Data shed light on how much 401(k)s pay advisors

It's becoming less common to be paid through fund expenses, and compensation by large plans is going down, according to the 401k Averages Book.

The overall fees charged to 401(k) plans are well-documented – but information about how much goes to advisors isn’t widely available.

New data published this week in the 401k Averages Book shed some light on that. As with other types of fees, advisor compensation varies by plan size, with $5 million 401(k)s paying an average of 37 basis points ($18,500 total) and $50 million plans paying less than half that rate, at 17 bps ($85,000 total).

Those figures come from the 24^th edition of the book, which launched this week. Although the publisher, Pension Data Source, has had compensation information for 401(k) advisors available in its database, it had not previously included it in the 401k Averages Book.

“Advisor fees have been trending down in our database, but we never created that number for our averages book,” said Joe Valletta, the book’s author.

The decline in fees might apply more to larger 401(k)s, as advisor fees for small plans appear to have held steady over the past few years. Separate data from fi360 show that the median advisor compensation from a $5 million plan in 2018 was about 35 bps.

Meanwhile, $10 million plans paid advisors 28 bps on average that year, and $100 million plans paid 7 bps, according to earlier reporting of fi360 data by InvestmentNews. At the time, the average advisor compensation for small plans had been trending upward, while it had been decreasing by as much as 20 percent since 2013 for big plans.

Further, data last year from Employee Fiduciary showed median fees of 50 bps for advisors serving in a fiduciary capacity for plans with $1 million to $5 million in assets.

One reason compensation for 401(k) advisors has been tricky to evaluate is that it’s sometimes tied to the so-called “revenue sharing” fees of mutual funds used within a plan. Such fees are separate from investment management costs and can be used to pay record keepers, advisors, and other service providers.

Increasingly, 401(k)s pay for administrative services through asset-based fees that are charged directly to participants or their employers. Paying through revenue sharing has become less common, with small retirement plans more likely than larger ones to continue doing so.

For example, $5 million 401(k) plans, which had average total fees of 104 bps in 2023, had 46 percent of their fees paid through revenue sharing, according to the 401k Averages Book. Total fees for plans of that size dropped from 116 bps in 2019, in part because investment management fees have been falling for years.

Data from the Investment Company Institute and BrightScope show that between 2010 and 2022, the asset-weighted average fees for equity mutual funds in 401(k)s dropped from 70 bps to 33 bps, and the fees for hybrid mutual funds – those that include a mix of equities and fixed income – went from 64 bps to 42 bps. Fees have gone down as plans and the funds offered within them have reached better economies of scale.

However, 401(k) participants don’t necessarily pay lower administrative costs if their plans are large. Because record-keeping costs have much more to do with the number of accounts in a plan than the size of the accounts, administrative fees are tied more to head count.

For example, two plans with $20 million but different numbers of participants pay different fees. One with 2,000 participants, having a high number of smaller accounts, has an average total cost of 126 bps, while one with 200 participants has an average total cost of 84 bps, according to the 401k Averages Book.