401(k) Fee disclosure and its effect on mutual fund share classes/revenue sharing

A recent article stated that with 401(k) fee disclosure, many mutual funds are starting to offer cheaper fund share classes, as disclosures are likely to have put some pricing pressure in the industry.

MFS, Putnam, John Hancock, Janus and Columbia separately began offering cheaper versions of some of the funds that are used in retirement plan accounts. Some of these share classes are more than 60% less expensive than the retail share classes of the same fund.

The article mentioned that cheaper share classes would have less revenue sharing payments to pay out that more expensive share classes. Less revenue sharing payments used to offset plan expenses, the article reasoned that administrative expenses would go up.

That’s nonsense because that presumes that every penny cut from administrative expenses are directed towards revenue sharing (whether that’s sub t/a, 12b1s, etc.) and that mutual fund expenses don’t matter in total administrative expenses.

The article stated that MFS now offers a retirement-plan share class of its $21 billion MFS Value fund, which costs investors $60 a year for every $10,000 invested. That compares to the company’s four other retirement share classes that charge anywhere from $69 to $169. If you were in the $69 share class and you then go to the $60 share class, was all $9 going to pay revenue sharing? Not likely since that $69 share class was bare bones and likely paying very little in revenue sharing. What if you switched from $169 share class to $60? Was $109, all revenue sharing? No, it can’t because funds don’t pay that much in revenue sharing.

Cutting out revenue sharing from Plan does not increase plan expenses because participants suffer more pecuniary harm with more expensive share classes. Revenue sharing is a slight of hand if the plan sponsor and their financial advisor believes that revenue sharing funds make plan administrative expensive less expensive than much cheaper funds like Vanguard that never pay revenue sharing.

There is nothing wrong with revenue sharing if it’s all disclosed, it just doesn’t reduce plan expenses more than using less expensive funds that don’t pay revenue sharing fees.

In addition, while this is a great step, it doesn’t mean anything if a plan sponsor is still working on funds that are in more expensive share classes The big Edison International case that held that a fiduciary has breached their duty of prudence by using retail share classes when cheater institutional share classes are available. I’ve seen too many plans over the past few years that have higher share classes in their Plans when cheaper share classes of the very same funds were available.

So while 401(k) fee disclosure will further put pricing strains on mutual fund costs, there are still quite a few 401(k) plans that will still not take advantage of it.