Many 401(k) plans are moving away from revenue sharing as executives cite the need for greater transparency, simplicity and democracy in how fees are assessed to participants.
Defined contribution plan consultants say federal fee regulations enacted in 2012 prompted executives to review plan practices for greater transparency.
"The revenue sharing is embedded in the expense ratio, but participants may not know this," said Jamie McAllister, Chicago-based senior vice president at Callan LLC. "There's also a question of the fairness of the fees," she added. "Some (investment) funds may have revenue sharing and some don't within the same plan."
Among her clients, sponsors want to drop or revise their revenue-sharing arrangements — the practice by which revenue from plan assets is the primary source of paying record-keeping fees. "They don't want to add to them," Ms. McAllister said.
Annual surveys by Callan show a steady decline in the use of revenue sharing — to 27.4% of plans last year from 66.6% in 2012. These figures cover plans solely using revenue sharing as well as plans using a combination of revenue sharing and "out-of-pocket" expenses — defined by Callan as an explicit fee, either per person or based on assets, paid by the participant. The percentage of revenue sharing-only plans was 14.2% last year vs. 36.2% in 2012.
Democracy and simplicity go hand in hand with transparency, experts say, as more plans decide that a per-head fee is fairer than the revenue-sharing practices in which fees are based on assets.
The Callan survey showed that 54.7% of plans used a per-participant fee last year to pay for plan administration vs. 41.6% in 2016. The survey contained responses from 152 sponsors — 64.5% of which were 401(k) plans; 21.7% were 457 plans; and the rest were profit-sharing, 403(b) or 401(a) plans. A survey published Feb. 26 by Willis Towers Watson PLC found 41% of plans used a fixed-dollar amount per participant for record-keeping fees vs. 32% in 2014 when the previous survey was conducted. Of the 349 plans surveyed, 91% were 401(k) plans and 9% were 403(b) plans.