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Edison International case highlights a needed reform: Share class restrictions in 401(k) plans.

Greg Carpenter

December 29, 2022


The Edison International case involves a plan sponsor who put “retail” class shares in its company 401k plan when identically managed but lower cost “institutional shares" were available. The difference in the two share classes was a 12(b)1 fee markup that was deducted from participant assets and used to pay administrative costs of the plan. The Supreme Court will be hearing the case and will likely weigh in on how and when plan participants are allowed to sue plan sponsors.

Interesting, but I think there is a more fundamental issue that needs to be addressed.

The use of multiple share classes for mutual funds in 401(k) plans is confusing the heck out of just about every small business retirement plan sponsor in America.

I’ve been in the industry for decades and I have a hard time explaining it to clients.

Fund companies use the different share classes to provide varying levels of compensation to intermediaries, such as financial advisors and recordkeepers. The underlying investment management is the same, the only difference between share classes is the amount of additional fees that are charged to shareholders. This “revenue sharing” shifts costs to plan participants and creates a layer of complexity in plan fees that sponsors and participants find confusing. Because these fees are included in the fund expense ratio and deducted before calculating net returns, these fees can be easily overlooked when evaluating total fees.

I have nothing against the use of multiple share classes per se. I believe that financial firms should be allowed to innovate and price their offerings as they see fit. One big exception: Keep them out of 401(k) plans and other defined contribution retirement plans.

As a practical matter, reform could happen like this: Each fund company can designate one share class that may be used in retirement plans. Full stop. Each fund company has the choice to offer a fund with no revenue sharing or as much as they care to lard on. That makes the XYZ Fund comparable across all plans. Comparison between plans? No problem.

But what about “fine tuning” additional compensation to third parties? Aren’t I restricting the ability of investment managers to freely price their products? No. If additional fees need to be added, the fund company, sponsors, advisors are free to add as much as they want and distribute it to whomever is serving the plan. These additional fees just need to outside the umbrella of the expense ratio, out in the open where everyone can see them – fully disclosed on plan participant quarterly benefit statements.


Our firm does not accept revenue sharing, and in those cases where our fees are charged against plan assets, our fees are right there on the participant statements, in fully-disclosed transparent glory. Would it be unfair to make others make the same disclosures that we are required to do?

Before you answer that, just one more question. Given the current hodge-podge of partial fee disclosures and share classes, who is being treated unfairly? The answer is plan participants. Remember, these are the people in whose best interests we fiduciaries are obliged to act.

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