What a Truly Free Market in Retirement Plans Would Look Like
Imagine shopping for a car, a phone, or a computer.
You can compare prices instantly, evaluate features side‑by‑side, read reviews, negotiate, and understand—down to the dollar—what you’re paying and why. Buyers have power because information is visible, prices are explicit, and sellers must justify value.
Now imagine shopping for a 401(k) plan.
No posted prices. No standardized invoices. No easy way to compare total cost or service quality. Fees quietly come out of accounts—usually expressed as percentages rather than dollars—and often without anyone ever seeing a bill.
That contrast exposes the truth: the retirement plan industry is not a truly free market. It is a partially free market shaped by legacy regulation, opaque compensation structures, and misaligned incentives.
At the center of the problem are three core failures.
The Three Core Failures
1) A Near‑Total Lack of Invoicing
In functioning markets, service providers send invoices.
Accountants invoice. Lawyers invoice. Payroll providers invoice. Consultants invoice.
In the retirement plan industry, most providers do not.
Instead, fees are:
Deducted silently from participant accounts
Embedded in fund expense ratios
Paid through revenue sharing, sub‑transfer agent (sub‑TA) revenue, or 12b‑1 fees
When there is no invoice:
Employers cannot evaluate value
Participants cannot see costs
No one demands justification
Without invoices, price discovery cannot exist. And without price discovery, there is no real market.
A free market gives rise to transparent pricing:
Employers receive invoices for employer‑level services
Participants receive clear statements or invoices showing all participant‑paid fees
Every provider invoices for every dollar they are paid
Participant‑paid does not mean invoice‑free.
2) Fees Are Not Commensurate With the Services Provided
Most retirement plan services do not scale meaningfully with assets:
Fund menus are largely commoditized
Lineups are often mostly generic index funds
Accounts are participant‑directed
Investment changes are rare or nonexistent
Yet advisors and recordkeepers are commonly paid as a percentage of plan assets.
As assets grow, fees grow automatically—even when:
No fund changes are made
No additional work is performed
The advisor is effectively “managing” a static lineup
Providers often argue that their percentage declines as assets increase. This misses the point.
In absolute dollars, compensation still rises—sometimes dramatically—without any corresponding increase in work. That outcome would not survive in a free market.
Ted Benna, the inventor of the 401(k), captured this perfectly:
“The advisors are getting paid each time they go through the process with an employer to help pick funds as if they're doing an original piece of work. There are more than half a million 401(k) plans, so that's happened over half a million times. The fund menus aren't that much different. But advisors are getting paid as if they're doing an original piece of work. That's just bizarre, extremely inefficient and much too expensive.
They need to get away from asset‑driven compensation and be paid a fee for service, the same as accountants or attorneys, who don't get paid a percentage of corporate assets. Building a smarter investment mix is pretty much of a commodity now.”
In a free market, prices reflect work performed, not balances observed.
3) Little Understanding of the Benefits of Paying Fees at the Employer Level
A free market does not require that employers always pay all fees. It requires that buyers understand their options.
For very large plans or plans with widely dispersed ownership, participant‑paid fees may make sense.
But for many professional service firms—law firms, medical practices, accounting firms—the economics are different:
Owners often hold the vast majority of plan assets
Owners control provider selection
Fees deducted from participant accounts therefore come largely out of owners’ own money
In those cases, pushing fees into the plan means owners are:
Paying most of the fees anyway
Paying with non‑tax‑deductible dollars
Reducing tax‑advantaged compounding
Paying at the employer level instead:
Is typically tax‑deductible like other business expenses
Forces real cost sensitivity
Keeps more money compounding inside tax‑advantaged accounts
Many small businesses are never told this is even an option.
A market where buyers don’t understand how pricing can work is not a free market.
Why Employers Rarely Monitor Advisors
Because employers usually do not receive a bill, they have:
No incentive to monitor advisor effort
No reason to request a breakdown of services
Questions that should be routine often go unasked:
How many fund changes were made this year?
How many participant meetings occurred?
How long did those meetings last?
What value was actually delivered?
The result is a system where fees flow automatically—sometimes absurdly so.
I recently described a real situation on a podcast where a plan was still paying an advisor who had been dead since 2014.
That is not a story about negligence by one employer. It is an indictment of a system with no invoices, no oversight, and no natural stopping mechanism.
Advice Bias Is Baked Into Asset‑Based Compensation
Even when asset‑based fees are not commissions, they still distort advice.
An advisor paid on assets is financially penalized for recommending:
Building emergency savings outside the plan
Paying off high‑interest debt once any match is exhausted
Saving for major purchases to avoid plan loans
Each of these reduces assets—and therefore reduces the advisor’s pay.
Brokers face an even stronger distortion: they can only be compensated on certain investments and not others.
In a free market:
Advice is paid for directly
Compensation does not depend on asset retention
Advisors can give fully honest guidance without financial penalty
Why Revenue Sharing Would Not Exist in a Free Market
Revenue sharing, sub‑TA fees, and 12b‑1 fees evolved because the market grew inside investment products rather than through direct billing.
These mechanisms:
Provide no benefit to employers or participants
Obscure total plan cost
Prevent clean price comparisons
In a free market:
Providers are paid directly
Every fee is explicit
Side payments disappear
No business owner would tolerate their accountant or attorney being paid through hidden kickbacks embedded in unrelated products.
Shopping for a 401(k) Should Be as Easy as Shopping for a Car
Markets function when buyers and sellers have equal access to information.
Consumers can compare cars, phones, and computers because:
Prices are visible
Features are standardized
Competition is real
There is no reason retirement plans could not operate the same way.
A free market in retirement plans would include:
Dollar‑based pricing
Comparable service descriptions
Direct billing
Real price discovery
Bad pricing collapses quickly when exposed to sunlight.
Final Thought: Transparency Is the Prerequisite for Freedom
The retirement plan industry does not need thicker regulation or more complexity.
It needs the same fundamentals every real market relies on:
Universal invoicing
Fees aligned with actual services
Clear understanding of who should pay and why
Elimination of hidden compensation
Until those exist, the industry will remain only partially free—leaving employers and participants with far less power than they enjoy everywhere else in the economy.