Fee Compression and Hidden Revenue: How to Calculate What Your 401(k) Provider Really Earns

There is one sentence every 401(k) fiduciary should slow down and think about when they hear it from a service provider: “We make our money in other ways.”

That statement may be completely innocent. It may also be the opening line of a much longer fiduciary conversation — one that most committees never have, because the number on the front page of the proposal looks so good.

Over the past decade, recordkeeping fees have been compressed across most of the 401(k) industry. Plans that once paid asset-based recordkeeping charges have moved to low per-participant pricing or sharply reduced basis points. On paper, that is a clear win.

But recordkeeping platforms are expensive to run. Call centers, cybersecurity, payroll integrations, compliance support, participant websites, mobile apps, statements, testing support, and sponsor reporting all cost real money. So when the visible fee drops toward zero, the prudent question is not “did we get a good deal?” It is “where did the economics go?”

This guide shows you where the money moves — and, more importantly, how to actually add it up.

Fee Compression Did Not Eliminate Cost. It Relocated It.

When a provider quotes a recordkeeping fee well below what it costs to service the plan, that gap has to be closed somewhere. It usually closes through one or more of these:

• Proprietary stable value or general account products, where the provider keeps the spread between what it earns and what it credits participants
• Revenue sharing paid out of fund expense ratios (12b-1 fees, sub-transfer agency fees, shareholder servicing fees)
• Managed account programs layered on top of the fund lineup
• Proprietary target-date funds that influence menu construction
• Co-manufactured or affiliated investment products with shared economics
• Participant-level fees for loans, distributions, QDROs, and brokerage windows
• Rollover programs that capture assets when participants leave

None of these is automatically improper. A proprietary stable value fund may be genuinely competitive. A managed account service may add real value for participants who use it. A target-date series may be well built and fairly priced.

The fiduciary problem is not that these products exist. The problem is a committee approving an arrangement without understanding how it is funded — and therefore being unable to say whether the total cost is reasonable for what the plan receives.

How to Calculate Total Provider Compensation

Most committees ask, “Is our recordkeeping fee competitive?” That question is too narrow. The better question is: what is the total compensation being earned from this plan, who receives it, and what do participants get in return?

You do not need to be a forensic accountant to answer it. You need five numbers, and your 408(b)(2) disclosure, fund lineup, and recordkeeper reports contain nearly all of them.

Step 1: Direct compensation

This is the explicit fee — the per-participant charge or basis points billed to the plan or the employer. Find it in the direct compensation section of your 408(b)(2) disclosure.

Calculate: per-participant fee × participant count, or plan assets × the stated basis points.

Step 2: Revenue sharing

Some funds pay part of their expense ratio back to the recordkeeper for administrative services. Your 408(b)(2) must disclose this as indirect compensation, and your recordkeeper can produce a fund-by-fund schedule showing the rate each fund pays.

Calculate: for each fund, assets in that fund × its revenue sharing rate. Add them up. Watch for share classes: the same fund often has a clean institutional class with no revenue sharing alongside a retail class paying 25–40 basis points.

Step 3: Proprietary investment revenue

This is the one most committees miss entirely, because it is often not expressed as a fee at all. In a proprietary stable value or general account product, the provider invests the money, credits participants a declared rate, and keeps the difference. That spread is provider revenue every bit as much as an invoice is.

Calculate: assets in the proprietary product × the spread. If your provider will not state the spread, that refusal is itself information — ask for the gross portfolio yield alongside the net crediting rate and work out the difference.

Step 4: Managed accounts and advice programs

Managed accounts typically charge 20–60 basis points on enrolled balances, on top of the underlying fund expenses. Because only some participants enroll, this revenue is invisible in plan-level averages.

Calculate: enrolled participants × their average balance × the program fee. Ask your recordkeeper for the enrolled headcount and enrolled assets — they have both.

Step 5: Participant transaction fees

Loan initiation, distributions, QDRO processing, and brokerage window fees are charged to individual participants, so they never appear on the plan sponsor's invoice. They are still revenue.

Calculate: annual volume of each event × the fee. Request a twelve-month transaction count from your recordkeeper rather than estimating.

A Worked Example

Consider a plan with $18 million in assets and 220 participants — an average account balance of about $81,800. The recordkeeper quoted $28 per participant per year, which sounds extraordinarily competitive. Here is what the plan is actually generating:

Now translate that into the two figures a committee can actually benchmark:

• $232 per participant per year ($51,055 ÷ 220)
• 0.28% of plan assets ($51,055 ÷ $18,000,000)

The headline quote was $28 per participant. The plan is generating roughly $232 per participant — about 8.3 times the stated fee. Nothing here is necessarily improper, and $232 per participant may well be defensible for a plan this size. But a committee that benchmarked only the $28 has not benchmarked its plan. It has benchmarked a fraction of it.

The One Question That Cuts Through All of It

If you ask a provider only one thing during a review or an RFP, make it this:

“What is your required revenue to service this plan, before revenue sharing, proprietary products, managed accounts, or any other ancillary revenue?”

That question changes the conversation. It separates the cost of core recordkeeping from the economics created by product placement, menu construction, and optional participant programs. Once you know the required revenue, you can decide deliberately how it should be paid — a flat per-participant fee, an employer-paid arrangement, plan assets, or specific participant-paid services.

The point is not that one funding method is always right. The point is that the choice should be intentional, documented, and tied to participant value — rather than inherited from whatever structure a proposal happened to contain.

Revenue Streams and the Question to Ask About Each

Why This Matters Under ERISA

ERISA does not require you to select the cheapest provider. It requires you to act prudently and solely in the interest of participants and beneficiaries. That means having a process for evaluating whether fees are reasonable in light of the services provided.

The Supreme Court reinforced this in Tibble v. Edison International (2015), which established that fiduciaries have a continuing duty to monitor plan investments — not merely a duty at the moment of selection. In Hughes v. Northwestern University (2022), the Court rejected the argument that offering some low-cost options cures the imprudence of other choices, and directed courts to apply a context-specific review of each decision.

The practical lesson from that litigation is consistent: committees need to be able to show their work. If a provider uses proprietary investments, you should know why they are appropriate. If revenue sharing exists, you should understand how it is credited and whether participants are treated fairly. If managed accounts generate additional revenue, you should be monitoring usage, cost, and outcomes. And if a provider offers a strikingly low headline fee, you should have determined where the economics are actually recovered.

A Practical Fee Review Process

1. Request a full compensation inventory from every service provider.
2. Ask for required revenue before proprietary products, revenue sharing, managed accounts, or ancillary services.
3. Review all investment-related compensation, including proprietary and co-manufactured products.
4. Benchmark recordkeeping, advisory, investment, managed account, and participant-level fees against plans of comparable size.
5. Evaluate whether fees are allocated fairly among participants.
6. Document why the committee believes the arrangement is reasonable.
7. Periodically test the market through an RFP or competitive review.

The Bottom Line

Fee compression has not made fiduciary oversight easier. In several respects it has made it harder. When recordkeeping fees were larger and more visible, committees could see what the plan was paying. Today a low headline number may be one chapter of a much longer revenue story.

That does not mean every low-cost proposal is suspect. It means the question deserves an answer. If a provider can service your plan for a surprisingly low price, a prudent committee asks how — and writes down what it learns.

Participants ultimately bear the weight of fee structures nobody fully understood. Your job is to bring those structures into the light, evaluate them on the merits, and document why the arrangement serves the people in the plan.