Why Your 401(k) Administration Fees Could Be Costing More Than You Think

Michelle Marsh
2 days ago
3 min read

When it comes to managing a 401(k) plan, many employers take a “set it and forget it” approach. As long as the provider seems to be doing a good job and the fees appear reasonable, it can feel like there’s no reason to dig deeper.

But ignoring how your 401(k) administration fees are structured could be quietly costing both you and your employees—sometimes a lot. Worse yet, it could expose you to serious fiduciary risk if the fees are later deemed excessive.

Let's walk through why the structure of your plan's fees matters, how it can impact retirement savings, and what you can do to protect both your employees and your business.

The Risk with Asset-Based 401(k) Administration Fees

Let’s compare two 401(k) plans, each with 40 participants and $800,000 in plan assets. They both receive identical administration services, but the way they pay for those services is very different:

Plan 1 pays a flat fee: $2,000 base + $60 per participant = $4,400 annually
Plan 2 pays an asset-based fee: 0.50% of plan assets annually

Today, both plans pay $4,400. But if assets grow to $1.6 million, only Plan 2’s fees increase—despite no change in the level of service.

	Plan 1 (Today)	Plan 2 (Today)	Plan 1 (Future)	Plan 2 (Future)
Assets	$800,000.00	$800,000.00	$1,600,000.00	$1,600,000.00
Participants	40	40	40	40
Flat Fee	$4,400.00	$0.00	$4,400.00	$0.00
Asset-Based Fee	0.00%	0.50%	0.00%	0.50%

That’s the risk with asset-based fees: they rise automatically as your plan’s assets grow—even if the work your provider does doesn’t change.

How 401(k) Administration Fees Eat Away at Retirement Savings

Think a small difference in fees won’t matter much? Let’s take a closer look:

An employee invests $30,000, earning a 7% average annual return. After 35 years, here’s the impact of fees:

0.5% annual fee → Balance grows to $272,000
1.5% annual fee → Balance grows to $195,000
Difference lost to fees: $77,000

That’s nearly $80,000 gone, just because of higher asset-based fees. Even a 1% fee difference can seriously erode retirement savings over time. This is why the Department of Labor (DOL) strongly encourages plan sponsors to monitor and control 401(k) fees carefully.

Fiduciary Duty: Why Employers Must Pay Attention

Under ERISA, employers who sponsor retirement plans have a fiduciary obligation to ensure plan fees are "reasonable" relative to the services provided. Failing to do so can open the door to lawsuits—and not just for large corporations. Increasingly, small and mid-sized companies are finding themselves under legal scrutiny over excessive fees.

If a court finds that fees are too high, business owners and plan fiduciaries could be held personally responsible for making participants whole.

Smarter Ways to Manage 401(k) Fees

The good news: there are straightforward steps you can take to reduce risk and protect participant savings.

1. Favor Flat, Per-Participant Fees

Administration costs are largely driven by the number of participants—not by how much money is in the plan. A flat fee structure based on participant count is often fairer and more predictable than asset-based pricing.

Many modern providers have moved toward flat fee arrangements for this reason.

2. Eliminate Hidden Fees

3. Benchmark Regularly

4. Document Your Due Diligence

The Bottom Line

Choosing the right 401(k) fee structure isn’t just about staying compliant—it’s about making sure your employees keep more of what they save towards retirement.

By avoiding asset-based administration fees, steering clear of hidden costs, and benchmarking regularly, you can build a retirement plan that truly serves your workforce—and protects your organization from avoidable risk.