Fee Leveling and Revenue Sharing
in 401(k) Plans.

By Brian C. Shannon, CRPS®, CPFA · First published in 2019 as a four-part series · Updated November 2026

If you are a plan sponsor, you might feel overwhelmed when choosing the best fee structure for your plan’s recordkeeping and administration services. There are many options to choose from. Or, if you were never given options, read on to learn what you have been missing.

Under ERISA, there is no excuse for failing to understand the decisions that affect your plan and participants. As a sponsor, you are responsible for failures that negatively affect participants, even if you used a plan advisor or consulted your ERISA attorney. ERISA requires plan sponsors to have a complete understanding of how their plan fees work.

So where do you start? Despite what you may think, it is not that difficult if you take the time to carefully evaluate a few key issues. And while many plan advisors can help sponsors with this process, not all of them have the expertise to guide you properly. If your advisor has not yet discussed fee leveling (also called “fee fairness”, “fee equalization” or “fee externalization”) with you, it is a good idea to get a second opinion from an advisor who specializes in retirement plan pricing structures and fees.

The trend toward fee leveling is not a fad. It is already a best practice, and over time it will become a standard offering because of the transparency and fair distribution of fees it gives plan sponsors and their participants. Here is what you need to know.

1. What is fee leveling?

At the most fundamental level, the goal of fee leveling is to make sure the fees for the plan’s recordkeeping and administration (RK&A) are paid equitably by participants, regardless of each participant’s investment selections. It ensures that participants do not unknowingly pay different RK&A fees based solely on their investment choices. “Fee equalization” and “fee fairness” are essentially the same as fee leveling; “fee externalization” is not the same, but closely related.

In most cases, prudent plan sponsors conclude that it is inappropriate to have participants pay different fee amounts for the same services. Once a plan sponsor properly understands fee issues, it is unlikely the sponsor will choose a fee structure that lets some participants subsidize others based solely on their investment choices.

The hypothetical example below shows the imbalance in RK&A fees at the participant level when a plan does not use fee leveling:

Participants 1 and 2 have the same balance and receive the same RK&A services, but Participant 2 bears none of the cost of those services. Fee leveling is required to resolve this issue, which still exists in a significant portion of retirement plans.

2. What is revenue sharing in a 401(k) plan?

When revenue sharing is used to pay a recordkeeper for RK&A services, the imbalance above comes from the different revenue sharing rates of the investments in the lineup. That is what created the need for fee leveling.

“Revenue sharing” can mean many things in financial services. Here, it means money paid by an asset manager to a recordkeeper for shareholder servicing and related services. More specifically, revenue sharing is typically a portion of an investment option’s total expense ratio (TER) that the asset manager pays to the recordkeeper for the RK&A services provided to participants in that investment. To the extent revenue sharing is included in the TER, it is taken out of the value of the investment before the net asset value (NAV) is struck at the end of each day.

In other words, participants will not see a line item on their statement for “expense ratio” or “revenue sharing”. In fact, participants typically do not know revenue sharing exists. It is not even required to be disclosed on participant fee disclosure notices.

You may have heard of 12b-1 fees and sub-transfer agency (sub-TA) fees. In a 401(k) plan, these are often the components of revenue sharing.

Confusion about the least expensive investment option

As the first example showed, a lineup like this can leave similarly situated participants paying very different recordkeeping fees for the same services. Equally confusing, plan sponsors are often told to “use the lowest share class available”, “don’t use retail share classes” or “use institutional share classes”. Unfortunately, that advice is far too simplistic and often leads to choices that are more expensive for the plan and its participants.

That advice may once have made sense, but since the mid-2000s it has been a best practice to use modern pricing structures in which revenue sharing offsets recordkeeping fees instead of adding to them. Advice to use the lowest share class assumes the recordkeeper keeps all the revenue sharing the plan generates, even if that gives the recordkeeper unreasonable fees. That has not been true for many years.

For example, if a reasonable fee for a plan’s recordkeeping services is $100,000 but revenue sharing generates $300,000 for the recordkeeper, modern pricing structures require the recordkeeper to return the excess. As a result, the investment option with the lowest TER may not have the lowest net cost to participants. Once modern pricing structures are used, a correct analysis of participants’ net cost requires the plan sponsor to evaluate the net investment management fee together with the TER. Any method that skips that analysis is incomplete, and it often leads to results that cost the plan and its participants more.

3. Taking advantage of the most efficient share class

The share class with the lowest expense ratio is not always the least expensive, or most efficient, share class.

How to use revenue sharing to your advantage

Choosing an investment lineup with share classes that pay no revenue sharing seems like the easiest and most logical option. But easy may come at a price: the share class with no revenue sharing is not always the least expensive for participants. Thousands of plan sponsors and their advisers have unknowingly selected lineups with no revenue sharing, thinking they were best for participants. Many of these choices were influenced by fee litigation, which led to simplistic advice to avoid “retail” share classes and move to “institutional” share classes without regard to the actual net cost to participants. Share classes marketed as “institutional” and positioned as the cheapest were an easy sell.

As plan sponsors learn more about pricing structures and fee leveling, they are often shocked to find that share classes with no revenue sharing can cost participants more than share classes with revenue sharing. After separating the recordkeeping and administration portion of the fee (the revenue sharing) from the investment management portion, some “institutional” share classes, and even collective trusts, are more expensive than some “retail” share classes. All else being equal, choosing those institutional options results in higher fees for participants. When a retail share class is less expensive than the institutional one, plan sponsors should consider a fee leveling solution so that participants are treated equitably and receive the benefit of the revenue sharing.

It is important to determine the most efficient share class when you move to externalize fees. Otherwise, you might cause participants to pay more than necessary for the same investment strategy.

How to find the most efficient share class

For every investment option, the 408(b)(2) regulations require recordkeepers to disclose the portion of the total expense ratio that pays for recordkeeping and administration services: the revenue sharing.

The most efficient share class can be found by comparing the net investment fee of share classes or investment options with similar strategies and the same portfolio managers. To find the net investment fee, subtract the revenue sharing rate from the total expense ratio. For example, a retail share class may have a total expense ratio of 0.75% and pay revenue sharing of 0.25%, for a net investment fee of 0.50%. The same fund’s “institutional” share class may have a total expense ratio of 0.60%. At first glance, the institutional class looks cheaper at 0.60% than the retail class at 0.75%. But the retail class’s net investment fee is only 0.50%, which is 0.10% less.

Taking advantage of the most efficient share class requires a pricing structure in which the recordkeeper applies a revenue sharing credit against recordkeeping fees. For each participant to benefit in proportion to the revenue sharing their own investments generate, a fee leveling feature is often needed as part of the solution. Skilled plan advisors and consultants know how to find the most efficient share classes, and how to set up a fee structure with the recordkeeper that takes advantage of them.

Here are two examples of traditional pricing arrangements that include revenue sharing:

Total recordkeeper compensation is the revenue sharing, plus any explicit fees, minus any ERISA budget (sometimes called an ERISA account or ERISA spending account). This is a simple illustration; it does not include other revenue such as transaction fees or float income.

It is clearly not prudent to offer investment options that are, in effect, more expensive for participants. One of the great benefits of a retirement plan is the collective purchasing power of a large pool of assets, which gives participants access to quality investments at competitive prices. That is exactly why “institutional” implies a lower price for larger pools of assets. But plan sponsors should not assume that a share class labeled “institutional” is the best deal; clearly that is not always the case.

4. Per capita vs. pro rata: options for allocating recordkeeping and administration fees

Once you have decided to equalize revenue sharing from the investment options, there are further fiduciary decisions about how RK&A fees are applied to participant accounts. These options should be considered carefully to make the best fiduciary decision for your participants.

Per capita: the same dollar amount for everyone

Do you believe each participant should pay the same dollar amount for recordkeeping and administration? This is known as an explicit per participant, or per capita, fee.

The per capita approach makes sure every participant, regardless of balance or investment selection, pays exactly the same dollar amount for RK&A. Callan’s 2019 DC Trends Survey reported an increase in the use of this fee structure among DC plans from 2017 to 2018.

Pro rata: the same percentage of assets

Or do you believe paying the same percentage of assets is more appropriate? This is known as an explicit asset-based, or pro rata, fee.

The pro rata approach makes sure each participant pays the same percentage of their balance for RK&A, regardless of investment selection. As the example shows, the dollar amount each participant pays varies, and the difference can be significant. Callan’s 2019 DC Trends Survey reported a decrease in the use of this fee structure from 2017 to 2018.

A combination of both

If neither approach is a great fit for your plan, a combination of a per participant fee and an asset-based fee may be appropriate.

A combination can be a good compromise if your committee is split or undecided about how to allocate RK&A fees among participants.

Less common approaches

Per capita and pro rata are the most common, but other approaches are increasingly considered. Some sponsors charge new employees lower fees to give them a chance to grow their balances before explicit fees apply. This is usually combined with a per capita approach, since a pro rata approach already charges participants with low balances much less. A minimum balance is another way to address the concern that per capita fees could hinder participants’ ability to save in their early years. Plan sponsors should understand the impact of each fee structure on all participants, so they can affirmatively decide how RK&A fees should be allocated.

5. Putting it together: the questions to ask

To make the best decision for your participants, ask these questions, whether you are the plan sponsor or an advisor working on the sponsor’s behalf.

Do your plan’s investment options pay revenue sharing?

• If yes, who ultimately benefits? Revenue sharing is often used to pay recordkeeping and administration fees and kept by the recordkeeper. Sometimes it is credited to the plan to pay qualified plan expenses. The best practice is to return it to participant accounts, so plan expenses are shared equitably.
• If no, could participants benefit from a more efficient share class? Many sponsors think they are in the clear with zero-revenue-sharing options. In reality, participants may be better off in a share class that pays revenue sharing, provided that revenue sharing is credited back to their accounts.

How is your plan advisor paid?

• Through 12b-1 payments? This creates unequal-compensation conflicts that need to be fixed, because the investments in a lineup often pay different 12b-1 rates. It is especially important if your advisor also gives advice directly to participants.
• A fixed percentage of plan assets? More equitable than 12b-1 payments, because the fee is based on the total balance, not on investment selection.
• A fixed dollar amount? The main benefit is that the advisor’s pay does not automatically rise as the plan grows.

How are plan fees allocated to participant accounts?

Per capita or pro rata? There is no simple answer to which is most fair; it is a plan sponsor decision to make after considering all the options. The way fees are allocated does not have to match the way they are calculated: a sponsor can contract with a recordkeeper on a per participant basis, then allocate the total to participants pro rata. Some sponsors also have the employer pay the fees for participants below a certain balance, or for their first few months in the plan.

Are your fees reasonable?

Once you understand the mechanics, use industry research, benchmarking reports and retirement plan specialists to see whether recordkeeping and administration fees can be brought down to reasonable levels. There is no substitute for an actual competitive bidding process among recordkeepers; it is the only way to be sure you are getting the best available rates. Asking the right questions about fee leveling gets that process moving in the right direction, toward better outcomes for your plan and participants.