401(k) Fees: What Plan Sponsors Should Review—and How Often
401(k) Fees: What Plan Sponsors Should Review—and How Often
401(k) plan fees are one of the most important—and often most misunderstood—parts of plan oversight. Many employers know their plan has fees, but may not know exactly what employees are paying, how costs are structured, or whether those costs are reasonable. Fees can appear in different disclosures, be paid in different ways, and involve multiple providers.
For plan sponsors, the objective is not necessarily to find the cheapest possible 401(k) plan. The goal is to establish a thoughtful process for understanding plan costs, evaluating the services being provided, and determining whether fees are reasonable.
Why Fee Oversight Matters
Under ERISA, plan sponsors have a responsibility to act prudently and in the best interest of plan participants. That includes understanding and monitoring the fees paid by the plan.
A plan can have reasonable fees even if it is not the lowest-cost option available. One provider may charge more but offer better technology, payroll integration, participant support, administrative service, education resources, or fiduciary assistance.
The important question is whether the fees are reasonable in light of the services and value being received.
A strong fee-review process can help plan sponsors:
Understand what the plan and participants are paying
Identify whether fees are transparent and appropriately allocated
Evaluate whether services still fit the company’s needs
Document prudent oversight of the plan
Avoid allowing an outdated fee structure to continue indefinitely
The Main Types of 401(k) Plan Fees
Most plans have several categories of fees. Understanding each category is the first step toward evaluating the plan as a whole.
- Investment Expenses
Investment expenses are the ongoing costs charged by mutual funds, exchange-traded funds, collective investment trusts, and other investment options in the plan.
Plan sponsors should review whether investment expenses are reasonable for the type of investments offered. That does not mean every fund must be the lowest-cost option in its category, but it does mean sponsors should understand why an investment is included and whether its expenses remain appropriate.
Items to review may include expense ratios, available share classes, revenue-sharing arrangements, target-date fund costs, and whether comparable lower-cost options are available.
- Recordkeeping Fees
Recordkeeping fees cover many of the day-to-day functions that allow a 401(k) plan to operate. These may include maintaining participant accounts, processing contributions, providing a website and mobile app, handling distributions and loans, issuing statements, and providing customer service.
Recordkeeping fees may be charged as a flat annual fee, a per-participant fee, a percentage of plan assets, or through revenue sharing generated by plan investments. Sponsors should understand how recordkeeping fees are paid, who pays them, and whether the arrangement still makes sense as the plan changes.
Third-Party Administration Fees
Third-party administrators, or TPAs, often assist with plan documents, annual compliance testing, employer contribution calculations, Form 5500 preparation, plan amendments, and operational questions.
These fees may be paid by the employer, the plan, or participants, depending on the arrangement. Sponsors should review them alongside the scope and quality of services being provided.
Bear in mind, oftentimes recordkeeper and TPA services are bundled (both services offered by the same provider), which can potentially reduce costs.
- Advisory Fees
Advisory fees compensate the financial professional or retirement plan advisor who supports the plan. Services may include investment monitoring, fiduciary support, fee benchmarking, employee education, plan-design guidance, committee support, and coordination with the recordkeeper and TPA.
- Individual Participant Fees
Some fees apply only to participants who use certain plan features, such as loans, distributions, managed accounts, brokerage windows, or qualified domestic relations order processing.
These fees can be reasonable because they are tied to services used by only some participants. Still, sponsors should understand what they are and whether they are clearly disclosed.
How Often Should Plan Sponsors Review Fees?
There is no single rule requiring every plan fee to be reviewed on the exact same schedule. However, sponsors should have a consistent process rather than reviewing fees only when a problem arises.
At Least Annually: Review Fees and Service Arrangements
At least once each year, plan sponsors should review provider fee disclosures and confirm they understand how plan costs are being paid.
This may include recordkeeping and administrative fees, advisory fees, investment expenses, revenue-sharing arrangements, participant-paid fees, and any changes in services or pricing. Annual review is also a good time to confirm that required participant fee disclosures are being provided.
Every One to Three Years: Benchmark Fees
Many plans benefit from periodically benchmarking recordkeeping and administrative fees against comparable plans.
A benchmarking review should consider more than cost. It may compare services, technology, participant support, payroll integration, investment options, and plan complexity. The goal is not to automatically change providers whenever a lower fee is identified. It is to determine whether the current arrangement remains reasonable.
What Should Trigger an Earlier Review?
Plan sponsors do not need to wait for the next scheduled review if something meaningful changes. An earlier review may be appropriate when plan assets or participant count grow significantly, payroll systems change, service quality declines, participant complaints increase, providers change pricing, the company goes through a merger or acquisition, or the plan adds new features.
A plan that was appropriately priced several years ago may no longer be the best fit today.
Document the Process
A fee review is most useful when it is documented. Sponsors should retain provider fee disclosures, benchmarking reports, committee meeting minutes, notes from provider discussions, and explanations for decisions to retain or change providers.
Documentation does not need to be overly complicated. Its purpose is to show that the sponsor considered relevant information, asked appropriate questions, and made decisions through a prudent process.
Bottom Line
401(k) fee oversight is not about finding the lowest-cost plan at all costs. It is about understanding what the plan pays, what participants pay, what services are being received, and whether those costs remain reasonable.
At a minimum, plan sponsors should review fees and service arrangements annually, benchmark recordkeeping and administrative costs periodically, and conduct a broader provider review every few years or when the plan experiences meaningful changes.
A consistent process can help employers support their fiduciary responsibilities, identify opportunities for improvement, and ensure the 401(k) plan continues to provide value to both the company and its employees.
Ryan Page, CFP®, MBA®
Office & Text:720-826-1092
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
