Researchers Examine Revenue Sharing Impact on Funds Chosen for 401(K) Menus

An academic paper from researchers at Vanderbilt University, the University of Texas at Austin and Board of Governors of the Federal Reserve System investigates revenue sharing, or indirect compensation arrangements, and their effect on 401(k) plans. The researchers observed that retirement plans are among the most important distribution channels for mutual funds and that in 2018, mutual funds managed more than 60% of the $5.2 trillion invested in 401(k) plans. The researchers argue that revenue sharing arrangements affect the investment menu of 401(k) plans. “Revenue-sharing funds are more likely to be added to the menu and are less likely to be deleted. Overall, revenue-sharing plans are more expensive as higher expense ratios are not offset by lower direct fees or by superior performance.”  Specifically, the researchers found that on average, about 55% of third-party (‘unaffiliated’) funds in revenue sharing plans offer revenue sharing rebates and that among these unaffiliated funds that revenue share, the average rebate is about 18bps. They also found that funds that revenue share are economically and statistically significantly less likely to be deleted from revenue-sharing plans. They also found that funds that tend to revenue share on other menus and tend to pay higher rebates are significantly more likely to be added to revenue-sharing plans. For example, funds with an above-median propensity to revenue share have an average addition rate of 0.16% to investment menus of 401(k) plans, whereas funds with a below-median propensity have an average addition rate of 0.10%