Commissions? Kickbacks? Revenue-sharing? 12b-1 fees? Whatever you name them, 401(k) revenue sharing has come into focus for small and medium-sized retirement plans. If you’re an administrator or have any level of fiduciary oversight on your plan, then this blog post is for you.

What is 401(k) revenue sharing?

Revenue sharing is a type of payment that is paid out to 401(k) advisors and brokers. While it’s a payment that may be in addition to the investment advisory fee, it’s included in the expense ratio of your funds.

Unfortunately, this sharing of fees means that they often go unnoticed, or are treated as an unavoidable component of the fund fee. This is not the case, and you can take action – ForUsAll is here to show you how.

What’s the impact of 12b-1 fees on my employees?

Ultimately, the dollars will come from your participants in the form of higher fund fees paid to the fund manager, who then pays the advisor/broker directly. Revenue sharing’s reductive effect on your employee’s retirement is immediate, and the higher fees will lead to a staggering impact at retirement.

The financial wellness website NerdWallet looked at the impact of fees on the value of a young saver’s retirement account. In their analysis, “a millennial with the option of investing in either of two commonly held funds can save nearly $215,000 in fees — and, through the magic of compounding, retire nearly $533,000 richer — by choosing the one with fees that are 0.93% lower.”

What about the consequences for the retirement plan sponsor?

With the rise in popularity of index funds with much lower expense ratios, a lot more scrutiny is being placed on whether plan sponsors are fulfilling their fiduciary obligations by recommending high-cost revenue sharing funds to their employees.

The DoL has taken notice and has made it a key requirement of the fiduciary to actively assess and ensure that their fees, whether direct or indirect, are reasonable.

And, perhaps even worse, the litigators have taken notice and are becoming active in targeting plan sponsors who allow ‘excessive’ fees in their 401(k)s. You can track 12b-1 related litigation on the Coalition of Mutual Fund Investor’s website.

401(k) Revenue Sharing, Fiduciaries vs. Brokers

In light of these potentially confusing revenue sharing relationships, a plan sponsor might want to find out if their 401(k) professional is acting as a fiduciary or a commissioned broker. My colleague has written a lot about how to tell if you’ve hired an investment fiduciary or just a broker, which you can read here. Understanding if your 401(k) advisor is actually an advisor or simply a broker commissioned to sell investment (or insurance) products will help you decide whether your advisor is truly acting in your best interest.