In Defense of Participant-Based Fees

Chief Marketing Officer at DALBAR Inc, Cory Clark, writing in the April/May edition of PLANSPONSOR magazine postulates that an asset-based fee construct (AKA AUM fee) is good for plan participants, incentivizes service providers and fuels plan success. Central to his argument is that “A plan participant is not paying for the cost of the service. What the participant is paying for is results, for success in securing a retirement income.”

We couldn’t disagree more.

What the participant should be paying for is accurate statements, a thoughtful fund line-up, robust planning tools, a user-friendly participant website, unconflicted 800# service and so forth. What a participant is saving and investing for, is securing adequate retirement income. Contributions (both employee and employer) drive outcomes more than anything else. And what drives contributions? Let’s be real; auto enrollment and auto increases have done more for participant contributions than education ever has. Should a service provider earn more because of the simple addition of these two plan features? The answer is obvious.

The market drives what service provides can charge. Per participant fees properly compensates a recordkeeper for recordkeeping. After all, it costs the same to recordkeeper a 100 person $2 million dollar plan as it does a 100 person $20 million dollar plan. Plan assets grow with simple plan design, contributions, market performance and time, none of which should inflate a recordkeeper’s fees.

To wit, we’re unaware of any Schlicter excessive fee lawsuit that involved per-participant pricing. Lawsuits have all (virtually) been about asset-based fees.