Muddy Waters
Bloomberg Personal Finance (10/02) p.75; O'Shaughnessy, Lynn

Many employees and even corporate managers are unaware of the practice of revenue sharing and how much it can cost 401(k) plan participants. Revenue sharing could take thousands out of participants' 401(k) funds to pay for administration, record keeping, and management fees--often penalizing those workers with the most savings. Critics say that revenue sharing makes it difficult to tell whether 401(k) plan expenses are reasonable. According to the Securities and Exchange Commission, the average retail mutual fund today has an expense ratio of 1.36 percent, which would be how much of the total balance of a person's 401(k) would go towards these administrative and management costs. Since many employees are paying retail prices for their 401(k) funds, they do not have access to the discounts provided by institutional money managers, but their 401(k) plans are subject to mutual funds' management fees. Industry insiders say that revenue sharing allows employers to invest in brand-name funds and has encouraged more companies to provide 401(k) plans to employees, but critics say that revenue sharing makes it difficult for companies to determine whether fees taken out of participants' funds are fair or how they are used. Critics also note that revenue sharing encourages conflicts of interest that often slide by employers and fund providers. Employers should offer inexpensive investments, the critics say, and allow participants to pay a flat fee for administration costs, instead of having these fees skimmed from their retirement accounts.


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