Overview
Many small business owners know they offer a 401(k) but are unsure what participants are actually paying in fees. Fees can come from fund expense ratios, recordkeeping, administration, and advisor or platform costs. Over time, even small differences in fees can meaningfully reduce an employee's retirement savings.
This guide explains how to spot common fee types, what responsibilities employers typically have, and practical next steps to evaluate whether your plan is cost-effective for both your business and your employees.
Key takeaways
- 401(k) costs come from multiple sources—fund fees, recordkeeping, and administrative charges.
- Employers should review fee disclosures and be ready to explain fees to employees.
- Comparing providers and plan options can reduce long-term costs for participants.
How it works
Most plans generate fees in several ways: mutual fund or ETF expense ratios, per-participant recordkeeping fees, and transactional or advisory fees. Providers must disclose these fees in plan documents, but the language can be technical and hard to interpret.
Employers sponsor the plan and typically select the provider and investment menu, while participants choose investments within that menu. That division means employers influence costs through provider choice and the funds offered, even if participants control allocations.
What it may cover (and what it may not)
Fee disclosures generally cover explicit costs: investment expense ratios, administrative charges, and any revenue-sharing arrangements. They may also list services included by the provider, such as participant communications or plan testing.
Disclosures may not show indirect costs like certain revenue sharing inside fund structures or one-time transition charges unless the provider itemizes them. Employers should ask providers to explain any line items they do not recognize.
Common mistakes to avoid
Assuming low participant account balances mean fees are unimportant: small accounts pay the biggest percentage impact over time.
Relying solely on a single disclosure document without following up: many employers skim disclosures and miss recurring charges or optional services that add cost.
Not benchmarking fees against similar plans: fees that seem reasonable in isolation may be high compared with comparable providers or plan sizes.
Questions to ask an agent
How are total plan fees calculated, and can you provide a sample annual cost for an average participant?
Which services are included in the quoted fee and which are optional or charged separately?
How frequently are fund menus reviewed and can lower-cost fund share classes be used?
Next steps
Start by collecting the fee disclosure documents your provider is required to supply and set aside time to review each line item with the provider or a consultant. If you want a focused review on plan structure and tax treatment, see Tax Deductible Retirement Plans.
Ask the provider for a participant-level cost example and comparable benchmarks for businesses of similar size. For help understanding how retirement plan choices interact with other employer-provided benefits, consider reviewing Understanding 401(k) Plans and Insurance Policies.
If you prefer personalized assistance, you can ask an agent to walk through your disclosures and outline lower-cost options for both the company and employees.
Frequently Asked Questions
How often should I review my 401(k) plan fees?
Review fees at least annually and when there is a significant change in provider services or participant balances.
Can switching fund share classes reduce costs for participants?
Yes; using lower-cost share classes for institutional or retirement plans can lower expense ratios for participants.
What if I don't understand a fee in the disclosure?
Ask the provider for a plain-language explanation and a numeric example of how the fee affects participant balances.
Are employers legally required to monitor plan fees?
Employers have a fiduciary duty to act prudently when selecting and monitoring plan providers and fees; regular review helps meet that obligation.