Why Asset-Based 401(k) Admin Fees Are a Problem – And What You Can Do About It

A lot of employers don’t think too much about how their 401(k) administration fees are structured. If the costs seem reasonable and the provider is doing its job, why fix what isn’t broken?

But here’s the problem: many 401(k) providers charge administration fees as a percentage of plan assets, and that setup can quietly siphon thousands—sometimes hundreds of thousands—of dollars away from participants’ savings over time. Worse yet, it can expose plan sponsors (that’s you, employers!) to major fiduciary liability if those fees are deemed excessive.

So, let’s break it down: How do asset-based fees hurt participants? What’s the legal risk for employers? And what’s a smarter way to structure 401(k) fees?

The Problem with Asset-Based 401(k) Fees

Let's compare two 401(k) plans, each with 50 participants and $1 million in plan assets. They pay their 401(k) provider the following fees for identical administration services:

• • Plan 1: Pays a flat fee ($2,500 base + $50 per participant) annually.
  • Plan 2: Pays a 0.50% asset-based fee annually.

Both plans pay $5,000 annually today. However, if plan assets were to double to $2 million, Plan 2 would pay twice as much as Plan 1 ($10,000 for Plan 2 vs. $5,000 for Plan 1) for the same level of service!

That’s the problem with asset-based fees: the cost scales up automatically as your plan grows, even though the work your provider does stays the same.

How Fees Eat Away at Retirement Savings

Think a small increase in fees doesn't matter? Consider this scenario:

An employee has $25,000 invested, growing at an average annual return of 7%. How do fees impact their savings after 35 years?

• • 0.5% annual fee: Retirement balance would grow to $227,000
  • 1.5% annual fee: Retirement balance grows only to $163,000

Total loss due to higher fees: $64,000!

That's tens of thousands of dollars lost—simply because of unnecessarily high asset-based fees. Even small fee differences compound significantly over time. This cumulative effect is why the Department of Labor (DOL) emphasizes the importance of controlling plan fees.

Fiduciary Red Flags: Why Employers Need to Pay Attention

Here’s where it gets serious for employers: Under ERISA (Employee Retirement Income Security Act), you have a fiduciary responsibility to ensure 401(k) fees are “reasonable” for the services provided.

If your plan’s fees are too high, you could face a lawsuit. And these lawsuits aren’t just hitting big corporations anymore—even small and mid-sized companies are being sued for excessive 401(k) fees.

If a court finds that your plan’s fees are too high, you (and other company decision-makers) could be personally liable for the excess costs. That’s a scary thought.

How to Avoid Overpaying (and Reduce Your Liability)

The good news? Fixing your 401(k) fee structure isn’t complicated.

Minimize Asset-Based Admin Fees

A fairer and more transparent way to pay for 401(k) administration is to charge fees per participant, not as a percentage of assets.

• • The cost of recordkeeping and plan administration is not tied to how much money is in the plan—it’s based on the number of employees.
  • Many 401(k) providers have already moved to flat per-person fees because it’s a simpler, more equitable way to charge for services.

Avoid “Hidden” Admin Fees

When paid from plan assets - not a corporate bank account - 401(k) administration fees can be direct or indirect in nature. Direct fees are deducted directly from participant accounts, while indirect fees are embedded in the expense ratio of plan investments – lowering their returns.

Indirect fees are often called “hidden” fees because they lack the transparency of direct fees. Revenue sharing and wrap fees are the most common forms of hidden fees. Both are generally charged as a percentage of plan assets. Hidden fees are the most insidious form of asset-based administration fee due to their lack of transparency.

Switching to low-cost investment funds that pay no hidden fees and a transparent fee structure can save participants thousands over time.

Benchmark Your Fees Regularly

Just because you’re paying a certain amount now doesn’t mean it’s competitive.

• • Get at least three quotes from different providers every few years to see how your fees compare.
  • Ask your provider to show exactly how their fees are calculated and whether they’ve been reduced as your plan has grown.

Keep Good Documentation

If your plan ever gets audited or sued, the best defense is proving that you regularly reviewed fees and made decisions based on participants’ best interests.

• • Keep meeting notes on fee discussions.
  • Document benchmarking results and any changes made.
  • Make sure fee disclosures 408(b)(2) are reviewed annually.

The Bottom Line

401(k) fees matter—a lot. If your plan is using asset-based fees for administration, your employees are likely overpaying, and you could be exposing yourself to legal risk.

By switching to flat per-participant fees, regularly benchmarking costs, and eliminating hidden charges, you can ensure your plan is cost-effective, transparent, and legally sound.

At the end of the day, a well-managed 401(k) isn’t just about compliance—it’s about helping your employees (and you!) retire with more money in their pockets.

If you haven’t reviewed your plan’s fees recently, now’s the time to do it. Your future self—and your employees—will thank you.