Industry Voices

(b)est Practices: What Do You Know About Revenue Sharing?

June 6, 2014 (PLANSPONSOR.com) – What do you know about revenue sharing? If your answer is anything other than, “a lot”, it’s really important that you read on.

By PS | June 06, 2014
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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.

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