Trump’s SEC wants to allow fund managers to charge extra fees for better performance. Here’s why it’s a terrible idea.

The proposal would permit registered funds, including those offered in 401(k) plans, to charge performance-based fees rather than the flat asset-based fees that are standard today. Supporters argue this could lower base costs and better align manager incentives with investor outcomes. The concern is that performance fees can be difficult for ordinary investors to evaluate, and their complexity may obscure the total cost of ownership.

For retirement savers, the key issue is comparability. A fund charging a modest base fee plus a performance premium is not directly comparable to a low-cost index fund on a single expense ratio. Performance fees may also encourage risk-taking, since managers can share in upside gains while downside losses are borne by fundholders.

What to watch: the final rule text, whether performance-fee funds appear in 401(k) lineups, and whether plan fiduciaries document how they assess such fees. Read a fund's prospectus closely and compare all-in costs before assuming a performance fee signals better management.