Almost all retirement plans participate in some form of
revenue sharing, so don’t think this doesn’t apply to you. Without a good understanding of the revenue
sharing taking place in your plan, you cannot possibly be fulfilling all of
your fiduciary obligations.
Revenue sharing is the secret
sauce that makes plan economics work.
Technically, thanks to the recent 408(b)(2) fee disclosure regulations,
it’s not really secret anymore, but to the average plan sponsor, it might as
well be. The dots are disclosed, but they
can be very hard to connect. You need to
spend some time to get up to speed on this topic.
The retirement plan industry is loaded with jargon, which
can frustrate a well-intentioned employer.
But, since the jargon is there, you either need to learn it or hire an
expert to help you. What do you know
about 12b-1 or sub-TA? They are at the
heart of revenue sharing, so let’s take a look at each.
12b-1 fees, a/k/a
“trails” or “service fees” are monies paid by fund companies to broker-dealers
to service the funds’ clients. They are
often expressed as a number of “basis points”, or one-hundredths of a percent. 12b-1 fees are part of a fund’s expense
ratio. For example, if the XYZ Growth
fund’s expense ratio (annual operating expenses) is 1.00% and it pays a 12b-1
fee of 0.25% (25 basis points), that means 0.75% of the fund’s assets go toward
other expenses annually.
Traditionally, 12b-1 fees have been sent to the
broker of record on an account, and although disclosed in the fund’s
prospectus, the investor never sees them.
It’s a way for the broker to get paid for the time and responsibility
they incur over the year watching over the client’s account. It’s a legitimate form of compensation in the
context of individual investment accounts.