401(k) Fee Study: 75% of Small Business Plans Pay Hidden Fees

Employers have a fiduciary responsibility to ensure the fees paid by their 401(k) plan are “reasonable” – so excessive fees do not reduce the investment returns of plan participants needlessly. To do that job, employers should ”benchmark” their 401(k) fees periodically by comparing them to industry averages and/or the fees charged by competing 401(k) providers. Sounds straightforward, but this information is hard to find and often harder to compare on an apples-to apples basis.

Fees are difficult to compare for two reasons. First, public information – most notably, the Form 5500 – provides only snippets of 401(k) fee data and is generally not suitable for completing a benchmark comparison. Second, 401(k) providers can charge "hidden” administration fees – in general, revenue sharing and wrap fees – whose dollar amount cannot be found in 408b-2 fee disclosures. In short, “following the money” is a difficult job even for those employers willing to invest the time and energy to do so.

To help employers benchmark their 401(k) fees, Employee Fiduciary launched a fee comparison service a few years ago. When this service is requested, we will total a plan’s “all-in” fee (administration fees + investment expenses) and then compare the amount to a comparable plan with Employee Fiduciary. Since launching our service, we’ve helped hundreds of employers evaluate their 401(k) fees – including all hidden administration fees.

Recently, we recently studied our latest fee comparisons. Below is a summary of the fees we found for 104 small business plans with less than $5 million in assets, including key findings.

Study of Small Business 401(k) Fees

⁽¹⁾Average of plans.

⁽²⁾Weighted average of plans based on assets.

⁽³⁾Weighted average of plans based on participant count. Includes the “hidden” portion of administration fees paid from fund expenses (i.e., revenue sharing and wrap fees)

Key findings

We made the following observations during our 2021 study: 

• The 1.18% all-in fee average was quite a bit lower than the 1.40% average we found in our 2018 study, while $445.43 per-capita admin fee average was about the same ($422.30 in 2018). In other words, we found 401(k) investment expenses dropped in recent years, while 401(k) administration fees remained steady. Perhaps due to more investment in low cost index funds.
• 75.96% of plans paid “hidden” administration fees – in general, revenue sharing and wrap fees.
• 6 of the top 10 highest-priced 401(k) providers in terms of per capita administration fees also ranked in the top 10 based on their % of hidden fees. 
• 9 of the top 10 highest-priced 401(k) providers in terms of per capita administration fees were insurance companies. The reason? My guess is their widespread use of variable annuities – which are mutual funds “wrapped” in a thin layer of insurance with additional fees and redemption restrictions – as plan investments. A “wrap” fee can be 1% or more, turning low cost mutual funds into costly variable annuities
• It’s important to evaluate 401(k) administration fees on a per-capita basis. The reason - many 401(k) providers charge asset-based administration fees that can appear reasonable on all-in fee basis, but anything but on a per capita basis. Consider this plan with $3,091,755 plan with 7 participants. While it’s 1.18% all-in fee was average, it’s $4,405.63 per capita admin fee was almost ten times average!

The Takeaway – Hidden 401(k) Fees Are Usually Higher

According to a recent Pew Charitable Trusts survey, only 19% of small to midsize employers are “very familiar” with the fees paid by their 401(k) plan, while 34% were “not at all familiar.” The remaining 47% said they were only “somewhat familiar.”  The culprit for this confusion? Hidden 401(k) administration fees like revenue sharing and wrap fees. I have no doubt.

And yet, our latest 401(k) fee study found 75% of small business plans pay them. If you use a 401(k) provider with a high percentage of hidden fees, we highly recommend you take a closer look at their 408b-2 fee disclosure to find out what you’re actually paying. There’s a good chance the amount could be a lot lower – which could ultimately help plan participants retire years sooner.