Last reviewed: July 2026
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.
Key Takeaways
- The funds in your 401(k) were chosen through a process shaped by which fund companies pay to be on the menu.
- Revenue sharing pays your plan’s recordkeeper from fund expense ratios, creating an incentive to favor higher-fee funds.
- Per FINRA, total costs for a small 401(k) plan average around 1.3% of assets a year, concentrated among smaller employers.
- A 1-point higher expense ratio can cost six figures over 25 years; an S&P 500 index fund should run just 0.03% to 0.10%.
- ERISA requires a 404(a)(5) fee disclosure annually, so the information to check your fund costs already comes to you.
About the Author
About the Author: Jeff Judge, CFP®, AEP®, ChFC®, CLU® is a financial planner who writes Viewpoints for JeffJudgeCFP.com. He helps families and business owners read their plan’s fee disclosures and weed out high-cost funds that quietly drain a balance, using the R.U.D.D.E.R. Method™, the financial planning process Jeff developed. “The funds in your 401(k) were chosen by someone with a financial interest in the outcome. That doesn’t make them bad funds. It means the incentive wasn’t yours.”
What is revenue sharing, and why does it shape 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 does the fee difference matter 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.
Is a higher expense ratio ever worth paying in a 401(k)?
Sometimes, but rarely in core asset classes. For plain S&P 500 or total-market exposure, a higher fee buys nothing extra, since the funds track the same benchmark. A premium can occasionally be defensible for a specialized strategy you cannot replicate cheaply, but compare it against the low-cost option first.
How do you read the disclosure your plan must 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 does ERISA actually require 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 should you do if your 401(k) offers only high-fee funds?
Raise it with your employer or benefits department in writing and ask for low-cost index options to be added, then document the response. Within the current lineup, move to the cheapest equivalent in each asset class. Plans have improved their menus when participants asked specific, fee-focused questions.
Frequently Asked Questions
What is revenue sharing in a 401(k)?
Revenue sharing is a payment a mutual fund company makes to a plan’s recordkeeper in exchange for being included in the investment menu. It is embedded in the fund’s expense ratio, often as 12b-1 or sub-transfer agency fees, so participants pay it whether or not they know it exists.
How much do 401(k) fees really cost over time?
Fees compound against your balance the way returns compound for you. Per the SEC, that effect is large over decades. The gap between a 0.10% index fund and a fund charging one point more can approach six figures over 25 years, even on a balance that never tops $200,000.
What is a 404(a)(5) fee disclosure?
The 404(a)(5) disclosure is a document ERISA requires your plan to send participants every year. It lists each fund in the plan with its expense ratio and other fees. A companion 408(b)(2) disclosure shows the service providers’ compensation, including indirect payments like revenue sharing.
What is a reasonable expense ratio for a 401(k) fund?
It depends on the asset class, but core index exposure should be cheap. An S&P 500 index fund should cost roughly 0.03% to 0.10%. A large-cap fund above 0.80% is a red flag worth questioning. Compare every fund you hold to a low-cost index alternative in the same category.
What can you 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.