This week, I asked readers what they thought about that approach. And, as you might expect, there was a “diversity” of opinion(s).
A plurality – just over one-in-four, in fact – agreed with the option that “it’s fine for things that are based on assets, but not for everything it’s being applied to these days.”
That said, a full quarter concurred with the proposition that the structure had “worked well for awhile, but it’s time to move on”, and another 12.5% simply said that it was “a device that has overstayed its welcome.”
And while nearly one-in-five (18.8%) said that while “it’s not perfect, it seems to work reasonably well most of the time, another 3% said they had “never really thought about it.”
But no one was willing to describe it as “an easy and efficient way to pay for a broad array of products and services.”
Food for thought.
There were, of course, some interesting verbatim. Here’s a sampling:
On the surface it's convenient and seems logical but the expenses associated with providing many of the underlying services do not vary in relation to the assets under management.
Service providers have no incentive to improve what they do; they just ride the market trends and reap big rewards if the market rises even though they may not do anything in terms of increasing the value of the services they provide.
There's no such thing as a free lunch but more 'n more it seems people feel they deserve it. One can wonder if with this entitlement mentality already firmly entrenched, whether fee arrangements may evolve into a type of quid pro quo basis tied to performance as opposed to assets. "Pay you, for what" "What have you done for me lately."
"It is funny, that recordkeepers were happy with fees based on assets and how their fees inflated when the market kept going up, but how they came pressuring for less services and more fees when the market was down. Now every time we turn around, the record keeper wants to stream line something, computerize, and do away with the personal touches that made them unique."
Like so many industries, abuse, greed and over-reaching of some have necessitated claims, litigation, investigations, legislation and policies. Fiduciary responsibility should be embraced (or enforced) at all levels.
When it makes sense to provide an incentive for asset performance, it can make sense. Otherwise it’s pretty silly and may even be counter-productive. Plan administration, for example ... It doesn't take longer or cost more to process 401(k) transactions when the fund performance is good vs when it isn't.
The fact is, many people have become rich with the current system, and those people are not plan participants. I agree with the concept of full and transparent fee disclosure; let those people who are paying these fees see what they're paying, and weigh it against what they're getting in return.
I see the logic in vendors willing to some additional services if they receive higher amounts of fees. I think the high-fee lawsuits were excessive. But I DO think that some vendors' were not good at full disclosure to the client/employer...not just the amounts, but "what does this get us?"
Sponsors need to compare apples to apples when measuring investment options. The only fees automatically charged to assets should be those related to services directly impacting the performance of those assets - period. All other fees charged separately and the sponsor can decide then to pay them from assets.
The current plan cost structure did not evolve form a rational process. It was primarily designed by investment providers around a model - originally designed for individual investors, then modified for IRA holders, then modified for plan participants - which ensured their profitability. Fiduciaries passively accepted this as an efficient, fairly priced template.
I grew up on the trust side of the business so I have a slanted view about this. If the fee is related to the service provided (i.e., asset management) then I think it is appropriate. It rewards those who do well and spreads the "pain" if there is a failure to perform. That said, I believe that it is inappropriate to charge this way for activities that might be only marginally related to the task of managing money. Investment management is a service that a certain percentage of the population needs and this is the fairest way IMHO of paying for it.
As this is the first company I've worked for that actually HELD the assets, this approach is new to me and in the last few years I've seen the problems. What we do from day to day doesn't change based on the dollar value of the assets. A few years ago when the assets dropped 30% in value the amount of work we did stayed the same but our income dropped by 30%. I prefer a fee based structure based on the work performed. Yes, we lose out as the plan grows its assets, but after the first few years the work normally gets easier to do.
But this week’s Editor’s Choice goes to the reader who observed, “Since there are so many providers that were able to provide their services for "free", it obviously has worked well for a long time. Going forward, I don't see a problem with asset based fees in and of themselves. The problem is that employers and participants aren't really going to know how much they are paying under the new fee disclosure regs. However, they WILL know that there is no such thing as a "free" plan.
Thanks to everyone who participated in our survey!