The Advantages of Zero Revenue Share Funds

What is a Revenue-Sharing Fee?

Revenue-sharing is common in the investment industry, where mutual fund companies pay a portion of their management fees to the brokerage firms that sell their funds. However, one option that has gained popularity recently is using zero revenue-share funds. These funds, also known as "clean shares," do not charge revenue-sharing or 12b-1 fees, which can result in lower costs for plan participants. However, before we get into the advantages of zero revenue-sharing funds, let's go over fund fees in general.

Understanding Revenue-Sharing Fees in a Fund

People need to realize there can be different share classes for the same fund. These share classes come with different fee schedules. Below is an example of how fees can impact the overall cost of a fund.

Example of how revenue-sharing funds can impact the overall fees.

In this example, the total cost paid for the fund is the "Expense Ratio." The "Net Investment Expense" is the expense without revenue-sharing cost.

Remember that every fund has its list of expenses; this is an example of what different share classes might look like. Here is a link to the FINRA Fund Analyzer tool. This tool allows you to look at the other share classes of a given fund.

Advantages of Using Zero Revenue-Share Funds

Now that we have gone over the context of revenue-sharing fees let's review some advantages of using zero revenue-share funds in a 401(k) plan.

Lower Costs for Plan Participants

The primary advantage of zero revenue-share funds is that they can result in lower costs for plan participants. With these funds, a portion of the management fees the fund pays goes to the broker-dealer or recordkeeper offering the plan.

This setup can result in higher costs for plan participants, as they are essentially paying for the services of the broker-dealer or recordkeeper through the fees charged by the fund. With zero revenue-share funds, no 12b-1 fees are charged, which can result in lower costs for plan participants.

Here is an example of how fees impact the overall outcome of plan participants.

Example of the difference fees can make in a participant’s investment account.

In the example above, we use the costs shown in the share class example from the first section of this blog post. The R1 share class has a fee of 1.39%, with 1% for revenue-sharing. The R6 share class has a cost of 0.30% with no revenue-sharing. If a $10,000 hypothetical investment were made with a 5% growth each year over ten years, the lower-cost share class of the same investment would be worth $1,633 more than the other share class.

The difference in overall account value would be more pronounced if the same example went on for 20 years. For example, this hypothetical would give the R1 account a value of $20,094 compared to an R6 share class with an account value of $24,988.

Greater Transparency

Zero revenue-share funds also offer greater transparency than revenue-sharing funds. Because there are no revenue-sharing fees or 12b-1 fees charged, the costs associated with the fund are clearly stated in the fund's prospectus and other documentation. This transparency makes it easier for plan sponsors and participants to understand the cost of the plan investments and make more informed investment decisions.

Avoiding Conflicts of Interest

Using zero revenue-share funds helps avoid potential conflicts of interest. Mutual fund company may pay a portion of its management fees to the broker-dealer or recordkeeper that sells the fund. This fee may incentivize the broker-dealer or recordkeeper to recommend these types of funds, even if it is not the best option for the plan participants. There is no such incentive with zero revenue-share funds, and the plan sponsor and advisor can choose the best investment options based solely on merit.

Flexible Investment Options

Zero revenue-share funds can offer flexibility in terms of investment options. With revenue-sharing funds, investment options may be limited by the arrangements in place. With zero revenue-share funds, there are no such limitations, and plan sponsors and advisors can choose from a broader range of investment options that meet the specific needs of the plan participants.

Keep in mind that investment option flexibility can go both ways. For example, some options are only available with revenue-sharing and vice versa.

Reduced Fiduciary Liability

Using zero revenue-share funds can also help to reduce fiduciary liability for plan sponsors. By using funds that do not charge 12b-1 fees, plan sponsors can demonstrate that they are acting in the best interests of the plan participants and are not influenced by any conflicts of interest that may arise from revenue-sharing arrangements.

Process

Remember that the process is often just as necessary as the outcome. In other words, looking for zero revenue-sharing funds is one of many things to improve 401(k) participant outcomes. But, more importantly, plan fiduciaries should create systems to review and improve participant outcomes consistently.

An excellent place to start is by reviewing all aspects of your 401(k) plan investments and seeing if there are revenue-sharing arrangements. While examining these fees, it is a great time to review all other investment costs to see if your investments have lower-costing asset classes.  

Conclusion

Zero revenue-share funds offer several advantages for 401(k) plans, including lower costs for plan participants, greater transparency, no conflicts of interest, flexible investment options, reduced fiduciary liability, and improved investment performance. As such, plan sponsors should consider these funds when selecting investments. In addition, they should carefully evaluate the costs and benefits of using revenue-sharing versus zero revenue-share funds. As a result, plan sponsors can help ensure their employees are well-prepared for retirement by choosing the best investment options for their plan participants.

Please set up a consultation if you need help reviewing your 401(k) plan. We can help you check fund fees. Though CUI Wealth Management is in Salt Lake City, Utah, we serve clients in many states. Please see the website footer for a complete list of states we serve.