3 Reasons Why 401(k) Plan Fees Should Reflect Amounts Managed, and Not the Number of People Invested

401(k) fees are like death and taxes—not fun but inevitable.

Still, plan sponsors often have some leeway in deciding how their fees will be calculated.

While 401(k) fees based on the number of total plan participants have been gaining ground, there are three clear benefits for plans whose fees are tied the total assets under management (AUM).

Fee by Headcount

Fees based on headcount have been gaining ground.

In 2016, 51% of plan sponsors reported using plans that assessed fees based on the number of 401(k) participants. This was the first time that fixed fee plans made up more than half of total plans.

Yet while fixed fee arrangements are becoming more common, they may not be the best choice for fast-growing companies.

3 Reasons to Choose Plans Based on AUM Pricing

Here are three reasons why plan sponsors may wish to consider AUM-based fee structures for your plan:

  • First, AUM-based fee plans are more predictable, even when a company is growing fast. If it doubles its workforce under a fixed per-person structure, then its benefits costs will also double. With an AUM structure, new workers typically don’t cost much, because they haven’t accumulated balances yet. Plan sponsors  can expand without worrying about how it will change your benefits obligations.
  • Second, these plans are more cost-effective. Fees are typically levied on the employee, not the plan sponsor, which significantly lowers costs for business owners. Plus, because the fees are deducted from investment returns, most employees don’t notice the costs at all.
  • Third, AUM fees will probably be a better deal for a  young, fast-growing workforce. Employees start, most often, with zero balances. As they accumulate wealth in their accounts, costs may go up, but employers won’t have to pay extra fees right away.  

 

The opinions expressed in this article are those of the author, and do not constitute any service or obligation of Vestwell Holdings, Inc or its affiliates.