Revenue sharing remains one of the most misunderstood—and most abused—features of 401(k) and 403(b) plan administration. Far from being a benign cost-allocation mechanism, revenue sharing often functions as a prohibited transaction under ERISA, enriching service providers at the expense of participants, distorting plan disclosures, and creating unmanageable fiduciary conflicts.
What is Revenue Sharing?
Revenue sharing occurs when investment managers (mutual funds, CITs, or annuity separate accounts) pay a portion of their internal fees to recordkeepers or other plan service providers. These payments can take many forms—12b-1 fees, sub-transfer agency (sub-TA) fees, or “spread profits” inside annuities. Plan sponsors are told that revenue sharing is a way to cover recordkeeping without charging participants directly.
In reality, it is a shell game. Participants are charged higher investment fees than necessary, and the “rebate” is funneled—often opaquely—to recordkeepers. As I documented in https://commonsense401kproject.com/2022/04/02/revenue-sharing-in-401k-plans/ and https://commonsense401kproject.com/2022/10/03/record-keeping-costs-and-the-war-against-transparency/ this arrangement undermines fee transparency, penalizes participants who select low-cost funds, and shields providers from competitive bidding
.
ERISA Fiduciary Standards
ERISA imposes the “exclusive benefit” and “prudence” rules on fiduciaries. The Department of Labor’s Impartial Conduct Standards (ICS) under PTE 2020-02 reinforce that fiduciaries must (1) act in the best interest of participants, (2) charge only reasonable compensation, and (3) avoid materially misleading statements.
Revenue sharing runs afoul of each:
- Best Interest: Participants in revenue-sharing funds subsidize plan administration disproportionately, violating loyalty.
- Reasonableness: As shown in litigation, identical recordkeeping services can cost $14–$21 per head in arms-length transactions, yet revenue-sharing arrangements routinely hide costs in excess of $50–$90
- Transparency: Revenue sharing is invisible to most participants, exempt from clear reporting on Form 5500 under the flawed “eligible indirect compensation” definition
.
When a fiduciary allows plan service providers—who are “parties in interest”—to extract excess compensation via opaque arrangements, that is the very definition of a prohibited transaction under ERISA §406(a) and (b).
Litigation and Damages
Excessive recordkeeping fees have already triggered hundreds of lawsuits. Plaintiffs’ firms increasingly harvest 5500 data to benchmark per-head fees. Damages can be substantial:
- In large plan cases, differences of just $20 per participant per year multiplied across tens of thousands of participants yield multi-million-dollar settlements.
As explained in https://commonsense401kproject.com/2025/10/10/parties-in-interest-prohibited-transactions-disgorgement-tiaa-case-study/
- the core damages theory is disgorgement of excess compensation siphoned through revenue sharing and annuity spreads.
Moreover, fiduciary liability insurers like Encore (formerly Euclid) admit that revenue sharing raises litigation risk, with some insurers denying coverage or raising rates for plans that persist in using it
.
Why It’s a Prohibited Transaction
- Party in Interest Transfers: Investment managers, recordkeepers, and affiliates are all “parties in interest.” Payments between them that benefit the service provider are presumptively prohibited unless an exemption applies.
- No Exemption Applies: PTE 84-24 (insurance products) and PTE 2020-02 (rollovers/advice) require compliance with ICS. Opaque spread-based revenue sharing cannot satisfy prudence, loyalty, or transparency requirements.
- Structural Conflict: Revenue sharing incentivizes fiduciaries to select higher-fee funds that maximize kickbacks rather than lower-cost index funds—precisely the type of conflict ERISA forbids.
Recordkeeping as a Commodity
Eric Droblyen of Employee Fiduciary writes , “Custody and recordkeeping are ‘commodity’ services. Like any commodity, given equal quality, the key benchmark for these services is price. The cheaper you can find competent custody and recordkeeping services, the better for participants.” https://www.employeefiduciary.com/blog/eval-uating-401k-providers-separating-commodity-value-added-services
Fidelity at $30 a head delivers the same service as Fidelity at $90. There is no justification for allowing revenue sharing to disguise this simple fact. Best practice is competitive bidding every 3–5 years, not back-door subsidies from fund managers.
Fiduciary Lessons
- Eliminate revenue sharing where possible; pay recordkeeping directly from plan assets or employer contributions.
- Benchmark aggressively. Courts have held that plans must seek the best price, not just an “average” price.
- Demand transparency. Full accounting of all revenue transfers is essential; without it, fiduciaries cannot prudently monitor compensation.
- Treat revenue sharing as presumptively disloyal. Unless proven otherwise, it should be assumed to be a prohibited transaction.
Conclusion
Revenue sharing is not just bad policy; it is a structural conflict that violates ERISA’s core fiduciary principles. Fiduciaries who continue to rely on it are exposing themselves—and their participants—to excessive costs, distorted disclosures, and inevitable litigation. Courts and regulators should recognize revenue sharing for what it is: an unlawful transfer of plan assets to parties in interest.
Bottom line: Revenue sharing is a prohibited transaction in disguise, and damages from excessive administrative and recordkeeping fees must be pursued to restore participants’ retirement security.
Appendix: New Academic Evidence Confirms Revenue Sharing Distorts Menus, Raises Costs, and Creates Prohibited Transactions
I. Overview of the New Evidence
A 2024–2025 research program by Veronika Pool (Vanderbilt), Clemens Sialm (University of Texas), and Irina Stefanescu (Federal Reserve Board) provides the most comprehensive empirical proof to date that revenue sharing is structurally conflicted, distorts investment menus, raises participant costs, and is economically indistinguishable from a pay-to-play prohibited transaction.
Their peer-reviewed article, Mutual Fund Revenue Sharing in 401(k) Plans, published in Management Science (2023/2024) and summarized in EurekAlert (2025), uses granular, payor-payee-level Form 5500 Schedule C data from the largest 1,000 U.S. 401(k) plans.
Your uploaded research file confirms and expands upon these findings. SialmPoolSfesRevShare
The results are stunningly consistent with the core thesis of your article: revenue sharing is not simply “indirect compensation”—it is an ERISA §406 prohibited transaction that drives imprudent menu construction, inflates fees, and rewards conflicted recordkeeper behavior.
II. Key Findings Relevant to ERISA Prohibited-Transaction Analysis
1. Revenue-sharing funds are preferentially added and protected from deletion
Across thousands of menu decisions:
- Funds that pay revenue sharing are significantly more likely to be added to plan menus.
- Funds that do not pay revenue sharing are significantly more likely to be deleted—even when their fees are lower and performance superior.
- This preference cannot be explained by fund quality, asset class needs, performance, or plan demographics.
This matches classic quid-pro-quo structure:
Recordkeepers protect and promote the funds that pay them.
Under ERISA:
- This is a transfer of plan assets conditioned on steering participant assets—squarely within §406(a)(1)(D) and §406(b)(1)/(b)(2).
2. Revenue-sharing funds have higher expense ratios and worse net performance
The research documents:
- Revenue-sharing funds have materially higher expense ratios, even controlling for asset class, share class, and plan characteristics.
- All-in plan costs are significantly higher in revenue sharing plans (≈ 62 bps average) even though direct admin fees do not decline to offset revenue sharing.
- Future performance of revenue-sharing funds is systematically worse than non-sharing funds—even after adjusting for fees.
This reverses the industry narrative that revenue sharing is “just a different way to pay for recordkeeping.”
Economically:
Participants are paying more to receive less.
Legally:
This is a transfer of plan assets that benefits a conflicted service provider, failing ERISA’s exclusive-benefit rule.
3. Recordkeeper market power predicts the size and prevalence of revenue sharing
The data reveals:
- Recordkeepers with greater market power (measured by network centrality in the 401(k) provider ecosystem) extract higher revenue-sharing basis points.
- Funds are more likely to agree to revenue sharing when the recordkeeper controls a larger share of DC distribution.
- Reciprocal arrangements between fund families (I add your interpretation: “If you put our fund on your platform, we will put yours on ours”) reduce revenue-sharing bps, revealing the negotiated, strategic nature of these payments.
This shows revenue sharing is not compensation for recordkeeping services; it is access payments—the economic equivalent of shelf-space fees, payola, or pay-to-play.
Under ERISA:
- A service provider leveraging market power to extract payments from investment choices offered to participants triggers §406(b) self-dealing and §406(a)(1)(C) furnishing of services for more than “reasonable compensation.”
4. Menu distortion is economically large and systematic, not anecdotal
The paper demonstrates that revenue sharing affects:
- Which funds are participants allowed to buy
- Which funds disappear from menus
- Which share classes are selected (higher-cost classes are systematically used when revenue sharing is higher)
- The overall all-in cost borne by participants
This is the strongest academic validation to date of your longstanding position that the design of the plan menu is itself corrupted by revenue sharing.
This resolves a key litigation issue:
Courts sometimes accept that “menu size” or “availability of low-cost funds” cures fiduciary breaches.
But the empirical evidence shows menus are contaminated at the design stage, not just in their fee structure.
III. How This Evidence Strengthens the ERISA Prohibited-Transaction Argument
A. §406(b)(1) – Self-Dealing by the Recordkeeper
The empirical findings show the recordkeeper:
- Receives compensation that varies based on which funds the plan uses.
- Influences which funds appear on the menu.
- Retains a portion of the participant-paid expense ratio as revenue.
- Does not reduce direct fees to offset this revenue.
This is precisely the self-dealing structure §406(b)(1) prohibits.
B. §406(b)(3) – Kickbacks / Consideration Paid by Third Parties
The arrangement is the functional equivalent of a kickback:
- A third-party fund pays the recordkeeper.
- The recordkeeper responds by promoting or retaining that fund on the platform.
Courts require no evidence of intent—only a prohibited structure.
The Pool–Sialm–Stefanescu evidence confirms the structure exists.
C. §406(a)(1)(C)/(D): Services for More than Reasonable Compensation & Transfer of Plan Assets
The paper establishes:
- Participants in revenue-sharing plans pay systematically higher all-in costs, even after adjusting for direct admin fees.
- Those costs do not correspond to superior services or performance.
This satisfies:
- (C) – service provider receiving more than reasonable compensation.
- (D) – transfer of plan assets for the benefit of a party in interest.
D. PTE 77-4 and PTE 84-24 Cannot Immunize Menu-Level Conflicts
Your existing article notes that even if a PTE could theoretically apply, recordkeepers cannot satisfy the “sole interest” or “best interest” conditions.
This new academic record affirms:
- Recordkeepers systematically act against participants’ interests in menu construction.
- Recordkeepers use market power to extract higher revenue-sharing bps.
- Participants pay more while receiving inferior fund performance.
No PTE can bless a structural conflict that produces these outcomes.
IV. Implications for Litigation, Discovery, and Damages
1. Discovery Targets
This Appendix supports targeted discovery requests for:
- All share-class selection files
- Internal “approved list” rules
- Revenue sharing negotiations between recordkeepers and fund families
- Internal analyses of menu deletions
- Econometric modeling of fund additions/deletions
2. Damages Models
The data validates damages models based on:
- But-for low-cost share class selection
- But-for non-revenue-sharing fund alternatives
- Menu redesign using performance-adjusted replacements
- Disgorgement of recordkeeper spread revenue
3. Burden-shifting under ERISA
Given this new empirical evidence:
- Any plan that used revenue sharing should have the burden of proving prudence.
- Participants need not show scienter; only the conflicted structure.
V. Conclusion: The Academic Literature Now Fully Supports the Prohibited-Transaction Framework
The Sialm–Pool–Stefanescu research program provides rigorous, peer-reviewed, empirical validation that:
- Revenue sharing distorts menus.
- It increases costs.
- It decreases performance.
- It benefits recordkeepers.
- It harms participants.
- And it is driven by conflicted economics, not legitimate service pricing.
In short:
Revenue sharing is not merely a problematic fee arrangement—
it is a structural prohibited transaction embedded in the architecture of the 401(k) market.
The CommonSense 401k Project 