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

The Securities and Exchange Commission under the Trump administration is considering allowing fund managers to charge performance-based fees, a structure in which managers collect extra compensation when a fund outperforms a benchmark. The agency frames this as a way to align manager and investor interests: if the fund does well, the manager shares in the upside.

The concern is what happens on the other side. Performance fees can create incentives for managers to take on more risk in pursuit of outsize returns, since the reward for winning is asymmetric while losses are borne by fundholders. For retirement savers in 401(k) plans, where choices are often made once and left in place, layered fees can quietly erode long-term returns — even in years when the fund merely tracks the market.

What to watch: the specifics of any rule proposal, including whether performance fees would carry a high-water mark or clawback provision, and whether 401(k) plan menus would include these funds by default. Fee disclosure and default investment selection are the details that will determine whether this structure helps or harms ordinary investors.