Why do so many people think their 401k plan is free? The reason stems from a practice called revenue sharing. Revenue sharing refers to indirect compensation paid to plan service providers from investment balances and can be referred to as 12b-1 fees, sub-transfer agency fees, shareholder servicing fees, or indirect payments.
It is hard to identify which provider receives these payments because there is no transaction history or accounting shown on statements. Instead, employers need to read pages of disclosures and regulatory filings to identify the true cost of their plan services.
Recently, regulators are questioning the entire practice of revenue sharing and the associated conflicts of interest caused by these ‘hidden’ fees. Christopher Carosa from Fiduciary News decided to poll financial professionals to get their thoughts on this practice and what the future may hold.
The general consensus is that including revenue sharing in a plan lineup increases liability for an employer since they need to monitor these fees for reasonableness. Most advisors feel that regulators have a tough road ahead given the strong industry opposition; however, they also note that advancements in technology and increased education for plan sponsors will pave the way for a more transparent compensation model in the future.
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