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Why Revenue Sharing Isn't Ideal for 401(k) Plan Participants: An Important Consideration

April 08, 2024

In the realm of 401(k) plan management, plan sponsors bear the weighty responsibility of making decisions that profoundly impact the financial futures of their employees.

Among the myriad decisions to be made, one crucial consideration stands out: whether to incorporate revenue sharing into the plan's investment options.

While revenue sharing may seem advantageous at first glance, its implications often reveal significant drawbacks that can adversely affect plan participants.

Let's delve deeper into why revenue sharing isn't a favorable practice for 401(k) plan participants and why it's imperative for plan sponsors to take this into account:

  1. Opaque Fee Structures: Revenue sharing arrangements often result in opaque fee structures, wherein the true costs of investment options remain obscured from plan participants. This lack of transparency makes it challenging for participants to grasp and compare the fees associated with different investment choices accurately.

  2. Conflicts of Interest: Implementing revenue sharing arrangements can engender conflicts of interest for both plan sponsors and service providers. Service providers may prioritize recommending investment options that yield revenue sharing payments over those that genuinely serve the best interests of plan participants.

    Consequently, this conflict undermines the fiduciary duty of plan sponsors to act solely in the best interests of their employees.

  3. Potential for Higher Costs: Revenue sharing arrangements have the potential to inflate overall costs for plan participants. These costs are often passed on to participants through elevated expense ratios or additional administrative fees, thereby diminishing the returns on their investments over time.

  4. Inequitable Fee Allocation: The structure of revenue sharing arrangements may result in an inequitable allocation of fees, with participants investing in certain funds unwittingly subsidizing the costs incurred by other participants.

    This lack of fairness can erode trust and satisfaction among plan participants, ultimately undermining the effectiveness of the plan.

  5. Regulatory Scrutiny: In recent years, revenue sharing arrangements have increasingly come under regulatory scrutiny, with regulators expressing concerns about potential conflicts of interest and their impact on plan participants.

    Plan sponsors may find themselves subject to legal and reputational risks by maintaining revenue sharing arrangements that fail to prioritize the best interests of participants.

Given these multifaceted challenges, plan sponsors are urged to exercise prudence and discernment when evaluating the inclusion of revenue sharing within their 401(k) plans.

Exploring alternative fee structures that prioritize transparency, fairness, and alignment with the best interests of plan participants is paramount. By doing so, plan sponsors can fulfill their fiduciary duty and cultivate a retirement savings plan that maximizes the long-term financial security of their employees.