Did you know that mutual fund families offer multiple share classes for their funds used in retirement plans and each of those share classes come with a different cost? While the underlying holdings of a fund may be identical, the returns vary based on the share class of that fund. Additionally, there are over 8000 mutual funds comprised of over 25,000 share classes!

This blog article will dive into share classes, expense ratios, revenue sharing and how critical it is to understand retirement plan fees.

Why it Matters?

Share Class Basics:

Think of share classes as different seating sections on an airliner: coach versus first class. Similarly, fund families offer different pricing tiers to plan sponsors and their participants. The plans with greater assets should receive better share classes, in the same way that people who pay more for airline tickets should get better seats. This, however, is not the case. Plan sponsors are frequently ill-equipped with the training and information to optimize share class. If your organization is not taking the correct steps to evaluate or benchmark your plan, there is possibility of a fiduciary breach that leaves your employees sitting in coach and paying the same costs as someone else’s participants that are sitting in first class.

Share Class Year-to-Date Return 3-Year Annual Return 5-Year Annual Return Expense Ratio Revenue Sharing
R3 19.79% 7.05% 13.17% 1.14% 0.65%
R4 20.17% 7.37% 13.50% 0.85% 0.35%
R6 20.58% 7.74% 13.85% 0.50% 0.00%

The table above provides an example of the different share classes potentially available within a fund. As you move from share class R3 to R6, your annual returns increase as the expense ratio and revenue sharing percentage decrease. Many plan sponsors are familiar with expense ratio, as it usually is listed on plan statements- revenue sharing, however, may not be too familiar with the concept of revenue sharing. The Government Accountability Office defines revenue sharing as: “...indirect payments made from one service provider to another service provider in connection with services provided to the plan, rather than payments made directly by the plan sponsor for plan services.” Revenue sharing is a way to pay participants’ plan administration fees. If sponsors do not understand these arrangements, it can result in the plan sponsor and participants paying more for services as assets grow, while the level of service provided generally remains the same. Mind that even a 1% reduction in plan fees can easily translate into hundreds of thousands of dollars saved after years of employee participation( Employee 401k Fee Comparison Calculator ).

GAO - 401(K) PLANS Improved Regulation Could Better Protect Participants from Conflicts of Interest


Here’s the industry catch: To make matters even more confusing, there is no industry-standard of a universal hierarchy of share classes. Some mutual fund families list share class R1-R6, with R6 being the best class, others denoting class R1 as their best. This chaos of un-standardized share class labeling illustrates the need for plan sponsors to seek the advice of an independent fiduciary expert.

Things For Plan Sponsor to Consider:

  • Is your plan using retail share class investments and are there less expensive institutional share classes available?
  • Has it been more than 3-4 years since your plan’s last RFP or benchmark?
  • Does your organization know how plan expenses are allocated between plan participants and the employer?
  • Is your plan paying revenue sharing and are you sure revenue sharing is used for the benefit of the participants?
  • Has your company or plan size (in terms of assets or employees) grown significantly? This might mean your plan is now mispriced to the market.
  • Do you have an independent fiduciary expert who can help you understand share class and negotiate upgrades?