Many employers are told by their providers that their 401(k) plan has “free” or “no-cost” recordkeeping. While that phrase is common in the retirement industry, it is also misleading. Recordkeeping is never free. The real question is how it is paid for, who pays for it, and whether the arrangement creates fiduciary or equity concerns for the plan sponsor. Recordkeepers and Third Party Administrators will provide the legally-required disclosures, but these disclosures are often neither clearly written nor entirely forthright.
Understanding the hidden costs behind “free” recordkeeping is one of the most important fiduciary responsibilities of a retirement plan committee.
Recordkeeping Costs Don’t Disappear, They Move
Every 401(k) plan incurs recordkeeping expenses to cover:
- Participant accounts and statements
- Website and call-center support
- Compliance testing and reporting
- Loan and distribution processing
When a recordkeeping provider advertises “free” recordkeeping, those costs are typically being paid through indirect compensation, most commonly:
- Revenue sharing embedded in investment expense ratios
- Higher-cost share classes
- Asset-based pricing that grows automatically as the plan grows
The cost exists, it’s just less visible.
Revenue Sharing Can Mask True Plan Costs
Revenue sharing occurs when a portion of an investment’s expense ratio is used to pay plan-level expenses, including recordkeeping. While revenue sharing is not inherently improper, it can create several issues:
Unequal Cost Allocation
Participants invested in higher-expense funds often subsidize:
- Participants in lower-cost index funds
- Participants with small balances
- Employer-paid expenses
Two participants with the same balance can pay very different effective recordkeeping costs depending on where they invest.
Cost Increases Without Notice
Because revenue sharing is asset-based, plan costs rise automatically as markets rise. Fees increase even if service levels do not. This makes it difficult for committees to confidently answer: “Are plan fees reasonable for the services received?”
“Free” Often Means Harder to Benchmark
When recordkeeping is bundled into investment expenses, it becomes harder to compare providers. RFPs are less precise, causing committees to struggle to identify the true cost of administration. This is one of the most common issues raised during fiduciary reviews, plan audits, and DOL investigations. Transparency, not cost minimization, is the fiduciary standard.
Revenue Sharing Can Create Fiduciary Risk
Courts and regulators consistently focus on whether fiduciaries understood how fees were paid, monitored those fees over time, and took action when costs became unreasonable. Plans that rely heavily on opaque fee structures may face poor documentation, inconsistent committee understanding, and difficulty demonstrating a prudent oversight process.
Importantly, fiduciary liability does not depend on whether fees were disclosed somewhere, it depends on whether fiduciaries understood and evaluated them.
Flat, Transparent Pricing Is Often More Equitable
Many plans today are moving toward:
- Flat or asset-based per-participant fees
- Explicit employer-paid administrative costs
- Revenue-neutral investment lineups
These approaches improve fee equity among participants, make benchmarking easier, strengthen fiduciary documentation, and reduce surprise cost increases as assets grow. Note: this does not always lower total costs immediately, but it often improves governance and defensibility.
The Right Question Isn’t “Is Recordkeeping Free?”
The better fiduciary questions are:
- How much does recordkeeping actually cost?
- How are those costs allocated among participants?
- Are fees reasonable for our plan size and complexity?
- Can we clearly explain our fee structure to participants?
A plan can be low-cost and poorly governed, or higher-cost and well-governed. The goal is reasonable, transparent, and well-documented fees.
Final Thought
“Free” recordkeeping may feel attractive, but it often comes with hidden trade-offs:
- Less transparency
- Uneven participant outcomes
- Greater fiduciary complexity
Strong fiduciary oversight doesn’t eliminate costs, it makes them visible, intentional, and defensible.
Want to Understand What Your Plan Is Really Paying?
A fiduciary review can help uncover:
- The true cost of recordkeeping
- Whether participants are subsidizing one another
- Opportunities to improve transparency without disrupting the plan
Clarity is not just good governance, it’s good risk management.
Have additional questions? Reach out to our Twelve Points Retirement Advisors team today.
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