Retirement planning in the United States has long been synonymous with the 401(k) plan, a employer-sponsored vehicle that allows employees to direct their own investment portfolios. These plans are often hailed for the autonomy they grant workers in selecting from a diverse menu of investment options—on average, as many as 28 distinct funds according to the Investment Company Institute. This perceived empowerment, however, may be undermined by covert financial arrangements that subtly skew the array of available funds. New research by Clemens Sialm, a finance professor at Texas McCombs, exposes a significant underpinning that calls into question the objectivity of these investment menus: revenue-sharing between mutual funds and plan administrators, commonly known as recordkeepers.
The concept of revenue-sharing refers to the payments that mutual funds make to 401(k) plan recordkeepers in exchange for their inclusion on the plan’s investment line-up. This quid pro quo, while often invisible to the employee participants, potentially biases plan offerings toward funds that are more lucrative for administrative intermediaries rather than those offering optimal returns for investors. Sialm’s investigation delves into the prevalence and consequences of this practice, shining a light on how monetary incentives within the retirement ecosystem may compromise investment quality.
Sialm, in collaboration with Veronika Pool of Vanderbilt University and Irina Stefanescu of the Federal Reserve, conducted an extensive empirical analysis of the 1,000 largest 401(k) plans reporting to the U.S. Department of Labor from 2009 through 2013. Their findings are startling: more than half of these prominent plans incorporated at least one fund that engaged in revenue-sharing with recordkeepers. Even more revealing is the propensity for these revenue-sharing funds to be favored in plan line-ups—they were approximately 60% more likely to be introduced into plans and exhibited a markedly lower likelihood of removal. This selective retention suggests that administrative payments serve as a powerful force in shaping the investment landscape offered to participants.
The implications for workers’ retirement outcomes are far from benign. Funds leveraging revenue-sharing typically impose higher administrative expenses than their non-revenue-sharing counterparts. This marks a double-edged sword because these additional fees essentially act as a hidden source of compensation for recordkeepers, with an average of 18% of the fees being allocated back to administrators. For plan sponsors and service providers, these arrangements translate into a means of defraying the substantial costs associated with plan administration—costs which might otherwise fall more transparently on the employer.
Yet, beneath the veil of administrative convenience lies a troubling tradeoff for investors. The research indicates that revenue-sharing funds tend to underperform relative to non-revenue-sharing funds over extended periods. This deterioration in returns, coupled with elevated fees, erodes the potential accumulation of retirement wealth for participants. Given the power of compounding over decades, even marginal differences in fee structures can result in losses amounting to tens of thousands of dollars by the time of retirement.
The opaque nature of these financial arrangements exacerbates the challenge for plan participants. Most employees are unaware that recordkeepers derive significant revenue from fund fees embedded within their 401(k) options. Moreover, the disclosure of such fees is often buried in fine print or complex documents, rendering it virtually inscrutable to the average participant. This lack of transparency fundamentally impedes informed decision-making, allowing inflated fees and subpar fund selection to persist unchecked.
Sialm advocates for heightened transparency that empowers employees to truly understand the costs associated with their investment options. He recommends clear, concise disclosures of all fees, circumventing the obfuscation common in voluminous financial statements. By making fee structures explicit and straightforward, employees can better assess the tradeoffs involved in their fund choices, potentially steering clear of those that prioritize administrative compensation over performance.
Beyond participant awareness, the study highlights a systemic solution to mitigate the distortions caused by revenue-sharing. Sialm endorses a compensation model where employers directly remunerate recordkeepers for their services rather than relying on embedded fees within investment funds. Such an approach would recalibrate incentives, aligning recordkeepers’ interests with those of plan sponsors and ultimately plan participants. By removing the motive to favor revenue-sharing funds, plan menus could be curated more objectively, potentially fostering cost efficiency and improved investment outcomes.
Of course, compensation for plan administration is a real cost, and recordkeepers provide vital functions including record-keeping, compliance, and participant services. The key issue is not the necessity of payment but the mechanism through which it is delivered. When these payments are hidden in the fee structures of funds, they obscure the actual expense borne by workers and disincentivize competitive pricing and performance monitoring.
The broader implications of these findings resonate across the retirement industry. As defined contribution plans increasingly supplant traditional defined benefit plans, the burden of investment decision-making—and associated costs—fall squarely on employees. Without regulatory or market-based correctives, practices like revenue-sharing can systematically erode retirement readiness for millions of workers who rely on their 401(k)s for financial security in old age.
Sialm’s research thus calls for a reevaluation of fee structures and administrative relationships in 401(k) plans. Policymakers, plan sponsors, and recordkeepers alike must reckon with the latent costs that revenue-sharing embeds within investment offerings. Greater transparency, clearer fee disclosures, and direct administrative compensation models emerge as integral reforms to restore integrity and fairness to retirement investing.
As retirement savings become ever more critical to economic stability and personal wellbeing, ensuring that financial intermediaries serve participant interests foremost is paramount. Employees deserve menus curated on merit—based on cost-efficiency and performance—not on the magnitude of payments to middlemen. Only through increased visibility and realignment of incentives can the full promise of 401(k) plans be realized for the millions who entrust their future to them.
Subject of Research: Revenue sharing and fee structures in 401(k) retirement plans
Article Title: Mutual Fund Revenue Sharing in 401(k) Plans
News Publication Date: 17-Oct-2025
Web References:
- https://pubsonline.informs.org/doi/10.1287/mnsc.2023.01560
- https://www.ici.org/news-releases/22-news-brightscope-401k
References:
Sialm, C., Pool, V., & Stefanescu, I. (2025). Mutual Fund Revenue Sharing in 401(k) Plans. Management Science. DOI: 10.1287/mnsc.2023.01560
Keywords: Finance, Financial management, Financial services, Public finance, Microeconomics
