Fiduciary

Under the Employee Retirement Income Security Act of 1974 (ERISA), all expenses paid by a qualified retirement plan shall be reasonable. What is reasonable depends upon all the current facts and circumstances and should be within a range of what plans of its size pay for similar type products and services taking into consideration the quality of such services.

There has been much discussion and litigation related to the expenses associated with investment options being used in retirement plan lineups. As plan investment costs continue to be a highly litigated area, many have speculated that the use of revenue sharing within plans will be eliminated. The basis of this theory is two-fold: (1) most share classes of funds that have revenue sharing built into their expense ratio are more expensive than those offering little or no revenue sharing; and (2) “zero revenue sharing” classes (such as an R6 share class) have more than tripled in assets since 2011.[1] But, is moving toward the use of only “zero revenue sharing” share classes for a retirement plan really fulfilling a plan sponsors’ fiduciary duty to the plan and its participants?

To answer this question, let’s explore the true investment management costs of a given fund after taking out the available revenue sharing built into the fund.[2] When doing so we get what is often referred to as “net investment cost.”[3] Our research has shown that many funds with revenue sharing have lower net investment costs than their “zero revenue sharing” counterparts, illustrated in the table below.

Current Investment Lineup

REVENUE SHARING

“ZERO REVENUE SHARING”

Exp Ratio %

Rev Share %

Net Investment
Cost %

Exp Ratio %

Rev Share %

Investment Cost Differential %

Fund 1

1.01

0.4

0.61

0.64

0

0.03

Fund 2

0.83

0.5

0.33

0.44

0

0.11

Fund 3

0.85

0.5

0.35

0.35

0

0.00

Fund 4

0.79

0.35

0.44

0.67

0

0.23

Fund 5

0.78

0.15

0.63

0.63

0

0.00

Fund 6

1.17

0.5

0.67

0.67

0

0.00

Fund 7

0.9

0.1

0.8

0.77

0

(0.03)

Fund 8

1.18

0.5

0.68

0.72

0

0.04

Fund 9

0.85

0.5

0.35

0.47

0

0.12

Fund 10

0.83

0.5

0.33

0.46

0

0.13

Fund 11

0.85

0.5

0.35

0.53

0

0.18


Based on the above analysis, in certain cases there may be no or minimal difference in the “net investment cost” as is the case with Funds 3, 5 and 6. In other instances, the differences can become more material, particularly as the plan grows in assets, which can be demonstrated in Funds 2, 4, 9, 10 and 11. In only one case (Fund 7) did the “zero revenue sharing” fund have a lower “net investment cost.”

Therefore, simply using a “zero revenue sharing” fund lineup could have participants paying more in investment expenses. Consequently, we believe simply choosing a zero revenue sharing fund lineup without additional considerations does not fulfill a fiduciary’s duty to the plan and its participants.

For more on this matter, feel free to contact us.


[1] “The Rise of Zero Revenue Share Funds,” PLANADVISER, November/December 2016.

[2] This article is making the important assumption that all revenue sharing being generated by the plan is going to offset dollar for dollar reasonable expenses of the plan.

[3] Fred Reish has also written various articles on the topic of “net investment cost.” See “Fiduciary Challenges For Evaluating Plan Fees: Investment Expenses and Revenue Sharing,” Fred Reish and Bruce Ashton, April 2015.