Although this market analysis uses the term “401(k),” the framework applies broadly to employer-sponsored defined contribution plans, including 403(b) and profit-sharing arrangements governed by similar structural incentives. The same framework can also be used to diagnose pricing and incentive failures in other industries where buyers are displaced, prices are not directly invoiced, and market discipline cannot form.

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. Those conditions define a functioning free market: voluntary exchange under secure property rights, coordinated by prices that buyers can see, compare, and refuse, without coercive interference. Here, “coercive interference” does not mean day-to-day compulsion by regulators, but the original legal and tax structures, including wage controls, tax preferences, and ERISA architecture, that displaced buyers, suppressed price signals, and permanently substituted administrative rules for market coordination.

What follows is not a critique of markets that failed, but an analysis of markets that were never able to form. In any real market, buyers can see the bill, compare alternatives, and decide whether the dollars make sense.

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 core problem: 401(k) pricing cannot be disciplined by a free market because the market mechanics required for price discovery are missing. Prices are hidden, invoicing is absent, and compensation is tied to asset balances rather than defined services. Five structural failures eliminate price discovery, which is why disclosure regimes and benchmarking never produced market discipline—and why conflicted pricing persists even when sponsors recognize it. Finally, I will explain what a genuinely free-market retirement plan would look like in practice—without requiring new regulation.

Each failure weakens discipline; together they eliminate it. This is not a story about “uninformed sponsors.” It is a story about missing market mechanics. When the buyer can’t see the bill, compare alternatives, or tie dollars to defined services, price discipline cannot form—even among sophisticated professionals.

One reason these failures persist is that the retirement plan industry cannot be understood from the outside. Unlike most markets, there is no single place where prices, services, and incentives converge in a way a buyer can observe directly. The economic reality is fragmented across regulatory filings, provider contracts, platform rules, and compensation arrangements that are rarely disclosed in one place—if at all. Understanding how the system actually works requires reconstructing it from the inside: reviewing Form 5500 filings over time, observing how fees move as assets grow, listening to how providers describe their roles privately versus publicly, and seeing how recordkeepers, administrators, advisors, and asset managers respond when pricing is questioned. You only see the system clearly by watching how it behaves when pricing is questioned.

What makes retirement plans especially resistant to market discipline is that they systematically suppress economic pain. In most benefit arrangements, the party paying the cost experiences it directly. When employers pay health insurance premiums, the expense is large, explicit, and unavoidable. When costs are shifted to employees, those costs show up immediately in payroll deductions, deductibles, or out-of-pocket spending. Retirement plans operate differently. Most plan costs are deducted invisibly from participant accounts, framed as small percentages rather than dollar amounts, and never experienced as a recurring bill. Employers, in turn, often pay little or none of the cost directly—and when they do, the amounts are typically small relative to other benefits. As a result, neither party experiences the kind of financial friction that normally triggers scrutiny, comparison, or renegotiation.

The shift from defined benefit pensions to participant-directed defined contribution plans intensified these failures. It was driven less by market preference than by regulatory, accounting, and cost pressures that made defined benefit plans increasingly unattractive for employers. Under defined benefit plans, employers bore investment risk, paid providers directly, and had strong incentives to monitor cost and performance. Pricing was explicit because the employer was the buyer. Defined contribution plans reversed that structure. Investment risk shifted to participants, fees migrated into participant accounts, and compensation became asset-based rather than service-based. The buyer was displaced, but no new buyer emerged in their place. This change was later compounded by the move toward participant-directed accounts within defined contribution plans, which further transferred responsibility for investment decisions and outcomes to employees without restoring a true buyer role. What remained was a system where costs could grow quietly, accountability diffused, and price discipline dissolved—not because oversight disappeared, but because it was never structurally reassigned.

The first failure—no invoicing—prevents basic price discovery; the remaining failures explain why discipline still fails even when some costs are disclosed.

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:

Charged to participant accounts rather than billed directly
Embedded in asset-based pricing structures at the fund or platform level
Collected without invoices or itemization

When there is no invoice:

Employers cannot evaluate value
Participants cannot see costs
No one demands justification

Without invoices, price discovery cannot exist because no one is forced to confront the dollar cost in real time. And without a recurring renewal moment, where cost is explicit, approval is required, and value must be justified, market discipline never forms.

For example, I once described on a podcast a plan I reviewed that was still paying an advisor who had been dead since 2014—years after any services could possibly have been performed. That is not a freak accident; it is the predictable result of fees being collected automatically, invisibly, and indefinitely. In a competitive market, invoicing and renewal decisions would force the question: what are we paying for, and is anyone still doing it?

And even when fees are participant paid, opacity is not inevitable. In many professional service firms, the ownership group holds the overwhelming majority of plan assets. In that context, participant-level payment shifts the expense off the employer’s P&L but not away from the owners themselves. The economic burden does not disappear—it is simply routed through the owners’ own retirement accounts, where it is paid with non-deductible dollars and quietly erodes tax-deferred compounding.

The result is perverse: expenses that could be deducted as ordinary business costs instead reduce retirement balances dollar for dollar, paid with non-deductible dollars from the very accounts advisors insist should be maximized and protected. In other words, participant-paid pricing often shifts the same cost into a less efficient channel.

Employer-paid pricing also functions as a meaningful recruiting and retention tool. When plan-level fees are paid by the employer, participant fees are eliminated entirely, improving employee outcomes in a way that is both tangible and easy to explain. It also strengthens fiduciary defensibility: fees are explicit, documented, and clearly tied to employer decisions rather than silently deducted from participant accounts.

What makes this especially revealing is the disconnect between this reality and standard advisory messaging. Advisors routinely emphasize the importance of maximizing contributions to tax-deferred accounts and protecting long-term compounding. Yet when an obvious alternative exists—paying plan-level fees at the employer level to minimize leakage from those same accounts—many advisors do not even raise the option. That silence preserves a structure that drains retirement balances while avoiding the cost sensitivity that employer-paid, invoiced expenses would create.

This omission is not hypothetical. In a conversation in January 2026 with a financial advisor who specializes exclusively in 401(k) plans and markets himself as a fiduciary, I asked whether he discusses employer-level billing in professional service firms where owners hold most plan assets and therefore pay most of the fees anyway. He admitted that he had not built that question into his client conversations. When I pressed further and asked whether this issue arose during his extensive plan reviews, he said it did not. He dismissed employer-paid fees as ‘the last thing on an employer’s mind.’ But he also admitted he never asks—so he can’t know.

The conversation became more revealing when I asked about billing practices. He acknowledged that he does not invoice his clients at all, citing the friction of calculating fees and the delay caused by business owners taking weeks to respond to emails. That rationale is hard to square with the fact that asset-based fees must be calculated regardless—and with the reality that invoicing is standard practice in every other professional service relationship. When I suggested he confirm whether his state securities regulator required fee invoices or statements, he admitted he did not know.

Finally, when I asked how often clients question the value of his services, he admitted that only one client had ever asked about the amount of time he actually spent on their plan. That admission is not evidence that the fees are reasonable. It is evidence that the system suppresses the very questions that would normally discipline pricing. Invoicing, employer-level payment, and explicit scope definition would make such questions routine. Their absence makes them almost unthinkable—even in relationships marketed as fiduciary.

Employer-level billing restores the basic behavioral mechanism markets depend on. Businesses are far more cost-sensitive when they receive a bill, write a check, and see the expense reflected on the company’s P&L. That billing event creates a renewal moment—an implicit question of value that invites scrutiny, comparison, and renegotiation. Fees deducted invisibly from participant accounts do the opposite. They are abstract, deferred, and psychologically discounted, even when the dollar amounts are substantial.

If retirement plans operated like real markets, this conversation would be routine. The fact that it is routinely omitted—even by advisors who specialize in 401(k) plans and present themselves as fiduciaries—reveals the deeper problem. The system is not designed to surface buyer-optimal choices. It is designed to minimize friction, preserve asset-based compensation, and suppress the cost sensitivity that invoicing and employer-level payment would inevitably create.

Failure #1: No Invoicing Means No Price Discovery:

Person typing on a laptop at a desk with a cup of coffee, notepad, pens, office phone, and tablet.

Failure #1 explains why price discovery never forms: when services are not invoiced, buyers cannot see, evaluate, or renew costs in a meaningful way. But even if invoicing existed, the retirement plan market would still fail to discipline prices. The reason is structural: most compensation is tied to asset balances rather than to defined work, time, or responsibility. When pay rises automatically without reference to activity, even visible prices lose their disciplining power.

Most retirement plan work is driven by participant count, activity, and complexity, not asset levels: onboarding, compliance coordination, meetings, Q&A, notices, testing support, and operational troubleshooting. A plan’s assets can double without doubling any of those tasks.

Why Asset-Based Pricing Produces Zero Accountability

This is not hypothetical.

Because employers usually do not receive a bill, they have:

No incentive to monitor advisor effort
No reason to request a breakdown of services

Because compensation is detached from activity and rarely invoiced, plan sponsors have no practical incentive to examine whether participants actually use advisory services or recordkeeper tools at all.

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?

Providers often argue that their percentage declines as assets increase, but this misses the point: in absolute dollars, compensation still rises—sometimes dramatically—without any corresponding increase in work.

Why Benchmarking Fails to Establish Fee Reasonableness

Benchmarking reports are often presented as evidence that retirement plan fees are “reasonable.” In reality, they compare prices without evaluating the work those prices are meant to represent. Two plans with the same number of participants and similar asset levels can appear identical in a benchmarking report while receiving vastly different levels of service.

Consider two plans of equal size and assets, each paying the same advisory fee. In one plan, the advisor conducts no group meetings, offers no individual meetings, and fields few or no participant calls throughout the year. In the other, the advisor holds multiple employee meetings annually, meets with participants one-on-one, and provides ongoing access and support. A benchmarking report treats these arrangements as equivalent. From a market perspective, they are not.

This exposes the core limitation of benchmarking: it measures relative pricing, not value. It cannot observe scope of work, time spent, service level, or necessity. Benchmarking is useful only after scope is defined—otherwise it compares prices for undefined bundles. As a result, benchmarking can validate prices that would be indefensible if services were itemized, invoiced, and evaluated directly. In a market with accountable pricing, price reasonableness depends on what is delivered—not on whether others happen to be charging the same amount.

Industry Admits the Model is “Upside Down”

This dynamic is not controversial among experienced industry observers. In a widely cited InvestmentNews article titled “401(k) Adviser Fees Are Upside Down,” Fred Barstein—founder and CEO of The Plan Sponsor University—made the same structural observation:

Barstein’s point in that piece is simple: costs are driven by participants; fees are driven by assets.

Adviser and recordkeeper fees are typically based on plan assets, while their costs are driven by activity and participant count. As assets grow, fees increase even when services and costs do not.

Barstein noted that most advisory services—fund monitoring, benchmarking, and fiduciary oversight—are now highly automated or outsourced, yet compensation continues to rise automatically with asset growth. He also challenged the common claim that “liability” justifies automatic asset-based pay increases.

Importantly, Barstein argued that rational pricing would resemble every other professional service relationship: fixed or activity-based fees that reflect work performed, with additional charges only when additional services are requested. He concluded that advisers and recordkeepers who fail to adapt to this reality will eventually be forced to do so by market pressure or litigation.

This assessment aligns directly with the core problem described here: when pricing is tied to balances rather than services, compensation becomes disconnected from value—and market discipline disappears.

Ted Benna, the inventor of the 401(k), also captured this problem 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.”

This problem is magnified in participant-directed plans, where investment outcomes are driven primarily by participant behavior rather than advisor intervention. Even where advisors point to ‘investment work’ as justification, the structure still fails the labor test.

Portfolio Models and Target Date Funds Expose the Pricing Fiction

Model design is front-loaded work. Once a model is created, the ongoing labor required to maintain it is minimal. Fund research is automated or outsourced. Changes are rare. Implementation and rebalancing are handled automatically by recordkeeping systems at no additional cost. Critically, none of this work scales with assets. A model holding $500,000 and one holding $5 million require the same effort.

Despite this, advisory compensation often increases as more participant assets are directed into these models. This creates a perverse incentive: advisors are financially rewarded for steering assets into models even when participants could achieve the same exposure by selecting the underlying funds directly. Automatic rebalancing is frequently cited as justification, yet the marginal value of rebalancing is modest and the marginal cost is effectively zero. Pricing a perpetual percentage of assets for this function is not pricing work — it is pricing inertia.

Target date funds make this contradiction impossible to ignore. These funds are professionally managed, continuously rebalanced, and explicitly designed to function as stand-alone investment solutions. When participants use target date funds, advisors typically perform less investment work, not more. Yet advisory fees are still charged on top of the fund’s internal management costs — often at the same asset-based rate.

If advisory pricing reflected work performed, compensation would decline when participants use target date funds. Instead, fees persist unchanged. This outcome is only possible in a system where compensation is tied to balances rather than services.

Participant behavior further reveals the system’s failure. Many participants select multiple target date funds or combine them with other investments — clear evidence that they do not understand how these funds are intended to function. In a functioning market, such confusion would lead to simplification, competitive pressure, and fee compression. In the retirement plan system, confusion persists while fees remain intact.

Portfolio models and target date funds do not justify asset-based advisory fees. They expose the absence of any rational connection between compensation and work. Automation did not reduce costs. It merely removed the last remaining justification for tying fees to assets.

Investment Complexity Does Not Repair the Pricing Disconnect

A common defense of asset-based advisory fees is that certain investment structures require more work. Active management, advisor-created portfolio models, and customized lineups are frequently cited as justification for ongoing percentage-based compensation. In principle, this argument is not wrong. In practice, it almost never holds, as participant behavior, turnover, and capital flows often dominate outcomes, limiting the effective time horizons over which active manager selection can influence results.

But in the modern retirement plan system, active oversight is usually passive. Most ‘active’ lineups are assembled from platform ‘approved lists,’ third-party research menus, or home-office models—not constructed and continuously defended at the individual plan level. Monitoring is outsourced, automated, or reduced to checklist compliance. Funds remain in place for years despite underperformance, and replacement decisions are rare and reactive. The funds may be active, but the oversight is not. In that environment, higher advisory fees are not justified. Active products without active oversight are simply higher-cost inputs, not higher-value services.

In a rational market, higher fees for active management would invite greater scrutiny, not deference. If sponsors received regular invoices showing that an active lineup warranted higher advisory compensation, they would rationally demand evidence that the additional cost was earning its keep. Performance persistence, manager changes, style drift, and replacement discipline would become unavoidable topics of review—not abstract fiduciary concepts, but concrete economic questions. Active funds would invite challenge rather than protection. That scrutiny rarely occurs today precisely because fees are paid invisibly, expressed as percentages rather than dollars, and never renewed affirmatively. Without invoices, higher fees do not trigger higher expectations—they simply compound quietly.

Mixed lineups—combining active and passive funds—expose the flaw in asset-based pricing most clearly. If advisory compensation reflected work performed, pricing would vary based on the number of active mandates, monitoring intensity, documentation burden, and replacement frequency. Instead, sponsors are charged a single undifferentiated percentage. Fees do not decline as lineups become more passive, nor do they increase in proportion to demonstrable effort when active strategies are employed. This tells us the fee is not pricing work. It is pricing asset balances.

All-passive lineups make the contradiction unavoidable. In these plans, fund selection is largely complete at inception, ongoing monitoring is minimal, changes are rare, and outcomes are driven primarily by participant behavior and contribution decisions. In a functioning market, this would imply lower advisory fees, flat pricing, or per-participant compensation. In practice, advisory fees often remain unchanged and continue to rise automatically as assets grow. No downward adjustment occurs once the design stabilizes. That alone proves compensation is not tied to labor.

The conclusion is not that active funds, portfolio models, or target date funds are inherently flawed. It is that investment complexity does not repair the underlying pricing failure. Compensation does not adjust when fund mix changes, when oversight diminishes, or when automation replaces labor. Fees remain tethered to balances, not responsibility.

Active management is not the problem. Unpriced oversight is. If advisory fees were invoiced, expressed in dollars, and renewed affirmatively, many “active” lineups would quietly revert to passive—not because passive is always superior, but because the economics would finally be visible.

Why Fiduciary Labels, Audits, and Credentials Reduce Scrutiny

In many conversations with plan sponsors, I hear the same reassurances offered as evidence that pricing concerns need not be examined: we have a fiduciary, the plan is audited, the advisor is credentialed.

These statements function as stopping points, signaling that oversight has already occurred elsewhere, relieving sponsors of the need to behave like buyers. In effect, institutional labels replace market signals.

Fiduciary status, while important, does not require that fees be invoiced, expressed in dollars, tied to defined services, or paid at the employer level. A fiduciary may still be compensated through asset-based fees without ever justifying the total cost of those arrangements in concrete terms. Fiduciary designation governs intent and process; it does not validate price.

Similarly, audits are routinely misunderstood as economic reviews. In reality, plan audits test compliance with procedural requirements and financial controls. They do not evaluate whether services are necessary, whether compensation is proportional to work performed, or whether alternative pricing models would be materially more efficient. An audited plan can still be irrationally priced.

Professional credentials add another layer of reassurance. They signal training, competence, and adherence to standards. But most do not require observable economic accountability. They do not mandate invoicing, prohibit conflicted compensation, or require documentation of time and scope. As a result, credentials can unintentionally substitute authority for inquiry. Sponsors trust that someone qualified is watching the system, even when no one is testing whether the price makes sense.

These assurances are not harmful because they are false. They are harmful because they are incomplete. They create psychological closure in a system that already lacks price signals. When fiduciary labels, audits, and credentials are treated as substitutes for invoicing, comparison, and justification, scrutiny declines and excessive pricing persists—not because it is defended, but because it is no longer examined.

This dynamic is reinforced by widely used fiduciary frameworks such as those promoted by FI360. These frameworks emphasize procedural prudence—documentation standards, monitoring protocols, checklists, and defensibility tools designed to demonstrate compliance with fiduciary norms. They are taken seriously for good reason: they help establish that decisions followed a recognized process.

What they do not do—and are not designed to do—is perform economic reconstruction. They provide no guidance on invoicing, on expressing compensation in absolute dollars, on evaluating whether fees bear any rational relationship to services performed, or on comparing employer-paid versus participant-paid cost efficiency. Their purpose is to answer the question “Can this process be defended?” not “Is this price rational?”

When fiduciary legitimacy is defined primarily through procedural compliance, economic scrutiny becomes optional. A plan can be procedurally pristine while remaining economically irrational—and no existing framework requires that contradiction to be resolved.

Conformity Risk and the Suppression of Originality

When oversight is replaced by labels and defensibility, innovation becomes professional risk. In this environment, originality is penalized rather than rewarded. Conformity becomes the safest professional behavior, even when it produces indistinguishable and mediocre outcomes. When originality carries professional risk and conformity carries protection, the system predictably selects for practitioners who are willing to operate within standardized, low-variance frameworks.

This dynamic is especially evident in asset allocation. Across thousands of retirement plans I have reviewed, I have almost never seen any exposure to commodities of any kind—not because such exposure is universally inappropriate, but because standardized lineups minimize professional risk and make deviation harder to defend.

What makes this absence revealing is that it persists even as mainstream investment discourse outside the retirement plan system shifts materially. Large, conservative institutions have publicly questioned traditional stock-and-bond frameworks and, in some cases, have recommended substantial allocations to assets such as gold. Whether those recommendations ultimately prove correct is beside the point. The point is that public, mainstream institutions can afford to depart from consensus in discretionary portfolios, while retirement plan lineups remain almost entirely unchanged.

This divergence highlights the structural difference between markets governed by adaptive judgment and systems governed by procedural defensibility. In retirement plans, deviation is not evaluated on economic merit alone; it must survive a higher bar of professional justification. As a result, even well-reasoned departures from standardized models are often avoided, not because they are unsound, but because they are harder to defend procedurally.

Retirement plans therefore evolve slowly by design. Advisors typically take a hands-off approach to lineup changes, and even proactive adjustments are constrained by notice requirements, documentation obligations, and reputational risk. Over time, this produces lineup inertia that reflects professional incentives rather than adaptive market reasoning.

The absence of commodities exposure in retirement plans is not an investment judgment. It is a diagnostic signal. It shows how professional incentives suppress deviation even when the surrounding market environment changes—reinforcing the broader pattern in which conformity substitutes for scrutiny and defensibility replaces economic testing.

Failure #2: Asset-Based Fees Detach Compensation From Work

What makes this especially revealing is that even accounting firms—who should know better than anyone—often structure their own plans inefficiently. In most cases, partners hold the majority of plan assets—a pattern that extends across professional service firms—meaning they are effectively paying most plan fees through participant accounts using non-deductible dollars. Yet many of those same expenses, if paid at the employer level, would typically be deductible as ordinary business expenses. When even tax professionals default into this structure, it signals that the problem is due to market design rather than lack of sophistication.

Paying those expenses at the employer level is not only more transparent, but typically deductible as an ordinary business expense—and it materially improves employee outcomes. Once fees are expressed as dollars and understood as compounding leakage, the ‘small percentage’ framing collapses. The Department of Labor itself has illustrated in its fee disclosure guidance how even modest fee differentials compound dramatically over time: in one example, a 35-year-old participant with a $25,000 balance pays approximately $67,000 more in cumulative fees over 30 years due solely to an additional 1% in annual costs. When employer-paid pricing reduces ongoing fees, the benefit compounds directly to participants and becomes a meaningful recruiting and retention tool rather than a hidden drag on retirement outcomes.

Even when the structure is explained and sponsors understand the tax efficiency of employer-level payment, action remains rare. Structural opacity explains why price signals fail, but it does not explain why change often stalls even after fees become explicit. That is a behavioral problem—and it shows up in predictable ways. At that point, the failure is no longer informational or economic. The incentives have been restored, yet action still fails to occur.

Failure #3: Employer Behavior Still Doesn’t Shift When Fees Become Explicit

What happens next reveals a deeper problem. Even after costs are visible, invoiced, and understood, corrective action often still does not follow.

One of the most revealing aspects of the 401(k) industry is what happens after transparency improves. Even when fees are shifted to the employer level, invoiced directly, and partially reduced, meaningful market discipline often still fails to emerge.

In a real-world example, a professional services plan sponsor with a small participant count and about $3 million in plan assets was paying multiple layers of asset-based fees, including an asset manager charging a percentage of plan assets and an advisor charging an additional percentage, yet could not explain what the asset manager actually did—or whether the service was necessary at all. Although the asset management fee was reduced after scrutiny, the sponsor still lacked the information required to determine whether the service should exist at all, let alone whether it was priced reasonably. Lowering the percentage did not create understanding, nor did it enable meaningful comparison shopping.

More strikingly, once the sponsor began writing checks to the advisor, she asked a simple and entirely reasonable question: how many hours were being spent on her account. The advisor refused to answer—or to provide any substitute explanation of scope, deliverables, or time spent. The takeaway: even after fees become visible, providers often refuse the basic accountability buyers would expect elsewhere.

In any market with real price discovery, this question would be unremarkable. An attorney, accountant, or consultant sending an annual invoice in the $11,000–$12,000 range while refusing to describe the services performed or the time spent would not retain a client for long. In the 401(k) industry, that question often lands as a pattern interrupt because decades of percentage-based, participant-paid fee collection trained sponsors not to ask normal buyer questions—and trained providers not to answer them with scope, deliverables, or time.

The problem is compounded by how fee reductions are perceived. In many cases, plan sponsors stop asking questions after securing a significant percentage reduction, even when the remaining fees are still unjustifiable in absolute terms. A reduction of 50% or more sounds decisive and corrective, but it can obscure the more relevant question: what services are actually being provided, and are they worth the dollars still being paid?

In this same example, the asset manager’s fee was reduced from 0.28% to 0.12% of plan assets — a relative reduction of approximately 57%. Yet on a plan with roughly $2.8 million in assets at the end of 2024, and annual combined employer and employee contributions of approximately $300,000 pushing assets higher, this still amounts to roughly $4,000 per year for a service the plan sponsor openly admitted she does not understand and cannot evaluate for necessity. Lowering the percentage changed the optics, but not the sponsor’s ability to function as an informed buyer.

And the advisor reduced his fee from 0.50% to 0.35%, which still translates to roughly $11,000–$12,000 per year on a ~$3 million plan with 14 participants, minimal fund changes, and no disclosed scope or hours. The fee only feels “reasonable” because it was previously worse.

A percentage reduction produces a one-time drop in dollars, but over time, total fees often rise again as assets grow—even if no additional services are provided.

This framing effect is well documented in psychological research. People tend to evaluate outcomes relative to a reference point rather than on their standalone merits. Once a painful cost is reduced, the remaining cost feels acceptable, even if it remains excessive. In the context of asset-based retirement plan pricing, this bias is especially dangerous because recurring percentage fees feel static even as the absolute dollars quietly escalate.

As a result, plan sponsors often experience a false sense of resolution. They believe they have “fixed” the problem because fees went down, and questioning stops. Yet the underlying issues remain: services are still not clearly defined, necessity is still not assessed, accountability is still absent, and absolute dollars paid may still be far out of proportion to the work performed. Once price levels are addressed, psychological and reputational barriers—not lack of information—become the primary obstacle to decisive change.

Observed Resistance to Even Costless Action

Over more than fifteen years of reviewing Form 5500 filings and contacting plan sponsors, I have repeatedly observed resistance even when the required action is minimal and no provider change is involved. In one instance, an advisor was receiving approximately $3,000 per year in ongoing commissions while providing little to no service. When I suggested simply asking the recordkeeper to reduce or eliminate the fee, one of the plan’s owners declined—not because the fee was justified, but because he did not want to spend time on the phone making the request. This response is revealing. The issue was not the cost, the complexity, or the legitimacy of the concern. It was friction avoidance. Because the fee was never invoiced, never paid at the employer level, and never experienced as a recurring expense on the company’s P&L, there was insufficient psychological “pain” to motivate action. Even more telling is what happens when sponsors do act. In many cases, after following the recommendation to reduce fees, sponsors do not acknowledge the change or even confirm that it occurred—unless prompted directly. This silence appears to reflect discomfort rather than ingratitude. Acknowledging the action requires acknowledging that the issue existed in the first place. Initial reactions are often hostile, dismissive, or suspicious—even when no services are offered and the recommendation is limited to exercising rights the sponsor already has. This pattern has been observable since 2009, across hundreds of interactions, and cannot be explained by tone or delivery. Given the system’s structure, it almost certainly predates the available records. It reflects a deeper conditioning: in a market where pricing is opaque and advice is usually conflicted, unsolicited transparency is treated as a threat rather than a benefit.

The same avoidance appears even when the dollars are large and the sponsor openly admits the advisor’s services are unclear. In another instance, a plan sponsor was paying approximately $15,000 per year in asset-based advisory fees deducted from participant accounts. When I suggested reducing or eliminating the fee, the sponsor responded that business was tough and he did not have the bandwidth to focus on making changes to the 401(k). This response was not tied to any proposed cost to the company; it was offered as a reason to continue paying an advisor whose services he could not describe and whose level of participant engagement he did not know. Scarcity normally heightens cost sensitivity; here, hidden, participant-paid fees invert it by insulating the cost from the employer’s normal budgeting and vendor-management reflexes.

Why Knowledge Alone Often Fails to Produce Action

Even when sponsors fully understand that participants have been paying excessive fees, change often does not follow. The barrier is not mathematical or technical—it is reputational risk. The moment of understanding introduces an uncomfortable question: what does this say about past oversight? This pattern is not hypothetical.

In multiple instances, I have raised fee concerns without proposing any provider changes, service reductions, or new engagements. Even when fees had increased materially without additional services—and even when shifting fees to the employer level would have reduced taxes and improved compounding—sponsors declined to act. The response was not disagreement with the analysis, but simple acceptance of the existing percentage-based arrangement. This confirms that inertia often persists even when action is costless, non-confrontational, and clearly beneficial.

When excessive fees have persisted for years, discovery introduces reputational risk. Sponsors may reasonably worry how participants would interpret that history—whether it reflects poor diligence, misplaced trust, or simple inattention. At that point, action does not merely improve outcomes going forward; it risks drawing attention backward. In contrast, doing nothing preserves ambiguity. If participants never fully understood what was happening, there is nothing to explain, defend, or revisit—and no reason to change.

This creates a subtle but powerful incentive for inaction. Fixing the problem may be the right decision economically, but it can feel personally exposing. Silence becomes a form of self-protection, not necessarily conscious or malicious, but entirely human. Research in psychology and organizational behavior helps explain this response. Decades of behavioral research on cognitive dissonance and self-concept maintenance show that when new information implies a problem existed for years, acknowledging it can threaten professional identity as much as reputation. People are often more motivated to preserve a coherent sense of competence than to revisit past decisions, even when the facts are clear. This effect is especially pronounced among professionals whose credibility rests on judgment and expertise. Hidden pricing removes market signals and preserves the narratives decision-makers use to rationalize inaction, allowing passivity to feel responsible rather than negligent. This response is predictable given the structural and psychological dynamics described above. Invoicing changes that calculus by forcing costs into explicit dollar terms and recurring review, making avoidance harder to sustain—whether those costs are borne by the employer or by participants.

Disbelief itself also becomes a form of self-protection. When excessive fees have been deducted for years without any visible bill, the claim can feel abstract or implausible, especially when raised by an unfamiliar outsider. Accepting it requires acknowledging that a material cost was borne quietly and continuously without detection. For many professionals, that realization triggers not curiosity but resistance. It is psychologically easier to doubt the messenger than to absorb the implication that a basic safeguard failed unnoticed.

Even when fees are explained in dollar terms, they often appear small for a different reason: they are implicitly compared to much larger company expenses and capital decisions. Research on judgment and persuasion describes this as a contrast effect: when a cost is evaluated alongside much larger figures, it appears insignificant by comparison even if it would feel material in isolation. Percentage-based pricing then compounds that distortion. Fees expressed as a percentage of assets appear small even when the dollar impact is substantial. I have seen this repeatedly in practice. In one case, a business owner with a $1.1 million retirement plan, of which he held roughly seventy percent, objected to a flat $2,500 fee as being excessive compared to the 1 percent he was already paying. In dollar terms, his share of the existing fee alone was several times higher than the flat fee he was rejecting, not to mention the portion borne by other participants. The comparison failed because percentages feel abstract while invoices feel concrete. Research on framing and mental accounting shows that people systematically underestimate costs when they are framed as percentages, especially when those costs are deducted invisibly over time. This framing makes large, recurring fees feel smaller than modest fixed charges, even when the math clearly shows the opposite. When those percentage-based fees are also paid with non-tax-deductible dollars inside participant accounts, the distortion becomes even more costly.

These dynamics are especially pronounced when responsibility for the plan rests with a CFO, controller, HR director, or managing partner. In those roles, investigating the retirement plan rarely produces recognition, compensation, or career advancement. It does not increase revenue. It does not reduce visible company expenses when fees are paid from plan assets. And it can create difficult conversations with ownership or participants if historical outcomes are questioned. Rationally or not, the perceived downside often outweighs the upside.

As a result, retirement plans fall into a unique category of organizational neglect: they are important in theory, but insulated from the normal feedback loops that drive scrutiny elsewhere in the business. This helps explain why excessive fees can persist even after the problem is understood. Structural opacity dulls incentives; reputational and psychological self-protection finish the job. Markets can’t discipline prices when buyers can’t translate a percentage into a scope of work, defined deliverables, and a defensible dollar price.

Why Personal Relationships Further Suppress Price Discipline

Even when sponsors recognize that advisor compensation is excessive, personal relationships and perceived friction often prevent action. Since entering this business in 2009, I have repeatedly encountered plans where the business owner hired a friend as the advisor—and openly admits that the advisor’s services are minimal or underutilized.

In some cases, the relationship is even more insulating: the advisor is a family member. I have encountered plans where a relative of the owner serves as the advisor and is never questioned, never thoroughly benchmarked, and never replaced—regardless of the level of service provided. In these arrangements, employee retirement assets effectively become a protected compensation stream for a family member, shielded from scrutiny by social norms rather than fiduciary judgment. The fees persist not because they are reasonable, necessary, or earned, but because confronting them would require a personal reckoning that sponsors are unwilling to initiate. This represents a complete breakdown of market discipline. No normal vendor relationship allows employee retirement funds to be treated as an untouchable revenue source simply because of family ties. Yet in the retirement plan industry, this arrangement is quietly tolerated precisely because pricing is indirect, invoicing is absent, and the people bearing the cost are not the ones empowered to object.

When I suggest reducing or eliminating that compensation, the most common response is not disagreement, but avoidance: “We’re too busy to make changes.” This response is revealing. Reducing recordkeeping fees or renegotiating advisor compensation often requires nothing more than a single email or phone call—actions that sponsors perform routinely with every other vendor. The real barrier is not time—it is discomfort. Questioning a friend’s compensation feels like a confrontation, so sponsors avoid it entirely, even when tens of thousands of dollars per year are at stake.

But this inertia is not limited to personal relationships.

I see the same response even when there is no friendship at all, and the sponsor openly acknowledges that the advisor’s services are rarely used. I also see it when I suggest something even simpler: asking the recordkeeper to reduce or eliminate certain fees. Sponsors routinely treat these requests as “changes” that feel intimidating or time-consuming—despite the fact that they are among the easiest actions a sponsor can take. This aversion persists even though sponsors routinely renegotiate payroll, legal, insurance, and technology contracts without hesitation.

In other words, the mere idea of making a change becomes a deterrent, even when the change is trivial, reversible, and clearly beneficial. What should feel like routine vendor management instead feels like disruption. This behavior is striking when compared to every other professional service relationship. In no other context would this level of passivity be considered responsible oversight. If a business received a large legal bill, it would be entirely natural to ask for a breakdown of the services performed, the time spent, and the value delivered. No one would consider that request confrontational or inappropriate — it would be viewed as responsible oversight. Retirement plan providers, by contrast, are almost never subjected to this scrutiny, not because their services are beyond question, but because they do not send bills. When there is no invoice, there is no natural trigger to ask, “What exactly are we paying for?”

I have suggested compromise solutions: negotiating recordkeeping fees downward, shifting the advisor’s compensation to the employer level where it can be tax-deductible, or reducing compensation to a level that is reasonable in proportion to services actually used. In nearly every case, these suggestions have not been acted upon. This pattern has held consistently since 2009.

This behavior persists because the market structure provides no forcing mechanism for accountability. When personal relationships and perceived friction insulate providers from scrutiny, pricing cannot be disciplined by competition. Transparency alone is often insufficient. Only invoicing—which creates a visible, recurring cost that must be justified to partners, boards, or co-owners—creates the institutional pressure needed to override avoidance and restore accountability.

Who pays the fees is secondary to whether the buyer can see, evaluate, and justify them. A free market does not require that employers always pay all fees. It requires that buyers understand their options.

Asset-based pricing can function as a rough subsidy in some contexts, particularly for smaller plans, but that distributional effect does not justify opaque pricing, the absence of invoicing, or the suppression of visible alternatives.

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. As a result, owners often pay most of the plan’s fees anyway — just in the least efficient, least transparent way possible. Taken together, these failures make excessive fees self-reinforcing. The result is a system where fees flow automatically—sometimes absurdly so.

Failure #4: Why Transparency and Fee Reductions Still Don’t Create a Market

Plan administrators often spend more time and provide far more value than advisors. They perform compliance testing, plan design work, nondiscrimination analysis, document maintenance, and ongoing operational support. In many plans, administrators spend more time, apply more specialized expertise, and deliver more tangible output than the advisor—yet receive a fraction of the compensation. In many small and mid-sized plans, administrators may receive a modest flat fee, while advisors collecting asset-based fees that are several multiples more than the administration fee despite performing less specialized and less time-intensive work. It’s not unusual to see administration billed as a few thousand dollars per year while an advisor collecting 0.50%–1.00% of assets earns tens of thousands—even when the plan has a static, participant-directed lineup.

In a buyer-driven market, administrators would naturally question excessive advisor fees. They are often best positioned to observe the mismatch between work performed and compensation received.

But administrators rarely act as watchdogs because many depend on advisors for referrals. Challenging advisor compensation risks disrupting their own business pipeline. As a result, the very parties most capable of identifying excess fees are structurally disincentivized from speaking up.

This silence is not merely cultural; it reflects a structural contradiction. Excessive advisor compensation is a recognized fiduciary risk under ERISA, yet it is routinely excluded from the very compliance processes designed to surface fiduciary failure. Third-party administrators regularly identify operational and compliance issues—testing errors, document defects, procedural violations—yet often remain silent on advisor compensation, even when it is clearly misaligned with services performed. This omission does not reflect a lack of relevance or awareness. It reflects the reality that administrators derive much of their business from advisor referrals. The result is a system tasked with identifying fiduciary risk that systematically excludes one of the most common fiduciary risks from routine scrutiny.

I once had a conversation with a third-party administrator that illustrates this dynamic perfectly. He emphasized how important it often is for fees to be paid at the employer level, both for tax efficiency and accountability. Yet in the same breath, he explained that he rarely gets involved in advisor compensation or how those fees are paid unless the sponsor explicitly asks. This is not because the issue is unimportant, but because administrators derive most of their business from advisors. Challenging advisor compensation—even when misaligned—creates friction with the very relationships that sustain their practice. The result is a quiet contradiction: the professionals most capable of identifying irrational pricing are structurally disincentivized from raising it.

Recordkeepers operate under similar incentives. In many cases, advisors directly control or heavily influence which recordkeeping platform a plan uses; in others, administrators serve as the gateway. As a result, recordkeepers compete for advisor relationships rather than employer relationships—an inversion of normal market incentives in which the party selecting the service is not the party bearing the cost. Recordkeepers therefore have limited incentive to challenge advisor compensation structures, even when fees are clearly misaligned with services.

The result is a cascading silence. Administrators don’t push back on advisors. Recordkeepers don’t push back on administrators or advisors. Each intermediary depends on the others for distribution. Excess pricing survives not because it is justified, but because no participant in the chain has both the incentive and the authority to challenge it. When distribution partners are the real ‘customers,’ pricing gets optimized for intermediaries—not for the people paying the bill. Even among advisors—who might appear best positioned to challenge excessive fees—structural incentives often prevent meaningful engagement. When advisors are compensated as a percentage of assets, embedded in distribution relationships, or constrained by broker-dealer affiliations that steer them toward “approved” recordkeepers and administrators, fee opacity becomes self-reinforcing rather than something to be corrected.

Each failure persists even when the prior one is addressed, which is why disclosure, benchmarking, fiduciary process, and fee reductions have failed to produce market discipline.

It is also important to distinguish fiduciary obligation from structural silence. In most plans, administrators are not acting as discretionary fiduciaries under ERISA Section 3(16), and therefore are not legally required to police advisory compensation. But that distinction does not resolve the underlying failure. Administrators routinely see advisor fees, plan complexity, participant counts, and actual service activity, and are often acutely aware when advisory compensation bears little relationship to the work being performed. In a market with meaningful price signals, that information would naturally trigger scrutiny, discussion, or competitive pressure. In the retirement plan system, it rarely does. The reason is not legal prohibition, but incentive alignment: administrators depend heavily on advisors for referrals, and challenging advisor compensation risks disrupting those relationships. As a result, even when excessive fees are visible to knowledgeable professionals, the system provides no incentive to surface or correct them. This silence reflects not a compliance gap, but the absence of a market, rooted in a system that displaced buyers and suppressed price signals from inception.

What follows are not additional core failures, but the mechanisms through which those failures are reinforced, normalized, and protected over time.

How Advisor Revenue Models Reinforce These Failures

A further constraint exists at the advisor level that is rarely acknowledged. Many advisors who “handle” retirement plans do so only incidentally, often managing a small number of plans not as a primary professional focus, but as a pathway to participant-level asset management. Under this model, the retirement plan itself is not the core economic product; it is a distribution channel.

This incentive structure distorts not only how plans are serviced, but how plan infrastructure is selected. Financial advisors are often incentivized to recommend asset-based recordkeeping platforms rather than flat-fee providers—particularly those that also perform administration—because flat-fee pricing makes total plan costs explicit. When a recordkeeper charges a transparent per-participant or fixed dollar fee, it invites comparison, and that comparison does not stop at the recordkeeper. It extends directly to the advisor’s own compensation. Recommending a low-cost, flat-fee platform can therefore expose whether an advisor’s asset-based fee is proportional to the services actually provided. As a result, advisors may avoid platforms that increase price clarity—not because those platforms are inferior, but because transparency itself threatens the sustainability of asset-based compensation. In this way, infrastructure selection becomes a defensive pricing strategy, and opacity is preserved not by accident, but by incentive.

The downstream effect is predictable. Plan-level pricing, service alignment, and operational rigor become structurally under-prioritized. Advisors may be independent and well-intentioned, yet have little financial or professional motivation to invest deeply in plan design, fee analysis, or ongoing plan oversight—because that work does not drive their revenue.

This helps explain why retirement plans are often minimally serviced even in the absence of overt conflicts or institutional censorship. When no party is economically rewarded for treating the plan itself as the primary engagement, sustained scrutiny fails to develop, and excessive or outdated arrangements persist by default rather than design.

Platform Design as a Defensive Pricing Strategy

Once advisors are economically rewarded for opacity, they predictably steer plans toward platforms that preserve it, so the incentive shapes not only pricing, but which recordkeepers win distribution. In a free market with real price discovery, reduced functionality would exert downward pressure on price. In the retirement plan market, the opposite routinely occurs. Recordkeeping platforms with more restricted investment menus, fewer customization options, and eliminated features often charge more—not less—than platforms offering open architecture, broader fund access, and ETFs. John Hancock, for example, not only doesn’t have an open architecture platform, but doesn’t even allow for a participant-directed brokerage account, which allows participants unlimited access to investments on a custodian’s platform. All else equal, these limitations should lower cost. Often, they don’t. This inversion reveals that pricing is not determined by features or participant value, but by how effectively a platform preserves asset-based compensation. Flat-fee, open-architecture platforms make total plan costs explicit and invite comparison—not only of the recordkeeper, but of the advisor’s own fee. As a result, infrastructure selection itself becomes a defensive pricing strategy: platforms that increase price clarity threaten asset-based compensation, while opaque, asset-based platforms protect it. In a free market, fewer choices would cost less. In the retirement plan market, fewer choices protect pricing.

It is important to note that not all recordkeepers are built the same way. Some flat-fee providers operate on simpler technology stacks and narrower service models, enabling lower and more transparent pricing. Large national recordkeepers, by contrast, support complex legacy systems, extensive participant-facing technology, and broad service infrastructures that carry higher fixed costs. These platforms may legitimately cost more to operate. But that reality strengthens—rather than weakens—the case for transparent pricing. In a functioning market, higher costs must be justified explicitly and compared meaningfully against alternatives. When pricing is obscured through asset-based fees and bundled compensation, sponsors are denied the ability to evaluate whether higher-cost platforms are worth the premium—or whether they are paying for complexity they do not need.

A Concrete Example: The ABA Retirement Funds Brokerage “Escape Hatch”

One of the clearest examples is the ABA Retirement Funds program used by many law firms. The program includes a brokerage option that, once elected, allows participants to place most of their balance outside the core fund lineup, subject to maintaining a modest required amount (for example, $2,500) in the core funds. In practice, this structure can materially reduce the embedded layers that typically fund the distribution system: revenue sharing in the core lineup, recordkeeping and administrative charges built into the default platform, and asset-based advisory fees deducted automatically from participant accounts.

The point is not that every fee disappears in every case. Rather, the largest recurring fee layers become optional for participants who choose to opt out of the default fee plumbing. The exact impact varies by plan design, brokerage window rules, and the fee schedules of the recordkeeper and custodian. The key point is that when a legally available mechanism can materially reduce embedded fee layers, a functioning market would make that option widely known and routinely evaluated.

As the fifteen-year Chicago law firm case study demonstrates, even when such a mechanism exists continuously and legally, it can remain unused for more than a decade in the absence of invoicing, buyer incentives, or corrective pressure.

For high-balance law firm participants, the fee impact can be enormous—especially in plans with significant assets and ongoing contributions where total annual expenses can reach tens of thousands of dollars. In a functioning market, a legally available mechanism capable of collapsing most recurring plan fees would be widely understood and actively discussed. In the retirement plan market, however, it is rarely highlighted or utilized—not because it lacks relevance, but because widespread adoption would force advisors to justify compensation directly or negotiate explicit agreements, rather than collecting an automatic percentage from every participant regardless of whether their services are used.

A Fifteen-Year Case Study in Structurally Suppressed Price Discovery

What follows will serve as a reference point throughout this analysis—a longitudinal control case showing how the retirement plan system behaves when no unusual errors occur and no corrective pressure is applied.

To illustrate how extreme fee-reduction opportunities remain systematically unused, consider one Chicago law firm participating in the ABA Retirement Funds program. Nothing about this firm was operationally unusual: it was small, professionally managed, and legally permitted to reduce fees throughout the entire period.

From 2009 through 2024, this firm’s plan assets grew from approximately $4.3 million to nearly $11 million, while the number of active participants declined from a peak of 21 to 14. Over the same period, “other plan expenses” rose from $4,347 annually to $57,900. While “other plan expenses” can include multiple categories, that caveat does not weaken the conclusion—the scale, persistence, and direction of the increase are the point: costs rose dramatically even as participation fell and the plan remained small enough that communication and oversight should have been trivial.

On a per-participant basis, costs escalated from $256 per participant in 2009 to $4,136 per participant in 2024 — a sixteen-fold increase, despite fewer participants and no significant corresponding increase in plan complexity or documented service intensity.

Throughout this entire period, participants could have legally eliminated most recordkeeping, administrative, custodial, and advisory fees by electing the plan’s self-directed brokerage account option, subject only to maintaining a modest balance in the core fund lineup. Communication would have been trivial: the plan never had more than 21 participants and often had far fewer.

Had participants elected this option, the majority of embedded fees would have disappeared. Only a limited portion of administration costs and any explicitly negotiated advisory fee would have remained — and those remaining fees would almost certainly have been far lower had they been billed directly to the employer rather than extracted automatically from participant accounts year after year.

In a functioning market, a legally available mechanism capable of reducing participant costs by thousands of dollars per year — particularly in a small, sophisticated professional firm — would be widely known, routinely evaluated, and actively discussed. That this option remained effectively invisible for more than a decade is a predictable outcome of the incentive structure. It reflects a system in which price discovery is actively suppressed because widespread adoption would collapse asset-based compensation models that depend on automatic, universal fee extraction.

This is not an outlier. It is a case study in how the absence of invoicing—combined with aligned intermediary incentives—prevents even the most obvious cost-elimination opportunities from being surfaced, let alone acted upon.

If transparency does not restore market discipline, and awareness does not produce action, then the failure is not informational or psychological alone. It is institutional. Markets require participants whose incentives are aligned with scrutiny. That role does not currently exist in the retirement plan system. In the absence of such a role, even extreme and legally avoidable costs can persist indefinitely without challenge.

Why the Buyer Still Doesn’t Behave Like a Buyer

The Failure of Price Discovery Requires a New Professional Category

This incentive-driven breakdown in scrutiny completes the picture illustrated by the fifteen-year Chicago law firm case study: in a system built without a buyer, without invoices, and without exit, no recognized, buyer-aligned professional role could ever emerge to reconstruct total plan cost, test it against work performed, or impose economic accountability.

Price discipline normally emerges because markets support a robust supply of specialists whose incentives are aligned with the buyer: auditors, cost accountants, procurement professionals, independent reviewers, and consultants who are paid directly to evaluate value.

This absence of scrutiny is especially revealing where extreme fee-reduction opportunities exist but remain almost entirely unknown. In certain plan structures, participants can legally eliminate most recordkeeping, administrative, custodial, and advisory fees through brokerage account usage—yet these options are rarely disclosed, rarely discussed, and rarely utilized.

In a free market, such cost-elimination mechanisms would be widely understood, particularly among high-balance participants. In the current system, they are effectively suppressed; their adoption would collapse asset-based compensation models that rely on automatic, plan-wide fee collection.

When participants can opt out of embedded fees entirely, advisors must justify their services directly—or negotiate separate agreements. The near-total absence of awareness around these structures is not accidental. It is further evidence that price discovery is not merely absent, but actively obstructed by incentive alignment across platforms, advisors, and intermediaries. I see the stakes most clearly in law firms: in my dataset of excessive-fee plans built from Form 5500 filings since 2009, law firms represent a large and recurring share of the worst cases.

A functioning market therefore requires not only transparent invoices, but a recognized professional discipline built around plan-level diagnostics—work that is paid for directly, independent of asset gathering, and explicitly focused on cost, scope, necessity, and accountability. Without that discipline, excessive arrangements will continue to persist by default, even when they are visible, because too few professionals are economically rewarded for making the plan itself the primary engagement.

These constraints extend even to advisors themselves. In many advisory firms, advisors are limited to a list of approved recordkeepers and administrators with whom the firm maintains institutional relationships. Criticizing those providers—even when the criticism is factual and publicly documented—can create internal conflicts. I encountered this directly earlier in my career. After referencing widely reported articles about excessive-fee lawsuits involving John Hancock, a provider with whom my firm had an approved relationship, I was told I could not make critical remarks about any firm the organization worked with. I was also instructed that I could no longer use Form 5500 filings as a prospecting or analytical tool, despite their being public regulatory documents, all in the name of “compliance.” The issue was not accuracy or tone; it was institutional risk management. Even truthful, evidence-based scrutiny became unacceptable once it conflicted with existing distribution relationships. This dynamic helps explain why excessive fees persist: the professionals best positioned to identify and explain them are often structurally discouraged—or explicitly prohibited—from doing so once scrutiny conflicts with existing distribution relationships. These outcomes are only possible in a system with no invoices, no routine oversight, and no natural stopping mechanism for excessive fees.

Failure #5: Institutional Silence and Referral Dependency Prevent Escalation

A related pricing distortion arises when advisory fees fail to adjust for the actual level of investment customization provided. If an advisor is not creating customized investment models or portfolios for participants—work that requires ongoing design, monitoring, and participant-specific judgment—there is no rational basis for premium advisory compensation. In a functioning market, the absence of customization would exert downward pressure on fees.

In practice, many plan sponsors lack the technical knowledge required to evaluate this distinction. Some recordkeepers do not even permit advisors to implement customized participant models, effectively commoditizing the advisory role while preserving asset-based compensation. Sponsors are rarely told that these platform constraints eliminate entire categories of advisory work—or that the fee should fall accordingly. As a result, advisory compensation often remains unchanged even when the service provided is materially limited by design.

This is a failure of market transparency. When platforms restrict advisory implementation while preserving asset-based fees, pricing ceases to be disciplined by competition. It becomes normalized by repetition. That distortion persists even when asset-based fees are not commissions.

An advisor paid on assets is financially penalized for recommending actions that reduce plan balances, including:

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 is not tied to asset retention, and advisors can give fully honest guidance without financial penalty.

These structural failures don’t just obscure pricing — they create conditions where even well-intended fiduciary standards fall short and conflicted compensation becomes self-perpetuating.

Another reason these conflicts persist is that plan sponsors are rarely positioned to see them clearly. Although sponsors formally make vendor decisions, they often lack the tools, time, and information clarity needed to push back on embedded conflicts. As Edward Siedle explained in his white paper Secrets of the 401(k) Plan Industry, the overwhelming majority of defined contribution plans are small and lack in-house investment expertise. As a result, sponsors rely heavily on providers for turnkey solutions and delegate communications to those same providers.

This creates a profound informational asymmetry. Providers largely control what sponsors and participants see, how fees are described, and which questions are never raised at all. As Siedle noted, service providers have predictably taken advantage of this “informational advantage” and the practical inability of sponsors and participants to devote the time required to scrutinize complex economic arrangements.

In other words, conflicted compensation models persist not because they are openly chosen in a competitive market, but because the parties paying the fees are structurally insulated from understanding how those fees actually work.

Even within the fee-only movement, the core conflict has been obvious for decades. This is not a new critique. Bert Whitehead, a pioneer of NAPFA and one of the earliest advocates for commission-free advice, openly criticized asset-based pricing as a failure of fiduciary ethics. His point was straightforward: when an adviser’s income depends on client decisions—rollovers, asset retention, investment allocation, or market performance—the adviser is no longer insulated from conflicted advice.

Asset-under-management fees merely disguise transaction-based compensation behind a percentage. The conflict is quieter, but the incentive is the same. While commissions were eliminated, adviser pay still rose and fell based on decisions clients made while relying on the adviser’s counsel. In that sense, brokers and fee-only advisers became economically indistinguishable.

Whitehead argued that a true fiduciary standard would require adviser compensation to be independent of any transaction—rollovers, allocation changes, asset transfers, or retention decisions—where the client relies on the adviser’s advice, not just the purchase or sale of investments. A flat, fixed retainer accomplishes this cleanly and transparently. Importantly, this model already works in the real world. Hundreds of successful firms have adopted it, proving that fiduciary alignment does not require asset-based pricing. That it remains a minority approach is not a market failure; it is the predictable result of industry and regulatory structures that protect incumbents, normalize conflicted pricing, and suppress genuine price competition.

Who Pays the Price?

The cost of these structural conflicts is ultimately borne by plan participants. When fees are embedded, unitemized, and tied to assets rather than services, participants unknowingly pay for layers of compensation that do nothing to improve investment outcomes or retirement readiness. Over time, these hidden costs compound — quietly reducing balances and transferring wealth from workers to intermediaries without informed consent. A compensation model that punishes honest advice cannot be reconciled with a functioning market.

Why Asset-Based Compensation Bakes in Advice Bias

Revenue sharing such as sub‑transfer agent fees (payments made by mutual funds to recordkeepers for administrative services, embedded in fund expense ratios and rarely disclosed as explicit plan costs), and 12b‑1 fees (ongoing fund marketing and distribution charges embedded in expense ratios) evolved because the market grew inside investment products rather than through transparent billing. These payments exist to fund the distribution system and intermediaries—not to improve employer or participant outcomes, but to compensate the financial infrastructure that sells, distributes, and administers the products. Because they are tied to fund selection and asset levels, they reinforce conflicted incentives while avoiding the scrutiny that direct invoicing would invite. In a free market, compensation must be paid by the buyer to the seller—not smuggled through product plumbing that hides the real price.

The following example matters because it shows that even when the sponsor understands the problem, the advisor agrees the fee is excessive, and both want to correct it, the system itself still resists rational pricing.

I have also encountered cases where both the plan sponsor and the advisor agreed that asset-based, participant-paid compensation was inappropriate—and still could not easily correct it. In one instance, a business owner was using American Funds with commission-bearing share classes that generated more than $10,000 per year in advisor compensation deducted from participant accounts. These payments were not invoiced, not itemized, and not paid directly. They were embedded inside the fund expense ratios and triggered solely by the selection of a particular share class.

Like most business owners, he did not understand the distinction between the share classes being used, how the compensation flowed, or that American Funds offers multiple share classes with materially different commission structures for the same underlying investments. In fact, over more than fifteen years of reviewing retirement plans, I have never encountered a business owner who could accurately explain how mutual fund share classes work, how embedded commissions are generated, or how advisor compensation varies depending on those selections. The pricing mechanism is simply too opaque, too technical, and too disconnected from any visible bill for sponsors to function as buyers at all.

Once this structure was explained, the owner recognized that the plan required very little ongoing service and that the compensation being extracted bore no rational relationship to the work performed. He did not want to change advisors, but he did want a significantly reduced, employer-paid fee that reflected the plan’s small size, limited participant count, and low service needs—particularly because most of the assets were his and employer-level payment would have been tax-deductible.

The advisor agreed. However, the advisor’s firm imposed a minimum annual fee floor that was substantially higher than what the plan reasonably warranted. Charging an appropriate fee required requesting a special exception from the firm—effectively asking permission to price the service rationally. Only because that exception was granted was the compensation corrected. Without it—and without external intervention—the embedded commission structure would have remained in place indefinitely.

This is not an isolated case. American Funds, like many fund families, offers multiple share classes of the same fund—each with different internal compensation arrangements that are invisible to sponsors and participants. When pricing is determined by share class selection rather than an explicit agreement between buyer and seller, market discipline becomes impossible. The buyer cannot evaluate cost, compare alternatives, or negotiate value, because the price is never presented as a price at all.

In practice, these mechanisms:

Provide no benefit to employers or participants
Obscure total plan cost
Prevent clean price comparisons

Mutual fund companies are not passive participants in this system. Funds seek placement on recordkeeping platforms, and recordkeepers control shelf space. To secure distribution, fund companies frequently offer multiple share classes—some with revenue sharing or sub-transfer agent payments and others without.

These payments are not tied to superior investment management. They exist to induce recordkeepers to include funds on their platforms and to incentivize advisors to select them for default lineups. In a fiduciary framework, fund selection should be driven by participant outcomes—cost, performance, and appropriateness. Revenue sharing reverses that logic. Funds compete not to serve participants better, but to compensate intermediaries. The resulting compensation flows prioritize the distribution network rather than the employer or the participant.

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. Understanding these structural distortions makes clear what must change — and how a truly competitive market could work.

When compensation flows are determined by distribution leverage rather than service value, markets cannot discipline pricing—no matter how many disclosures are layered on top.

This is the same structural defect described earlier: when fees are not invoiced, not comparable, and not paid by the buyer, price discipline cannot form, no matter how many disclosures are layered on top.

In a functioning market, invoices would not only show total cost, but also clearly describe the services being provided, allowing sponsors to evaluate whether fees bear any rational relationship to actual work performed. There is no reason retirement plans could not operate the same way. This is how transparent markets work and why so many industries deliver better outcomes when pricing and services are clearly and meaningfully disclosed and defined with enough context for buyers to assess whether costs are reasonable.

Price transparency creates price literacy over time, and price literacy is what allows buyers to recognize value, question excess, and discipline pricing through competition. In most markets, invoices translate abstract pricing into concrete dollar amounts and create continual reminders of what is being paid and for what services. Without invoices, fees remain distant, normalized, and easy to ignore — even when they are excessive. Regular invoicing would force fees into active awareness, making it far easier to judge whether dollars paid match work performed.

This failure of invoicing is not an isolated flaw, but rather a symptom of a deeper market breakdown. Economists have spent decades explaining why health care doesn’t behave like a normal market: prices are hidden, services are bundled, and third parties pay the bill. Retirement plans share the same structural defects. In contrast, consumer markets work precisely because buyers see prices, compare alternatives, and feel the cost of their decisions. In both cases, the party choosing the service (employer or doctor) is different from the party paying for it (participant or patient), and the party receiving the service rarely knows the price in advance. Until retirement plans adopt those same fundamentals—direct payment, transparent pricing, and universal invoicing—they will continue to resemble health care: administratively managed, heavily regulated, and structurally incapable of market discipline.

When invoices disappear, prices are hidden, and payments are routed through third parties, market discipline collapses. Regulation then steps in to manage the absence of market signals.

The modern U.S. retirement system did not emerge from consumer demand or voluntary market exchange. It originated during World War II, when federal wage and price controls prevented employers from competing for labor through higher pay. To attract workers, employers turned to tax-favored benefits instead. Deferred compensation arrangements—what later became employer-sponsored retirement plans—emerged as a workaround to regulatory constraints, not as a response to individual savers seeking retirement products. This structure was later formalized and expanded through the tax code and ERISA. By the time the system matured, employers had been permanently positioned as plan sponsors and decision-makers, while individual savers were relegated to passive participants. The market architecture was set before a market ever had the chance to form.

The deeper issue is not simply hidden fees or conflicted incentives. A system born from tax engineering and administrative delegation cannot spontaneously generate a market, no matter how much disclosure is added later. Once the buyer is displaced and price signals are suppressed at inception, regulation can manage behavior, but it cannot create market discipline that never existed.

How Regulation Replaced Market Signals

At this point, the incentive failure in the retirement plan system should be unmistakable. So even before we get to regulation, the system is structurally biased toward passivity: the decision-maker doesn’t feel the bill, and the bill-payer doesn’t control the decision. No single party simultaneously experiences the full cost of the decision and the benefit of the service.

This is exactly the dynamic Milton Friedman identified as the least disciplined way to spend money. He distinguished four cases: spending your own money on yourself (most disciplined), your own money on others, others’ money on yourself, and—least disciplined of all—spending others’ money on others.

This misalignment is compounded by how retirement plan fees are actually allocated among participants. When fees are charged to participants and allocated in proportion to account balances—whether through asset-based pricing or balance-weighted allocation of flat or base fees—the participants with the largest balances bear the largest share of total plan costs, sometimes overwhelmingly so.

Importantly, this outcome is not limited to percentage-based pricing. Even flat advisory or recordkeeping fees, when paid from participant accounts rather than at the employer level, are often allocated pro rata based on account balances rather than equally per participant. As a result, the economic burden can still fall disproportionately on a small number of high-balance participants regardless of whether the fee is expressed as a percentage or a flat dollar amount.

Yet decision-making authority is rarely aligned with this economic burden. Plan oversight is typically assigned based on organizational role—owner, managing partner, CFO, controller, or HR director—not based on who is actually paying the largest share of the fees. Even when the individual overseeing the plan holds a substantial balance, there is often at least one other participant with a similarly large balance who has no input into provider selection, fee negotiation, or whether services are necessary at all.

In many cases, the misalignment is even starker. The person responsible for plan decisions may have relatively little of their own money in the plan, and it often does not occur to them to consult the participants who are bearing the majority of the cost. Authority flows from position, while costs flow to balances. The people funding the system most heavily are frequently the least empowered to question it.

This dynamic makes the retirement plan market even less disciplined than the fourth category Milton Friedman identified as the least efficient way to spend money. Not only is the decision-maker insulated from the cost, but the cost itself is concentrated on a subset of participants who lack both visibility and voice. When decision rights and economic burden are so completely separated, normal market feedback mechanisms cannot function.

This distortion was later compounded by layers of regulatory design that replaced market signals with administrative rules. Under ERISA, retirement plans evolved within a compliance framework focused on regulatory uniformity rather than price discovery or competitive comparison. Non-discrimination testing requirements, such as ADP/ACP testing and cross-testing, imposed ongoing costs and complexity unrelated to service quality or participant demand. At the same time, regulatory constructs like Rule 12b-1 permitted ongoing distribution fees to be embedded invisibly inside investment products. Even mandated disclosures like Form 5500 filings were designed to satisfy regulatory oversight rather than to facilitate comparison or price discovery by plan sponsors. The result was an industry shaped by compliance and opacity, not by competition or price discovery.

This failure is not theoretical. It has been observed in practice even where disclosure was implemented clearly and in good faith.

In 2012, Employee Fiduciary publicly documented the impact of the Department of Labor’s new fee disclosure requirements on its own pricing practices. Prior to the regulations, Employee Fiduciary charged an explicit and fully disclosed annual fee of $1,500, plus $30 per participant above 30 participants, and 0.08% of plan assets. For smaller plans under $1 million in assets, the firm routinely waived the 0.08% asset-based fee.

After the implementation of the disclosure rules, Employee Fiduciary concluded that it could no longer waive the asset-based fee while remaining compliant with the new regulatory framework. The fee structure did not become less transparent or more complex — but the outcome was higher costs for plans that had previously paid less. Disclosure did not create price discipline; it produced the opposite effect.

Bad pricing collapses quickly when exposed to sunlight and meaningful comparison.

What a Free-Market Retirement Plan Looks Like in Practice

In a functioning free market for retirement plans:

Every provider is paid directly and invoices for every dollar received
Fees are expressed in dollars, not percentages, and tied to actual services performed
Employers and participants can compare total costs on a like-for-like basis
Compensation reflects activity and responsibility, not asset growth alone
Conflicts created by asset-based and embedded compensation structures are exposed and constrained by transparency

None of this requires new regulation. These are the same conditions that govern every other professional service relationship.

What Plan Sponsors Can Do Today

Plan sponsors do not need to wait for regulatory reform to move closer to a free-market outcome. Practical steps include:

Request a single, consolidated annual fee report showing every provider, every fee, who pays it, and the dollar amount.
Require service descriptions (deliverables + cadence) that match each fee line.
Move employer-level services to employer-paid invoicing where appropriate (often deductible).
Benchmark against flat-fee / per-participant / fixed-retainer alternatives using the same scope.
Eliminate indirect compensation where possible: revenue sharing, sub-TA, 12b-1, and commissionable share classes.

None of these steps require regulatory change. However, the structural and psychological barriers described above explain why they remain rare in practice unless invoicing forces the issue.

Why Revenue Sharing Would Not Exist in a Free Market

Final Thought:

Transparency Is the Prerequisite for Freedom

A truly free market in retirement plans would not eliminate costs or complexity; it would force them into the open. Fees would be explicit, comparable, and directly tied to defined services. Advisors and providers would invoice for their work, sponsors would see the bill, and alternatives would be visible. Under those conditions, compensation structures that rely on opacity or conflicted incentives would struggle to survive—not because they are prohibited, but because they would be questioned.

The persistence of opaque pricing, asset-based fees, and indirect compensation is therefore not evidence that these arrangements are efficient or optimal. It is evidence that market discipline has been structurally suppressed. Transparency without comparability, explicit pricing, and buyer leverage does not create a market—it creates paperwork. Markets discipline prices only when buyers can see what they are paying, understand what they are receiving, and credibly refuse renewal. Where those conditions do not exist, the outcome is predictable: prices drift upward, accountability decays, and the people funding the system rarely realize it is happening.

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Paul D. Sippil & Associates, LLC is registered in Illinois and provides advice in regard to retirement plans in Illinois.

65 E. Scott St. 5N Chicago, IL 60610