How to tell whether your 401(k) fees are reasonable

Fee litigation against plan sponsors has been steady for years, and the cases rarely turn on a sponsor paying too much in some absolute sense. They turn on whether the sponsor could show they knew what they were paying and had checked whether it was reasonable.

That is a documentation problem before it is a pricing problem. Here is how to close it.

Find the total cost, not the invoice

Most sponsors can tell you what their recordkeeper bills the company. That is often a minority of what the plan actually costs, because much of the cost comes out of participant accounts rather than corporate cash.

The four places cost hides

• Recordkeeping and administration, sometimes billed to the company, sometimes deducted from accounts, sometimes both.
• Investment expense ratios inside each fund, paid by participants and easy to overlook because they never appear on an invoice.
• Revenue sharing, where a fund returns part of its expense ratio to the recordkeeper, offsetting fees in a way that makes the plan look cheaper than it is.
• Advisory fees, and individual transaction charges for loans, distributions, and QDROs.

Add all of it and divide by plan assets to get an all-in cost. That single number is what you benchmark, and it is frequently two or three times what the sponsor expected.

Compare against the right peer group

Plan cost scales with size, so a comparison is only useful against plans of roughly similar assets and headcount. A plan with a few million dollars and thirty participants should not be measured against one with hundreds of millions.

Complexity matters too. Payroll integration, multiple entities, a safe harbor design, an auto-enrollment feature, and on-site education all cost something. Reasonable means reasonable for the services you are receiving, which is why the analysis pairs cost with a list of what the plan actually gets.

Run a formal benchmark on a schedule

A live request for proposals from several providers gives you real market pricing rather than a report. Sponsors frequently find their incumbent will match a competitive quote, which means the exercise pays for itself without changing vendors.

Every few years is a defensible cadence for most plans, and sooner if the plan's assets or headcount have grown a lot since the last look. Pricing tiers are usually asset-based, so a plan that has doubled may be entitled to pricing nobody thought to ask for.

Write it down

The benchmark protects you only if it exists on paper. Keep the analysis, the peer comparison, the committee's discussion, and the reasoning behind whatever you decided, including a decision to make no change. A documented decision to stay put is defensible. An undocumented one is difficult to reconstruct years later.

Platform choice is separate from fee review

We consult on plans across Vanguard, Fidelity, and the newer low-cost recordkeepers, and we are not tied to any of them. Ask any advisor to state their fiduciary status in writing.