Comparing Hard dollar and Asset Based Fees. With a focus on fees by regulators and lawsuits against 401k and 403b plans, the question that sponsors of these defined contribution (DC) plans need to ask is which payment scheme is most fair to their employees: asset based or flat fee? When plans use participants assets, there’s a fiduciary responsibility to ensure that they are reasonable but isn’t there a need to make sure they are fair as well?
Hard dollar fees charge each participant in the DC plan the same regardless of their account balance. Record keeper’s cost are primarily based on the number of people in the plan whereas investments charge a percentage of assets because their costs do not vary. But is it fair to charge a participant $100 with just $10,000 or 1% of assets where a $100,000 account would only be paying .1%?
On the other hand, is it fair for the larger account to pay more under an asset based model if they are receiving the same services as the lower account balance? If a plan charges an average of .25%, a $100,000 account balance would pay $250 whereas the smaller account pays just $25 annually. The same argument could be made about taxes.
But it’s hard to discuss fee fairness without dealing with the fact that some participants that invest in investments like index funds which pay low or no revenue sharing to offset costs of running the plan pay very little while others may pay a hefty fee. Taking the example of two participants with $100,000 account balance, the one investing in index funds may pay nothing while the other using active investments may pay as high as .5% or $0 compared to $500. Many plans are moving to no revenue sharing funds and then charging each participant the same fee deducted from their account whether hard dollar or asset based.
What’s fair for your plan? That depends but more important is to ask the question and understand how revenue sharing works – or doesn’t.
