Hidden Revenue-Sharing Deals Are Quietly Raising 401(k) Fees and Hurting Investors
New research is shining a bright light on a problem most American workers have no idea exists inside their 401(k) plans: revenue-sharing deals between mutual funds and plan administrators. These arrangements can influence which investment options workers see on their plan menus — and not always in ways that benefit them.
A study by researchers at the University of Texas at Austin, Vanderbilt University and the Federal Reserve takes a close look at how these concealed payments shape the structure of some of the largest 401(k) plans in the United States. The findings make one thing clear: when employees think they are choosing freely from a menu of solid investment options, they may actually be navigating a system influenced by behind-the-scenes financial incentives.
This article breaks down everything the study uncovered, why it matters, and how revenue sharing works. You’ll also find extra context about 401(k) fees, recordkeepers and how these arrangements affect long-term retirement outcomes.
What the Study Found About Revenue Sharing in 401(k)s
Researchers examined the 1,000 largest 401(k) plans that reported data to the U.S. Department of Labor between 2009 and 2013. Their main focus was whether mutual funds that pay revenue-sharing rebates are treated differently by plan administrators (also called recordkeepers) compared to funds that do not pay such rebates.
The results were surprisingly clear:
- 54% of the plans included at least one fund involved in revenue sharing.
- Funds that shared revenue were 60% more likely to be added to a plan than comparable funds without revenue-sharing arrangements.
- These same funds were also less likely to be removed once they made it onto the investment menu.
- Revenue-sharing funds charged higher administrative fees, in part because they were sending an average of 18% of those fees back to the recordkeepers.
In other words, many plans are influenced by a system where some mutual funds essentially “pay for placement.” Workers rarely know this — and many assume the investment menu was built with only their best interests in mind.
But that wasn’t the case here. The study found that the funds paying revenue-sharing rebates performed worse over time than funds that did not engage in revenue sharing. So investors were often presented with options that cost more and delivered weaker returns.
Why This Matters for Employees
The biggest problem is that these additional costs are often hidden inside the fund’s expense ratio, and employees usually have no idea that a portion of those costs is being quietly paid back to the recordkeeper.
For everyday investors who may not dig into lengthy disclosures or fee tables, this can be a major disadvantage. A seemingly small difference in fees — even 1% — can reduce a retirement account’s balance by tens of thousands of dollars over a long career.
The study’s authors point out that employees often assume investment options are screened for quality and affordability. But if recordkeepers are being compensated indirectly, they may prioritize funds that benefit them rather than the employees.
The solution, according to the researchers, starts with transparency. Employers should clearly lay out all fees in an easy-to-read format, instead of burying them in complex documents. The research also suggests that the most effective way to eliminate this conflict of interest would be for employers to pay recordkeepers directly for their services instead of relying on hidden revenue-sharing rebates.
What Is Revenue Sharing and Why Does It Exist?
Revenue sharing is a common practice in the retirement plan industry. It involves mutual funds sending a portion of their fees back to the recordkeeper, typically as compensation for administrative services.
From the recordkeeper’s perspective, this is attractive because:
- It subsidizes their operating costs
- It allows them to offer cheaper upfront pricing to employers
- It creates an incentive to include more funds that pay these rebates
From the participant’s perspective, however, the story is different. The payment is extracted from the mutual fund’s expense ratio, meaning the investor ultimately pays more. And because the cost is embedded, the investor may believe they are simply paying for fund management, not realizing some of that money is rebated elsewhere.
The issue isn’t that recordkeepers shouldn’t be paid. Managing 401(k) plans is complex and expensive. The issue is how they are paid — and whether that method misaligns their interests with the interests of the employees saving for retirement.
How Higher Fees Affect Long-Term Growth
401(k) fees matter enormously because of compounding. A fee difference of even half a percentage point can snowball into a large difference over decades of investing.
For example:
- A worker contributing consistently over 30 years could easily lose tens of thousands of dollars because of a 1% higher expense ratio.
- Lower returns caused by higher fees can silently erode gains, especially for young workers who have the longest time horizon.
This is why understanding expense ratios, share classes, and administrative fees is crucial for anyone using a 401(k) for retirement savings.
How Employees Can Protect Themselves
Even though employees can’t choose what their employers include in their plan menus, they can take a few steps to protect themselves:
1. Examine the Expense Ratios
Higher expense ratios can be a red flag. Many low-cost index funds charge under 0.10%. A fund charging more than 1% deserves a closer look.
2. Ask HR for a Clear Fee Breakdown
Employers must provide this information, even if it’s not prominently displayed.
3. Watch Out for Multiple Share Classes
Some mutual funds have cheaper institutional versions. If your plan offers only expensive share classes, it may be a sign of revenue-sharing arrangements.
4. Consider Using Low-Cost Funds When Possible
If your plan includes low-cost index funds or target-date funds with reasonable expenses, those may be safer options.
5. Stay Educated
Retirement plans evolve, fees change, and new laws are always being introduced. Understanding the basics goes a long way.
The Bigger Picture: Why Revenue Sharing Is Controversial
Revenue sharing has been challenged in court cases, questioned by regulators, and scrutinized by academics. Critics argue that:
- It creates conflicts of interest
- It hides true costs
- It complicates fee comparisons for investors
- It can lead to poorer investment options
Supporters claim that revenue sharing keeps employer costs low and helps maintain plan services. But the research here suggests that the downsides are real — especially when higher costs and weaker returns land squarely on employees.
As the 401(k) system continues to play a central role in American retirement, transparency and fairness become even more important. Millions rely on these accounts as their primary source of retirement income, so the structure of these plans has real-world consequences.
Reference
Research Paper: Mutual Fund Revenue Sharing in 401(k) Plans (Management Science, 2025)
https://doi.org/10.1287/mnsc.2023.01560
