How 401(k) Fees Affect Your Plan Participants — And Why It's Your Responsibility

According to the U.S. Government Accountability Office, 41% of 401(k) participants incorrectly believe they pay no fees in their retirement plan. Another 45% cannot use their fee disclosure to determine what they actually pay. For most participants, 401(k) fees are simply invisible.

For you, the plan sponsor, they cannot be. Under ERISA, you have a legal fiduciary obligation to ensure that every dollar your plan pays in fees is “reasonable” — regardless of whether participants notice or understand those fees. The disclosure system creates accountability. It does not transfer responsibility to participants.

Here is what fee drag does to the people in your plan — and why it is your problem to fix.

The 28% Rule: How Fee Drag Compounds

The U.S. Department of Labor has published a calculation that every plan sponsor should know by heart: a 1% difference in annual fees reduces a participant's retirement balance by 28% over a 35-year career. The scenario: a $25,000 starting balance at a 7% gross annual return. The difference between a plan charging 0.5% and one charging 1.5% — a single percentage point — is not a rounding error. It is roughly $56,000 of retirement income.

The math compounds against participants in three distinct ways:

• Direct reduction: Every fee dollar is a dollar not invested on behalf of the participant.
• Lost compounding: That missing dollar would have generated returns in every subsequent year. You lose not just the fee itself, but all future earnings on it.
• Late-stage acceleration: In the years when balances are largest — the decade before retirement — the same fee percentage extracts the most absolute dollars, with the least time remaining to recover.

At scale, fee drag produces outcomes that are difficult to ignore:

The participant in the 3% plan ends up with 43% less than the participant in the 1% plan — from the same starting balance, the same gross market return, and the same contribution history. The only variable is fees.

What the Average Participant Has at Stake

Fee drag is not theoretical. Using current median account balances from Vanguard's How America Saves report, here is what is at risk for typical participants in your plan:

Consider the participant in the 45–54 range. With a median balance of $60,763, a 1% annual fee drag represents approximately $22,000 in lost wealth by retirement age — roughly a full year of retirement income, erased by fees they likely cannot see and that you are legally required to benchmark.

A note on the data: the median figure is used here deliberately, not the average. The overall average 401(k) balance across all participants is $148,153 — but this is skewed sharply upward by high-balance accounts. The median ($38,176 overall) reflects the actual experience of most people in most plans.

What Participants Are Actually Paying

401(k) plan costs have three distinct layers. A complete fiduciary review requires understanding all three:

• Fund expense ratios (investment costs): The annual cost of the plan's investment funds, expressed as a percentage of assets. For 401(k) participants specifically, the average equity fund expense ratio is 0.26% — down 66% from 0.76% in 2000, driven by the shift toward index funds and institutional share classes (ICI, 2024). This is the most visible layer because it appears in fund disclosures.
• Recordkeeping and administration fees: Charged by the recordkeeper to maintain participant accounts, process transactions, and administer the plan. Industry average: $45–$80 per participant per year. These are often assessed as a basis-point charge against assets rather than a flat dollar fee — which makes them easy to overlook and, in revenue-sharing arrangements, easy to conceal.
• Total all-in cost: The participant-weighted average across all plan expenses is approximately 0.49% of assets per year (BrightScope/ICI, most recently published data). But this average conceals enormous variation by plan size — ranging from approximately 1.26% for plans under $1 million in assets to 0.27% for plans over $1 billion.

Plan size is the single largest driver of what participants pay. A 1% difference in all-in cost between a small plan and a large plan is, compounded over a career, precisely the “28% rule” gap described above.

One important ERISA clarification: the standard is not that your plan must have the lowest fees available. The standard is that fees must be market-competitive for a plan of your specific size. A small plan will reasonably cost more on a percentage basis than a large plan. But it must still be competitive within its peer group — and benchmarking against same-size plans is the only way to demonstrate that.

SECURE 2.0 Provisions That Raise the Stakes

The SECURE Act 2.0 introduced a series of participant-focused changes that directly affect how much money flows through your plan — and therefore how much fee drag matters:

• Mandatory automatic enrollment (effective 2025 for new plans): New 401(k) plans must auto-enroll participants at a default deferral rate of 3–10%, with automatic annual escalation to at least 10% (and up to 15%). More participants contributing from day one means more assets accumulating — and more assets exposed to fee drag from an earlier age.
• Enhanced catch-up contributions for ages 60–63 (effective 2025): Participants who turn 60, 61, 62, or 63 during the plan year may now contribute up to $11,250 in catch-up contributions — 40% more than the standard $8,000 catch-up limit. These participants are in the late-stage compounding window where fee drag inflicts the most absolute dollar damage.
• Mandatory Roth catch-up for high earners (effective for the 2026 plan year): Participants with prior-year wages exceeding $150,000 must now make all catch-up contributions on a Roth (after-tax) basis. Plans without a Roth option cannot accept catch-up contributions from these participants. Plan sponsors should verify their plan document and payroll systems are configured correctly for this requirement now in effect.

Taken together, these provisions are pushing more assets into 401(k) plans from more participants at more stages of their careers. As assets under management grow, per-participant costs should decrease — larger plans carry more negotiating leverage with recordkeepers. If your fees have not been renegotiated since SECURE 2.0 took effect, you may be leaving savings on the table.

Why This Is Your Fiduciary Responsibility — Not Theirs

The GAO's 2024 review of 401(k) fee disclosures confirmed what many plan sponsors already suspect: while the disclosure regulations have increased employer awareness of fees, participant comprehension remains low. Participants who cannot identify their fees will not complain about excessive fees — and they will not pressure providers to reduce them. The system is not self-correcting through participant behavior.

This is precisely why ERISA places the obligation on you. Your duty under ERISA Section 404 is to act as a prudent expert — to evaluate plan costs with the care, skill, and diligence of a knowledgeable person familiar with such matters. That duty is not satisfied by receiving a 408(b)(2) disclosure. It is satisfied by reviewing that disclosure, comparing it against market rates for plans of your size, and documenting that your fees are reasonable.

Courts have been explicit: a plan sponsor cannot discharge their fiduciary duty by simply accepting what a provider tells them. The evidence of a prudent process — including a documented fee benchmark — is what separates a defensible plan from a litigation target.

Three Questions Every Plan Sponsor Should Be Able to Answer

If you cannot answer these three questions, you have a fiduciary documentation gap:

1. What is my plan's all-in cost as a percentage of assets? This is the total of fund expense ratios, recordkeeping charges, advisory fees, and any indirect compensation paid to service providers — including revenue sharing.
2. Is that cost competitive for a plan of my size? Benchmarking requires comparing your all-in cost to market rates for plans with similar asset levels and participant counts — not to a broad industry average.
3. Is that analysis in your fiduciary file? An undocumented benchmark is not a defense. The evidence must exist in writing and be producible to the DOL or in litigation.

FEEDUCIARY's benchmarking tool is built to answer all three. Enter your plan's total fees and participant count, and receive an instant comparison against current market rates for plans of your size — formatted for your fiduciary file.