Friends that I have in the industry say that I’m too hard on the revenue sharing practice in 401(k) plans and that I should keep in mind that this practice saves participants money because they typically are the ones who pay for the administration of their 401(k) plans. Without revenue sharing, my friends state that plan participants would lose more of their account balance to fees.

The problem with that argument is that there is a hidden cost with the selection of revenue sharing producing funds which negates their savings. The hidden cost is the actual selection of these revenue sharing producing funds. The hidden costs may be increased mutual fund fees, poor performance, and increased liability for the plan sponsor. There is a price to pay for the selection of mutual funds that slip a couple dollars back to the third party administration firm.