Why Asset-Based Fees for Recordkeepers May Not Be Favorable for Administrators

Asset-based fee structures for retirement plan recordkeepers have long been a standard in the industry. Under this model, fees are calculated as a percentage of total plan assets. While this approach simplifies billing and aligns the recordkeeper’s compensation with the growth of plan assets, it may not always serve the best interests of plan administrators or participants. Here's why alternative fee structures should be considered.

1. Lack of Alignment with Services Rendered

One of the most significant drawbacks of asset-based fees is that they don’t directly correlate with the level of services provided. For example, a recordkeeper’s workload and associated costs typically depend on the number of participants in a plan, not the total asset value. As plan assets grow—due to market performance or participant contributions—administrators may end up paying significantly higher fees without receiving additional services​

2. Disproportionate Cost Burden on Larger Plans

Asset-based fees can disproportionately impact plans with higher account balances. Administrators overseeing large plans may face escalating costs simply due to asset growth, even though the recordkeeping work remains constant or increases only marginally. This can make such plans less competitive and impose unnecessary costs on participants​

3. Market Volatility and Unpredictable Costs

In volatile markets, asset-based fees can lead to unpredictable expenses. During periods of market growth, fees can balloon, straining budgets for administrators. Conversely, market downturns may temporarily reduce costs, but they also impact participants' savings—adding financial stress for all parties involved​

4. Inequitable Participant Fee Allocation

Asset-based fees often result in higher costs for participants with larger account balances, creating inequity within the plan. For instance, a participant with a $500,000 balance pays significantly more in fees than someone with a $50,000 balance, even though both benefit from the same recordkeeping services. This can discourage higher contributions from key employees or executives​

5. Alternative Fee Structures to Consider

Administrators seeking more equitable and predictable fee arrangements might explore alternative pricing models, such as:

• Flat Per-Participant Fees: Charges are based on the number of participants, ensuring fees reflect actual service levels.

• Hybrid Models: A combination of asset-based and flat fees, balancing fairness and simplicity.

• Fixed Annual Fees: Predefined costs provide budgeting stability and transparency​

  CultureMonkey
  

Conclusion

While asset-based fees offer simplicity, they may not be the most advantageous option for plan administrators or participants. Their lack of alignment with service levels, potential for cost inequity, and sensitivity to market conditions highlight the need for more tailored pricing strategies. Administrators should evaluate alternative fee structures to ensure transparency, fairness, and cost efficiency, ultimately supporting better outcomes for all stakeholders.

For more insights on fee structures and their implications, consult resources like the Plan Sponsor Council of America or American Retirement Association.