The notion of diminishing 401(k) fees might not be as straightforward as it seems. Over the past 15 years, there has been a steady narrative suggesting a reduction in 401(k) fees that has garnered favorable attention. While there is some truth to this, it is not without nuances. Several factors contribute to the apparent decrease in average fees when measured as a fraction of plan assets:

• Availability of lower-cost investment choices

• Regulatory actions and legal challenges promoting enhanced transparency

• Improved practices by plan advisors and sponsors in assessing provider expenses

Hence, when analyzing average fee percentages, there seems to be a positive trend. Sounds promising, doesn't it? Hold that thought.

Aggregate Fees Are Actually on the Rise

The situation becomes more intricate when considering the bigger picture. While fee rates are on a downward trajectory, plan balances are increasing at a much faster pace due to investment returns and regular contributions. As a result:

• The total sum paid in fees continues to surge

• Many plans are issuing larger payments to providers annually, notwithstanding the apparent "reduction in fees"

Let's crunch the numbers:

- In 2015, a $2 million plan paying 1.60% in total fees equates to $32,000 per year

- In 2025, a $6 million plan with fees reduced to 0.90% amounts to $54,000 yearly

Consequently, despite the substantial decrease in the fee rate, the plan's actual costs escalate by almost 69%. This scenario highlights the concealed downside of percentage-based pricing, where costs escalate in line with assets, regardless of service.

Misaligned Incentives

While asset-based pricing, known as "AUM fees," may appear innocuous initially, it brings forth subtle, and at times detrimental, repercussions:

• Advisors stand to gain more when individuals accumulate assets in a particular product, rather than when they contribute generously, reduce debt, or invest in their families

• Providers profit from inertia and complexity, capitalizing on participants' lack of fee awareness

• Sponsors are lulled into a false sense of security as "fees decrease," while actual costs silently mount, often drawn from assets without much notice

In Conclusion

Although 401(k) fee rates might indicate a declining pattern, if your plan's overall expenses are on an upward trajectory (which is likely the case), it is imperative to pose more probing questions:

• Is evaluating fees as a fraction of assets a prudent approach?

• Are we genuinely receiving enhanced value or simply paying more?

• Is our fee structure in harmony with the desired outcomes for our employees?

• Would a direct payment model to providers alter our perspective on costs?

If you are inclined to transition from a system that penalizes growth to one that commends responsible management, we would be delighted to support you in this journey.