Evaluating 401k Net Investment Fees as an ERISA Fiduciary 

By Robert McGowan

September 7, 2022

When the fund with the lowest gross expense isn’t necessarily the least expensive for 401k plan participants

As a Retirement plan fiduciary, you have an obligation under ERISA to prudently select and monitor plan investments, which includes monitoring investment fund fees to determine whether they’re reasonable. Although ERISA doesn’t say what’s reasonable, one widely accepted way to test reasonableness is to compare the fees of like investment funds. Sometimes, however, making sure you’re not overpaying for a fund provider’s services requires that you go deeper than making simple comparisons.  

Understanding 401(k) investments’ revenue sharing 

The same 401(k) investment can come in different packages, known as share classes. Different share classes have different fees, which are included in the expense ratios. Some classes share revenue with the plan sponsor, a practice known as revenue sharing. A plan sponsor can use revenue sharing to pay for plan services, such as recordkeeping or investment advice. Funds that share revenue have higher expense ratios than those that don’t.  

Some 401(k) funds are cheaper after refunds 

Even if you don’t use revenue sharing to pay for plan expenses (a practice we typically recommend), you may want to consider funds that share revenue, because net fees aren’t always equal. This creates an opportunity for plan sponsors to cut the net fees participants pay by refunding unused revenue sharing to them. 

Example: Same fund, different share classes, and different net fees (%) 


Fund share   Expense ratio  Revenue sharing  Net fee 
Class R  1.00  0.55  0.45 
Class Z  0.50  NA  0.50 

This is a hypothetical illustration only and is not indicative of any particular investment. 

Class R is now 0.05% cheaper on a net-of-fee basis. Plan sponsors can lower participant investment costs by selecting Class R and asking their recordkeeper to refund revenue sharing to participants. In this case, the savings to participants from refunded revenue sharing is 0.05%, or the difference in net cost between Class R and Class Z.  

Watching 401(k) investment net fees helps you and your participants 

ERISA frowns on overpaying for services, including plan investments. If you don’t ask your recordkeeper or financial professional to investigate lowest net cost fund options, you may not be living up to your ERISA responsibilities. Even if you don’t require revenue sharing, you may be able to lower participant investment fees by using revenue sharing funds and refunding unused revenue sharing to participants.  Remember, the fund with the lowest gross expense isn’t necessarily the least expensive for participants.