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When Investing Meets Revenue Sharing Part 2 Print E-mail
Written by Marshall Cobb   
Tuesday, 05 February 2008 10:00

Part I of this article discussed how investment expenses affect individual accounts and mutual funds. Now, let's take a look at the affect of those same fees on participants and sponsors of 401(k) plans.

For the sake of this discussion, let's assume I participate in Employer XYZ's 401(k) Plan through Recordkeeper EFG. I pay no fees for the account (at least that I see on the statement), and am delighted by the fact that Bond Fund Class A (the same fund I use in my personal IRA) is also one of the options available under the 401(k) Plan. Unlike when I purchase Bond Fund Class A in my personal account, I pay no upfront fees/commissions when I purchase Bond Fund Class A in my 401(k) with my salary deferral. Moreover, using the same prospectus provided by Firm ABC, I can verify that the operating expenses for Fund A are exactly the same under the 401(k): 1%.

What I probably don't realize is that the allocation of that 1% is very different under the 401(k) plan. Please look at our revised chart.

revenue_sharing_2

The total is still 1%, but now it appears that all of the 12b-1 Servicing Fees and half of the "Other Operating Expenses" are being paid to Recordkeeper EFG.

Who is Recordkeeper EFG? You may not have thought about it before, but Recordkeeper EFG is the firm that provides the quarterly statements for the 401(k) plan, and they also run the website and call center for the plan so I can review my investments and make changes to my account.

Maybe I already knew that, but I'm not sure why nearly half the money previously paid solely to Firm ABC to run Bond Fund Class A is now going to Recordkeeper EFG.

There are actually two reasons. First, Firm ABC, who offers Bond Fund Class A, doesn't have to keep track of me as an individual if I buy Bond Fund Class A within the 401(k) plan. Instead, Recordkeeper EFG now has to keep track of my account, my statements and my information. Because of this, Firm ABC has volunteered to "share" some of the revenue it receives with Recordkeeper EFG (after all, Recordkeeper EFG is the company doing this particular work).

A second, more subtle, reason for this transfer in revenue - including the significant transfer of all of the 12b-1 fees generated by my investment - is that Recordkeeper EFG only works with funds that provide revenue sharing. If Firm ABC refused to share this revenue, Recordkeeper EFG might not make it available to companies like my employer.

Why should Recordkeeper EFG care? After all, they could always bill my employer for the work they are providing - right?

That's true, but it's not the way the 401(k) industry works. Recordkeeping companies have typically marketed their products assuming that some, or all, of their fees would be paid by the revenue sharing from the funds within their client's plans.  It's for this reason that I, as a participant, and my employer, as the sponsor, of the 401(k) plan have potentially never paid an account/plan fee - at least directly.

Some would argue that this arrangement is meaningless to me as a participant in the Plan. After all, I'm paying the same 1% for the fund operating expense either way. In my particular case, I'm also saving the fees related to the commission on each additional purchase.

That's true, but it misses the larger point. The menu of funds available for selection within a 401(k) plan is often driven first-and-foremost by whether or not the fund provides revenue sharing for the recordkeeper. Many excellent funds, especially low-cost index funds, never appear as an option within a 401(k) plan for the simple fact that they don't share revenue (this is particularly true for index funds because they typically start out with such low expenses that there is little/no room to "share" revenue).

For additional information on this Newsletter article, please contact:

CAPTRUST Financial Advisors
(713) 660-9605
Email:  This e-mail address is being protected from spambots. You need JavaScript enabled to view it


All Publication Rights Reserved. None of the material in this publication may be reproduced in any form without the express written permission of CAPTRUST: 919.870.6822.

© 2012 CAPTRUST Financial Advisors

The opinions expressed in this report are subject to change without notice. This material has been prepared or is distributed solely for informational purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. The information and statistics in this report are from sources believed to be reliable, but are not warranted by CAPTRUST Financial Advisors to be accurate or complete. Performance data depicts historical performance and is not meant to predict future results. CAPTRUST Financial Advisors, Member FINRA/SIPC.


 

 

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