Revenue Sharing is becoming the 401(k) Leisure Suit

by Ary Rosenbaum
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When I was a child, I remember bringing the soundtrack to Saturday Night Fever for my first grade class’ Chanukah party (I went to a Jewish day school). To this day, I still don’t how to operate a record player. Around the same time, my Uncle’s Cadillac had an 8-track tape cassette. A few years later, I had a JVC boom box with a cassette player. If you go to a music store (if you can find one), you won’t find much room for LPs, cassettes, and 8 tracks.

When I entered the 401(k) plan business, revenue sharing was all the rage. It was supposed to help plan sponsors reduce plan expenses by using revenue sharing funds. It looked good on paper until the fight for fee disclosure began and plan sponsors (many through litigation by aggrieved plan participants) learned that revenue sharing was nothing more than a shell game because the revenue sharing was only provided because the funds that paid revenue sharing were more expensive than those who don’t.

Much like LPs were replaced by cassettes; which were replaced by Compact Discs; which were replaced by MP3s, revenue sharing is being replaced by fee transparency, which makes clear what third party administrators receive from direct and indirect sources (revenue sharing). Litigation has proven that revenue sharing is too costly because litigation is looking more at fiduciary responsibility and making sure that investment selections weren’t just predicated on the fact that these investment options were selected because they pay revenue sharing.

Leisure suits were once in style and while people claim style is cyclical, leisure suits never made a comeback. Revenue sharing is becomes a lot like a leisure suit, it’s not going to come back in style and most plan sponsors and their plan providers are going to touch it with a 10 foot pole.

 

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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