Double Edged Sword of 401(k) Revenue Sharing Fees

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The following is an article written by an independent law firm discussing the current practice of revenue
sharing. We have also included our comments regarding this article as well as the author's response to our

By: Ary Rosenbaum

Payola, is the illegal practice of payment by record companies for the broadcast of recordings on music
radio, in which the song is presented as being part of the normal day’s broadcast. A kickback is a return
of a part of a sum received often because of confidential agreement or coercion. In the 401(k) industry,
revenue sharing... Read the entire article here.

Alliance's Comments

November 5th – From LinkedIn

50 people each invest $3,000 in fund ABC which has an expense ratio of 0.80%. Fund ABC is required to process
deposits, send out statements, and provide web access, individually for 50 people. Fund ABC’s earnings for managing
the fund and providing these services are $1,200.

50 other people, participating in an Open Architecture 401(k)tm plan invest $3,000 in Fund ABC. Fund ABC has one
omnibus account with the custodian, receives one deposit electronically for the 50 people and has no need to provide
statements or web access to any of the participants as this is all done by the record keeper. Fund ABC’s earnings for
managing the fund and providing these reduced services are $1,200.

Since the second model is more profitable Fund ABC elects to share some of their revenue with Record keeper who is
lowering the overall cost of providing services and is bearing the burden for these services. This makes perfect sense if;

  • This is disclosed to the participant and the plan
  • The record keeper is NOT the investment advisor
  • The funds have not increased their expense ratios (as many have with different share classes) to just create
  • revenue to pay “Payola”
  • This is why my firm has steadfastly refused to be in the investment business which would present an opportunity
  • for conflict that is too difficult to explain or resolve.

It conversely may be argued that funds that allow omnibus accounts and benefit from the assistance of a record keeper
to lower their costs without sharing some of their revenue, are improperly enriching themselves.

The problem isn’t with revenue sharing; it is with the conflicted model of Independent record keepers also advising on
which funds to use. It is like having your auto mechanic also be the parts manufacturer. How many “repairs” do you
think would be done on your car vs. replaced parts?

Mr. Rosenbaum's Response

Your points are great, especially on producing TPAs and the inherent conflict that is always there.
Revenue sharing is an issue for me if better funds with lower expense ratios are shunned for revenue sharing funds

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