Assuming that a voter likes a candidate’s positions on issues - if their preferred candidate is fiscally prudent - that makes them even more valuable. They are willing to dig into costs, understand how the government is charged fees and how they'll change as circumstances change. They are willing to fight for fee transparency and lower fees. They understand that taxpayers are footing the bill. They’ll look for creative ways, reasonable ways to make each buck go farther.This is very similar to the role of a plan sponsor. Let us introduce the reader to the fiscally conservative 401k strategy for small and medium sized plans. The Fiscally Prudent 401(k) Plan is a “shining beacon” in the small and medium size plan market (<$50M). It's important to understand the three types of fees found in 401k plans. All of these fees are annual fees, which are typically collected quarterly.Base: A single annual fee that doesn't change - it is not tied to anything like total plan assets or number of participants. These fees rarely change which makes them a preferred fee option. Per Participant: An annual fee for each participant so the total is calculated by the number of participants with accounts in the plan. Usually this fee has an annual base fee that comes with it. These fees are also preferred. It makes sense that record-keeping fees would be tied to the number of participants. It increases only as the number of participants increases.Asset-based also called AUM: A percentage fee that is calculated by multiplying the percentage by the total dollar assets. Two Important Notes about AUM FeesImportant AUM Note 1: They grow fast! Since assets are growing steadily through participant contributions and market growth, these fees grow steadily. AUM fees require constant renegotiation with providers. It's not unusual that plans double in size quickly especially when they are small. When plans double in size, the AUM fee also doubles unless the percentage is negotiated lower: Did the services also double in scope or quality? Probably not! This is a major profit center for providers serving the small and medium size plan market! Do you think they voluntarily reduce the percentage Important AUM Note 2: The growth rate of fees as the pan increases in size is directly related to the total of all the AUM fees. Most plans in the small and medium size range have total AUM fees in the range of 0.85% to 1.35%. Plans we oversee and have improved have around 0.30% total AUM fees. That’s 70% to 80% lower growth rate in fees as the plan grows. The plan remains fee competitive as it grows in size and fees remain competitive. In the chart below the slope of the two lines is the total AUM.Fiscally Prudent Plans: We minimize use of AUM fees as much as possible - and reduce the remaining AUM fees. We believe that the fund expense ratios (which cannot be avoided) and a portion of the investment advisory fee are the only two places that require AUM fees. A best practices selection of funds reduces the fund AUM. The record-keeping fees, bundled with the custodian and administration fees, should be base plus per participant. No AUM at all. And the advisory fee can be base plus a very low AUM.. Here’s a typical chart that visually demonstrates the stark difference in the total “cost curves”. Note the flat slope of the lower green total cost line (fiscally prudent) compared to the steeper red line (current AUM focused fees). Those AUM fees are absolutely AWFUL.
Click here to see larger image.Note the large difference in fees in the ten year look ahead. It gives you a feel for how much these high fees mute the growth of the participants’ accounts! No wonder there are a lot of lawsuits, and they may be increasing in this small and medium size plan market.
