401(k) Fees Comparisons: How to Understand & Monitor Fees

In my experience speaking with small and mid-sized business owners about their 401(k) benefits, I’ve seen a lot of confusing 401(k) fees. Those who manage a 401(k) plan seldom understand exactly what they or their employees are paying for service. When we dig into their existing plan, they're almost always surprised by fees they didn't know about. I saw this firsthand recently when I met with a controller of a building materials distributor. When we took a close look at all the fees associated with her plan, she was shocked and annoyed to learn that an adviser (who she didn’t know) was collecting fees without providing any service. Yikes! Whenever we look at fees in a plan like this, we find fees for investments, for administrative costs, for fiduciary and consulting services, and we usually find indirect fees, like revenue sharing. 401(k) service providers charge these fees in a lot of different ways, and that can make it very challenging to pin down exactly who is being paid, for what service, and how much.


What fees do 401(k) service providers charge?
Investments Fees
Administrative Fees
Revenue Sharing Fees
Fiduciary & Consulting Fee


I believe the fees you and your employees pay for your 401(k) service should be as clear as possible, and that’s why my firm charges one transparent fee for our services. It’s better for all involved, and it makes it much easier for employers to monitor 401(k) plan fees and make sure they and their employees are getting a level of service that’s in line with the price they pay. As a fiduciary, I also believe you need to document that 401(k) fees are reasonable for the services provided. That is why we utilize third-party fee benchmarking to provide our clients and potential clients the peace of mind they deserve.

After all, fees can be a big hit on retirement savings, especially if they’re hidden in the fine print. In that spirit, let’s explore the six steps I recommend to employers who are trying to figure out how much their current plan costs.

1. Gather the right documentation.

First, collect any and all documentation you have available in order to track what fees you pay, and also what fees are paid by the employees investing in your plan. This may include an asset statement or any invoices for fees you’ve paid as an employer to your different service providers. Additionally, your plan documentation will include something called a 408(b)(2) fee disclosure, which is required to disclose fees charged by your plan service providers.

Checklist: Fee Documentation

  • Asset Statement
  • Service Provider Invoices
  • 408(b)(2) Statement

With these documents in hand, you can now identify every service provider receiving payment from your plan. Depending on your adviser and the level of support they offer in administration, you may have met all or just a few members of your service provider team.

To get a complete picture of who you and your employees are paying, call each of your known service providers and ask them who else is involved with providing service to your plan.

2. Understand who is getting paid and how much.

With these documents in hand, you can now identify every service provider receiving payment from your plan. Depending on your adviser and the level of support they offer in administration, you may have met all or just a few members of your service provider team. This team might include:

  • Third party administrator: Different from your adviser, your third party administrator (TPA) handles many of the ongoing tasks required to keep a plan functioning.
  • Custodian: Your custodian holds the assets (the money saved in the plan) and processes any transactions requiring contributions, withdrawals, or purchases or sales of investments. In other words, the custodian has the money and handles all of its movement in and out of the plan.
  • Recordkeeper: Your recordkeeper documents who is participating in your plan, what assets and investments they own, and how money enters and exits the plan. If the custodian manages the money, the recordkeeper is the one watching and recording everything the custodian does.
  • Bundled: Some 401(k) providers bundle the TPA, custodian, and recordkeeper into one solution, which typically shows up in fee statements with the designation “Bundled.” If you see fees for Bundled service, that would replace the first three providers in this list.
  • Adviser: Your adviser helps you make good decisions managing your plan, and helps your employees make the most of their savings and investments.
  • Other Third Party Vendors: Your plan may also utilize the services of other vendors, as well, including auditors, brokers, asset managers, or fund managers.

To get a complete picture of who you and your employees are paying, call each of your known service providers and ask them who else is involved with providing service to your plan.

3. Trace the flow of funds from the plan to the service providers.

Next comes something of an exercise in forensic accounting to track where exactly money is coming from in your plan, and where it’s going. Think about oil rigs pumping oil out of the ground, and piping it to different refineries. If you want to know where the oil is going, and which refineries are getting how much of it, you’ll want to track all the different pipes coming out of the rigs and see where they go. When it comes to 401(k) fees, the most common scenario is for a plan to hold funds which have something called an expense ratio associated with the mutual funds included in the plan’s investment lineup. The expense ratio is the percentage of an investor’s assets that will be used to cover fund expenses like fund management fees and operating and administrative costs fees. Let’s say a mutual fund has an expense ratio of 1%. That means that each year, 1% of an employee’s assets invested in that fund will be deducted to pay fund service providers.

Most plans will also include revenue sharing, a setup in which the company managing a mutual fund will actually pay your 401(k) providers for their services to the mutual fund. Imagine a plan participant invests their $100,000 retirement nest egg into a mutual fund with a 1% expense ratio. Let’s say the mutual fund grows 10% over time, to $110,000 in value. But the expense ratio of 1% amounts to $1,100 in annual fees, reducing the value of the investment to $108,900. Maybe the mutual fund company keeps $400 of the $1,100 fee, and then transfers another $400 to the 401(k) provider, and maybe another $300 to the adviser who recommended the 401(k) provider and/or mutual funds.

This explains why plan sponsors generally do not know how much they are paying their service providers and how it’s possible an adviser could receive a recurring fee for doing basically no work. It also calls into question whether the adviser recommending the 401(k) provider and mutual funds is doing so because those are best for the sponsor and participants, or because the payout is the best. I believe advisers should make unbiased recommendations when it comes to your investment choices, and that’s why my firm does not participate in indirect compensation activities like revenue sharing.

So, if you want real clarity surrounding your 401(k) fees, what should you do? Identify the expense ratios and any indirect compensation hidden within your plan’s fund lineup, and you can see how much money in total comes out of your employees’ retirement accounts each year in fees. Also, keep an eye out for any additional “asset charges” where perhaps additional fees are charged on top of the mutual fund expense ratios. Asset charges are not necessarily bad, and in fact some of the best run retirement plans have them, but as a plan sponsor you definitely need to know about them.

401k documentation & Fees

4. Calculate fees paid to each service provider.

Once you understand the flow of funds out of your plan, you can perform some calculations, either in the form of percentage of total plan assets or in a dollar amount, to demonstrate how much of the money flowing out of your plan ended up with each service provider. This is where you’ll use things like your invoices for your different providers or your contracts to determine what portion of the expense ratio goes to each service providers.

5. Compare your fees against other 401(k) providers.

Now that you know how much each service provider is charging, compare those numbers to other similar plans to see how those plans’ fees stack up against yours.

It can be hard to know how much similar plans are paying for similar services. That is why we offer our clients third-party fee benchmarking. I recently met with the CFO of a construction company, and he was benchmarking his fees, but he only had five other plans to benchmark against. Some of those plans were very different than his, receiving different levels of service and representing entirely different plan features.

The CFO simply wasn’t aware how different his plan was from the others he was benchmarking against, and that’s because comparing 401(k) plans is rarely as simple as comparing apples to apples. If your provider is doing very little for you, it might make sense that their fees are lower than the industry benchmark you find while comparing expenses. Likewise, a provider that offers an exceptionally high level of service might reasonably charge higher fees. But there is lots of grey area between those two extremes, and that’s why it’s so important to look at as many plans as possible to get a sense for where yours sits along the spectrum of service and cost.

I recommend looking at more than 100 plans in the benchmark so that you can really get a good view of how your plan’s fees compare to comparable plans, but also so you can look at the subset where the services are very similar. We use third party benchmarking tools in order to get that meaningful sample size, and we value the unbiased summary a third party can provide to our clients and potential clients.

6. Stay with your current 401(k) service provider or choose a new one.

The last step of this process is to review your findings and decide whether or not the fees in your plan are reasonable. For the service you get, does your plan seem to align with others like it in terms of fees? Make sure you see through the potential biases present in the results of your benchmark; your service provider might argue that their fees are reasonable because of a certain service they provide you, but they may not be compared to other providers who offer that same service. It’s just as important for you to document your perception of the fees as it is to document the fees in the first place. That document could become valuable to you in the future if you were ever challenged regarding fee reasonableness.

Review proposals and benchmark studies you conduct, and take note of which ones are most legitimate and reasonable, which ones might be lower or higher than the benchmarks you’ve found, and which ones are unacceptable for the service you receive. In such cases, the best course of action will likely to be to find a new provider who can either offer the level of service you expect for the price you pay, or will offer lower fees in line with the service you need.

Safeguarding Retirement Readiness

It’s important that employers take these steps periodically to monitor the fees associated with their 401(k) plan and document fee reasonableness. Some employers with complex or expensive plans, a quickly-changing workforce, or otherwise with changing needs might benchmark annually. Others with very stable plans and/or solid service providers will review fees quarterly, but only benchmark and document fees every three to five years. When left unchecked, high fees can add up quickly.

I see it time and time again: Business owners are busy, and it’s easy to assume fees are reasonable until we uncover all the hidden costs and partner fees involved in a 401(k). The fact is the business owner and 401(k) plan manager are accountable under ERISA law to understand their plan fees and determine they are reasonable for the level of service provided. This isn’t just about getting a good deal. It’s about the important work of empowering your employees toward retirement security by making sure they get to keep as much of their savings as possible.


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