The Beginning of the End for Asset-Based Retirement Plan Recordkeeping Fees?
In The Top Retirement Plan Trends for 2020 we discussed the migration of retirement plans from traditional percentage of assets-based recordkeeping fees to per-participant fee structures. By implementing a per-participant model, recordkeeping fees do not snowball as plan assets grow (which only stands to increase recordkeeper profit margins without additional expenses incurred).
Does this shift indicate the beginning of the end for asset-based recordkeeping fees? After all, per-head charges are still a relative rarity in some markets, particularly the 403(b) retirement plan space. Below are some factors that may help determine whether (or not) we will be asking the question, “Do you remember the time when there were asset-based recordkeeping fees?” in a decade or two from now.
- The learning curve of flat-fee pricing for recordkeepers — In most of the Requests for Proposals (RFPs), where per-head pricing is requested, there is at least one major recordkeeper that prices the business as if they have no apparent idea about what they are doing! Some simply take their current asset-based fee and convert it into a per-head amount, without taking into account variables such as asset or participant growth rates. Until all the large players in the marketplace can correctly price plans on a per-head basis, it is unlikely that per-head pricing will completely take over the marketplace.
- Almost all asset-based to per-head charge conversions will decrease profit margins for the recordkeeper, and that lost profit will have to come from somewhere — In order for a recordkeeper’s business to be sustainable, they have to, of course, make money. When they lose money—as they will in most conversions to a per-head charge—they will have to find a way to cut expenses, raise revenue somewhere else, or both. If that affects the value that the recordkeeper provides to the plan sponsor, then perhaps the cost savings associated with the conversion to per-head might not be worth it.
- The per-head charge is not a panacea for all of the fee issues that plan sponsors face — For example, a per-head charge does little to affect the revenue sharing issue. And, for some plans, particularly those with fewer assets, automatic enrollment, and/or high employee turnover, per-head pricing can sometimes turn out to be MORE expensive than flat-fee pricing. Flat-dollar fees disproportionately affect those at the beginning of their retirement savings journey, since a $50 per-head charge is quite impactful to a $1,000 account balance, but of limited impact to a $100,000 account balance. And, that impact typically comes at the worst possible time - in early career years where the power of compounding is at its greatest. Thus, modifications to the per-head fee structure may be necessary to address this important issue.
While per-head flat-dollar fees are here to stay, there is some work to be done before this type of recordkeeping pricing will become the universal standard.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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