The mutual funds in your 401(k) didn’t get there by accident. Someone chose them, and the process that chose them had more to do with which fund companies pay to be included than most employees ever find out. Understanding this doesn’t require conspiracy thinking. It requires reading the fee disclosure your plan is legally required to give you, which most people never do.
What Revenue Sharing Is and Why It Shapes Your Fund Menu
Revenue sharing is a payment made by a mutual fund company to the recordkeeper or administrator of a retirement plan in exchange for being included in that plan’s investment menu. The payment is typically a percentage of participant assets invested in the fund, embedded in what the industry calls “12b-1 fees” or “sub-transfer agency fees.” These fees appear inside the fund’s expense ratio. You pay them whether you’re aware of them or not.
The mechanics: a fund company wants access to the 401(k) plans administered by a given recordkeeper. It agrees to pay the recordkeeper a portion of whatever participants invest in its funds. The recordkeeper now has an incentive to include funds that pay higher revenue-sharing rates. The participant, who never selected the fund and may not know the arrangement exists, picks from a menu shaped by that incentive.
This is not illegal. Under ERISA, plan fiduciaries are required to ensure fees are reasonable and that fund selection is prudent. Per FINRA, average total plan costs for a small 401(k) plan run around 1.3% of assets annually, a figure that includes both investment fees and administrative costs, with higher-fee plans concentrated among smaller employers whose fiduciaries have less oversight experience.
Why the Fee Difference Matters More Than Most People Calculate
The math on fund fees compounds in the same direction as the math on returns, just in reverse. Per the SEC, fees compound against your balance exactly as returns compound in your favor.
| Expense ratio | $200,000 balance after 25 years | $300,000 balance after 25 years | Estimated cost vs. 0.10% option |
|---|---|---|---|
| 0.10% (index fund) | ~$418,000 | ~$627,000 | Baseline |
| 0.80% | ~$360,000 | ~$540,000 | ~$58,000 to $87,000 |
| 1.30% | ~$320,000 | ~$480,000 | ~$98,000 to $147,000 |
Assumes 7% gross annual return before fees. Illustrative only; actual results vary.
A fund that costs 1 percentage point more annually doesn’t just cost 1% more this year. It costs you the compounding on that 1% for every year the account runs. Over 25 years, the difference between a 0.10% index fund and a 1.10% actively managed fund in the same asset category can approach six figures on a balance that never exceeded $200,000.
That gap still gets taxed on withdrawal. But you would have paid tax on substantially more real growth, rather than subsidizing a fee arrangement you likely never agreed to.
How to Read the Disclosure Your Plan Is Required to Give You
ERISA requires that your plan provide a 404(a)(5) participant fee disclosure annually. This document lists every fund in the plan with its expense ratio and any other fees. Most people receive it and stop reading before reaching the relevant tables.
| What to look for | Where to find it | What a red flag looks like |
|---|---|---|
| Expense ratios by fund | 404(a)(5) annual fee disclosure | Large-cap fund above 0.50%; any S&P 500 fund above 0.15% |
| Revenue sharing payments | 408(b)(2) service provider disclosure | High indirect compensation used to offset direct plan costs |
| Share class | Fund prospectus or fee disclosure table | ”Investor class” or “A shares” when institutional class exists |
| Administrative fee structure | Plan documents | Admin costs paid entirely through fund revenue sharing, not direct fees |
Expense ratios by fund. Every fund in your plan should list its expense ratio. Compare them to low-cost index alternatives in the same asset class. An S&P 500 index fund should cost somewhere between 0.03% and 0.10%. If the large-cap fund in your 401(k) carries an expense ratio above 0.80%, the difference is going somewhere. Find out where.
Revenue sharing disclosures. The 408(b)(2) disclosure your plan receives from its service providers must identify indirect compensation, including revenue sharing payments. Ask your plan administrator for this document. If the plan is paying for recordkeeping primarily through fund revenue sharing rather than direct fees, that’s a structural conflict worth understanding.
Share class. The same fund often comes in multiple share classes with different expense ratios. An institutional share class may cost half what the retail class costs. Large plans negotiate institutional pricing routinely. Many small plans don’t. If your 401(k) holds retail-class shares of a fund that offers cheaper institutional classes, that difference is a fee with no corresponding service.
What ERISA Actually Requires of Your Employer
ERISA requires plan fiduciaries to act prudently and in participants’ interests when selecting and monitoring investments. That includes understanding and monitoring fee levels. A fiduciary who allows the plan to pay excessive fees because it’s convenient, or because the recordkeeper arranged the menu, may have breached that duty.
The practical implication for employees: you’re not the fiduciary, but you have the right to information. If your plan’s investment menu is built primarily around high-fee actively managed funds with no low-cost index options, that’s worth raising with your HR or benefits department in writing. Plans have been successfully challenged under ERISA for excessive fees, and the legal landscape has created real accountability for employers who don’t take the obligation seriously.
If you’re self-employed or run a small business and sponsor a retirement plan, the fiduciary obligation runs to you directly. The funds in your plan need to be prudently selected and monitored. That means knowing what they cost, why they’re there, and who is being paid by having them there.
What You Can Actually Do About This
If you’re an employee: Read the annual fee disclosure. Look up the expense ratio on every fund you hold. If cheaper alternatives exist within the plan, switch to them. If the plan lacks low-cost index options, raise it with your employer in writing and document the response. Plans have improved their lineups when employees asked the right questions.
If you’re a business owner: Ask your recordkeeper to itemize the revenue sharing payments associated with your current fund lineup. Request a comparison to equivalent funds with lower costs. Ask directly: is this plan priced on direct fees, revenue sharing, or both? The answer tells you where the incentives are.
The funds in your 401(k) were chosen by someone with a financial interest in the outcome. That doesn’t mean they’re bad funds. It means the selection process had an incentive that wasn’t aligned with yours. Knowing that is the first step to doing something about it.
Schedule a no-obligation call with Jeff to review your current 401(k) plan costs and whether lower-cost alternatives are available.
The information provided is for educational purposes only and should not be construed as investment advice. Investment strategies should be tailored to individual circumstances, risk tolerance, and goals. Past performance doesn’t guarantee future results. Consult with qualified financial professionals regarding your specific situation. Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a registered investment advisor and separate entity from LPL Financial. © 2026 JeffJudgeCFP.com | Not to be reproduced in whole or in part. All rights reserved.