Interesting study in the Journal of Management Science in mid-October, examining the impact of revenue sharing arrangements in defined contribution plans. Not surprisingly investments that offered revenue sharing were less likely to be removed from a plan's investment menu and more likely to be added.
TLDR: If I could say one thing to my fellow 401k advisors, it would be to "Do right by your client always". And if I could say one thing to plan sponsors, it would be to "Make sure your defendable and repeatable investment selection process ensures the investments offered are made available in the lowest fee/ share class possible". Typically these share classes are I-class (I for institutional) or R6-share class.
The long version of my thoughts?
Key Takeaways
- A research study (2009–2013 data, the largest 1,000 DC plans) found that funds that pay revenue-sharing (i.e., indirect compensation to service providers/record keepers) are less likely to be removed from plan menus, and more likely to be added, than funds that don’t pay revenue-sharing — even when performance and other metrics are accounted for.
- Specifically: the deletion rate averaged ~20% for revenue-sharing funds vs. ~28% for non-revenue-sharing funds.
- Addition rate: funds that tend to revenue-share averaged ~0.16% additions while non-revenue-sharing funds averaged ~0.08%.
- The article links this pattern to structural dynamics: record keepers often control the platform, create/influence the investment menu, and may benefit from rebates (which are paid via revenue sharing). Thus the incentive structure may favor certain funds independent of participant benefit.
- Although revenue-sharing has declined (for example, the proportion of plans with indirect compensation fell from 66.8% in 2011 to 51.7% in 2022; average rebate dropped from ~0.47% of assets in 2012 to ~0.11% in 2022) the practice remains relevant.
- The authors caution that the sample period is dated (2009-2013) and that industry practices (disclosure, fiduciary awareness, record-keeping systems) have improved since then.
- Implication for participants: Plans using revenue sharing tend to have “significantly higher fees” and less transparent indirect payment flows, which could mean higher cost or lower value for participants.
- Some plans had mechanisms (like “ERISA fee capture accounts”) to collect revenue-sharing and credit back to participants, but in the study period less than 5% did so.
Actionable Notes for my fellow 401k advisors and for Plan Sponsors
- Review whether your plan uses revenue sharing (indirect compensation) and how that is disclosed/managed.
- Ensure investment menu decisions are driven by performance, cost, diversification and participant need — not by whether a fund pays a rebate.
- Check that any revenue-sharing flows (if present) are properly credited back to the plan or participants or clearly disclosed.
- Assess fund deletion/addition activity: Are underperforming funds lingering because of revenue-sharing arrangements?
- Given increased transparency and evolving industry practice, use this as an opportunity to reaffirm fiduciary oversight and demonstrate your governance process.
The Parting Glass
I believe this study highlights a meaningful governance risk: when investment-menu decisions are influenced by indirect compensation rather than purely participant best interest, the fiduciary posture weakens. Even though the data set is somewhat dated, the fact that revenue-sharing hasn’t disappeared means sponsors should proactively guard against legacy arrangements that could detract from plan value.
In practice, for a plan focused on fiduciary duty, the duty of loyalty, and acting as a Prudent Person would do, this means going beyond mere compliance — it means documenting a clear decision-framework for menu management, cost transparency, and ensuring alignment with participant outcomes.