What Are "Reasonable" 401(k) Fees Under ERISA?

ERISA Section 408(b)(2) requires that compensation paid to service providers be "reasonable." But the statute doesn't define what reasonable means — and neither does the regulation. Instead, the standard has been shaped by DOL guidance, court decisions, and industry practice.

The Core Standard: Reasonable Relative to Services

The DOL has consistently interpreted "reasonable" to mean that fees must be reasonable in relation to the services provided. This is a two-part test:

1. Are the services actually being performed?
2. Is the compensation appropriate for those services, given what is available in the market?

Critically, the DOL does not require that you always hire the cheapest provider. A plan may pay above-market fees if there is a documented reason — superior service, unique capabilities, or other value. But you must be able to demonstrate that you considered the cost and consciously decided the value justified it.

How Courts Have Applied the Standard

In the surge of ERISA fee litigation over the past decade, courts have generally held that fiduciaries must:

• Actually compare fees to the market — not just accept what a single provider charges
• Conduct periodic benchmarking (at minimum every few years)
• Document their process and conclusions
• Monitor fees over time and act if fees become unreasonable

Plans that paid significantly above-market fees without documented benchmarking have consistently lost in litigation. Plans that could show a documented, good-faith benchmarking process — even when fees were somewhat above market — have often prevailed.

What the Market Data Shows

Industry data from Vanguard, Callan, and NEPC provides benchmarks for typical recordkeeping fees by plan size:

• Small plans (< $10M): $60 – $160 per participant annually
• Mid plans ($10M – $100M): $45 – $110 per participant annually
• Large plans ($100M – $250M): $30 – $85 per participant annually

These are just recordkeeping fees. Adding advisor fees, TPA fees, audit costs, and fund expense ratios can significantly increase total plan cost.

Practical Steps to Document Reasonableness

1. Obtain and review your 408(b)(2) disclosures annually
2. Calculate total fees on a per-participant and percentage-of-assets basis
3. Compare to current market benchmarks for your plan size tier
4. Document the comparison and your conclusion
5. Store the benchmark in your fiduciary file with your meeting minutes
6. Conduct a formal RFP every 3–5 years

FEEDUCIARY automates steps 2 through 4 — giving you a timestamped benchmark report you can drop directly into your fiduciary file.