Revenue Sharing Demolition Night

When I was a kid in the 1970’s, disco was the biggest thing. By 1980, disco was dead thanks to a backlash. People didn’t know it at the time, but disco died the night of July 12, 1979, thanks to the riot during a White Sox doubleheader promotion called Disco Demolition Night.

When I started in the 401(k) plan business back in 1998, revenue sharing was a big thing. The idea that selecting certain mutual funds would “lower” plan administrative expenses when those certain mutual funds “kicked back” a fee to the third party administration (TPA). While we don’t have a Revenue Sharing Demolition Night, I believe that revenue sharing is dead.

I have never been a big fan of revenue sharing and I never will because I think it’s always been a shell game. Selecting certain mutual funds that pay revenue sharing is a shell game because the funds that pay them tend to be more expensive than those that don’t. If plan participants are paying 50 extra basis points in mutual fund expenses just to get a 25 basis point revenue sharing fee to the TPA doesn’t save the plan participant any money.

In my mind, revenue sharing is dead man walking because of the amount of litigation brought against larger 401(k) plans where revenue sharing factored into the decision making of selecting plan investments. Plan sponsor have been paying the consequence of using revenue sharing as a basis for selecting plan investments. For years, I have been advocating for a revenue sharing neutral fund lineup because I believe that’s the model we’ve been heading anyway.  Revenue sharing is getting the reputation of asbestos except that revenue sharing never killed anyone.

Thanks to the rampant litigation, I believe the mutual fund companies will decide that revenue sharing just isn’t worth the litigation. Unfortunately, there won’t be a promotion like Revenue Sharing Demolition Night.