan fiduciaries and their advisors have expressed increasing interest in mutual fund share classes that don’t use any revenue sharing.

These share classes go by various names, depending on the fund complex. For example, some call their non-revenue-sharing classes “Class Z,” while others use “R-6.” Typically, non-revenue-sharing classes have a net expense ratio that’s lower than the other share classes of a particular fund. Another way to eliminate issues surrounding revenue sharing is to use collective investment trusts (CITs) as the underlying investment vehicles instead of mutual funds. CITs typically don’t engage in revenue sharing and are usually less expensive than mutual funds because they have lower compliance, marketing and administrative costs.

Advisors and consultants can help DC plan sponsors move toward greater fee transparency by opening up a dialogue with them about incorporating non-revenue-sharing classes or CITs into their investment menus. The bottom line for plan fiduciaries is to make an informed decision. Get enough information to think the issue through, work with the plan’s advisors or consultants, make a decision and document it. That is how plan sponsors—as fiduciaries—can do the right thing for their plan participants and protect themselves at the same time.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Richard A. Davies

Senior Managing Director, Global Head—Defined Contribution and Multi-Asset Business Development
Richard A. Davies is Senior Managing Director and Global Head of Defined Contribution, responsible for the overall leadership and strategic direction of AB’s global defined contribution and multi-asset businesses. He previously served as co-head of Institutions for the firm’s North America Client Group, while leading its US defined contribution activities. Davies rejoined AB in 2013 after spending several years leading Russell Investments’ institutional defined contribution business. During his earlier, 16-year career with AB, he led the firm’s institutional defined contribution, sub-advisory, and retail retirement and college savings businesses. Davies also served as head of global marketing and product management and led several business lines and distribution channels for the mutual funds group. He joined the firm in 1995 from First Chicago Corporation, where he served as president of retail investment services and was a managing director of First Chicago Investment Management Company. Prior to joining First Chicago in 1989, Davies was a strategy consultant and manager with The Boston Consulting Group. He worked in brand management for Procter & Gamble before attending graduate school. Davies holds a BA in economics, with honors, from the University of Wisconsin, Madison, and an MBA from Harvard Business School. He chairs the Advisory Board of the University of Wisconsin’s economics department. Davies is a Trustee of the Employee Benefit Research Institute and was a founder of the Defined Contribution Institutional Investment Association. Location: New York

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