401(k) Fee Audit — What You Actually Pay

Part Four · Stanford Research

Why TDFs may not be what you think they are.

Shoven and Walton (Stanford/NBER Working Paper 27971, November 2020) analyzed 612 target-date funds against their benchmarks from 2010 through April 2020. The findings are unkind to the conventional wisdom about TDFs as a "set it and forget it" solution.

Total TDF AUM

$1.4T

End of 2019. ~24% of all 401(k) assets.

Fee Split

<20 / 50-70

Bimodal expense ratios (bps). Half cheap and indexed, half expensive and active.

2020 Crash

-30 to -35%

Long-dated TDFs (2045+) lost roughly one-third in Feb-Mar 2020.

Near-Retirees

-20 to -25%

2025 TDFs, designed for people ~5 years from retirement, lost a quarter.

The 2020 stress test by vintage

Feb 19, 2020 to Mar 23, 2020. The broad U.S. equity market fell roughly one-third. What TDF participants actually experienced:

Vintage	Target participant age (2020)	Average loss	Comment
2045+	~40 yrs	−30 to −35%	Nearly indistinguishable from a 100% equity fund.
2035-2040	~45-50 yrs	−25 to −30%	Glide path starting to bend, not enough to matter yet.
2025-2030	~55-60 yrs	−20 to −25%	Five years from retirement and still losing a quarter.
Retirement Income	65+	−15 to −20%	"Conservative" vintage still carried material equity risk.

Four findings from the Stanford paper

1. Fees are bimodal. About half of TDF assets face expense ratios under 20 basis points (these are usually passive, institutional share classes). The other half face 50-70 bps — typically active, retail share classes. The difference compounds to material dollars over 30 years.

2. Higher-cost TDFs mostly underperform their benchmarks. Low-cost TDFs (<30 bps) track their style-analysis benchmarks closely. High-cost TDFs have dispersed alpha, with a negative average — and all 35 of the worst performers in the sample were high-cost funds.

3. Past performance barely predicts future performance. A 1% per year edge in 2010-2014 predicted only 9 basis points per year of edge in 2015-2019. Strong mean reversion. High-cost TDFs with strong records still have lower expected returns than low-cost alternatives going forward.

4. A balanced fund may be a better default than a TDF. The authors' closing argument: TDFs treat age as the only variable that matters. Two 45-year-olds with identical birth years may have radically different risk tolerance, tax situation, pension coverage, and outside assets. A curated set of balanced (target-risk) funds lets people sort themselves by risk rather than by age — and aligns better with how financial planning actually works.

"TDFs have a one-size-fits-all aspect to them where the only difference between employees is their age. People differ in many other important dimensions."
— Shoven & Walton, NBER WP 27971

The Fee Stack · What You Actually Pay

A target-date fund can charge you twice.

A target-date fund is a fund-of-funds. You pay its headline expense ratio — and inside that wrapper sit underlying funds with fees of their own. In an active series the all-in stack runs roughly 0.60–0.78% a year. The exact same glide path, built from index funds, costs closer to 0.08–0.12%. You are often paying five-to-ten times as much for the convenience of a single ticker.

Active TDF series

~0.65%

Typical all-in expense ratio (active fund-of-funds).

Index equivalent

~0.10%

Same allocation, built from index funds.

You pay

6–13×

More, every year, for the identical glide path.

30-yr drag

~$130k

Illustrative cost of 1% extra on a $100k balance compounding 30 years.

The same glide path, very different cost

Annual expense ratio — popular target-date series

Vanguard Target Retirement

0.08%

BlackRock LifePath Index

0.11%

Fidelity Freedom Index

0.12%

T. Rowe Price Retirement

0.60%

American Funds Target Date

0.66%

Fidelity Freedom (active)

0.75%

IndexActive

Where the “double” really bites

Target-date series	Type	Expense ratio	Index you could build it from
Vanguard Target Retirement	Index	~0.08%	Already index — near the floor
Fidelity Freedom Index	Index	~0.12%	Already index
BlackRock LifePath Index	Index	~0.11%	Already index
T. Rowe Price Retirement	Active	~0.60%	~0.08% — about 7× cheaper
American Funds Target Date (R6)	Active	~0.66%	~0.08% — about 8× cheaper
Fidelity Freedom (active)	Active	~0.75%	~0.10% — about 7–9× cheaper

The real trap is the second layer: many recordkeeper and insurance-platform target-date funds add a wrapper or administrative fee on top of the underlying fund fees — so you pay the index funds’ cost and the platform’s cut for bundling them. That stacked fee is exactly what an independent fee audit surfaces, line by line.

Figures are representative net expense ratios from fund prospectuses and Morningstar, rounded for illustration; your plan’s specific share class may differ. Not a recommendation to buy or sell any fund. Bring your statement and we’ll pull your exact numbers.

Part Five · The Audit We Run

What an independent 401(k) fee audit actually looks at.

A 20-minute Zoom with one of our licensed advisors. Bring your most recent statement and, if possible, the plan's Summary Plan Description or Form 5500 (we can pull the Form 5500 for any public plan). Here is what we look at, in order.

Our five-step institutional fee audit

Identify the share class. Most participants are in retail share classes (R1, R2, R3, A-class) when institutional shares (R6, Y-class, K-class) are available at lower cost. Tibble v. Edison made the share-class decision a fiduciary obligation — but enforcement is uneven. We check yours against what the plan actually offers.
Decompose the expense ratio. A headline 0.70% expense ratio often hides a management fee (0.35%), revenue-sharing rebate paid back to the recordkeeper (0.15-0.25%), sub-TA fees (0.10%), and 12b-1 distribution fees (variable). We map each line so you can see what you're paying for.
Compare vs. the institutional benchmark. We pull median institutional expense ratios from ICI and Morningstar for your fund category, and flag any line item that's above median.
Check the glide path vs. your actual risk tolerance. If you're auto-enrolled in a 2045 TDF but you're already sitting on a CalSTRS pension floor or a paid-off house, your real risk capacity is different from what the glide path assumes. Often dramatically.
Calculate lifetime fee drag. We run a two-scenario projection: your current allocation at current fees vs. a low-cost institutional alternative. Over a 30-year horizon, a 0.50% annual fee gap compounds to roughly 14% of the ending balance. On a $500K projected balance, that's $70K.

Fee-drag math: Starting balance $50K, $20K/yr contribution, 7% gross return, 30 years. Low-cost TDF (0.12% expense) ends at $2.22M. High-cost TDF (0.72% expense) ends at $1.97M. The 60 basis-point gap costs you roughly $245K over a working career. Numbers are illustrative, not projections.

What we don't do

We don't custody your 401(k). The plan's recordkeeper (Fidelity, Vanguard, Empower, Principal, etc.) keeps your account. Your employer remains the plan sponsor. We're an independent fiduciary who advises on the allocation inside your existing plan, using the fund menu the plan offers. If there's a rollover opportunity — in-service distribution, separation from service, or plan termination — we'll evaluate it separately. But the first conversation is almost always "what should you own inside the plan you already have?"

Part One · The Default Trap

Before 2006, the default was earning you nothing.

Auto-enrollment into 401(k) plans started spreading in the late 1990s. But employers faced an ERISA problem: under Section 404(c), a plan sponsor is a fiduciary for default investments. If a default fund lost money, participants could sue. So sponsors chose the "safest" possible defaults — money market funds, stable-value contracts, and short-term GICs. Zero equity exposure.

The result: millions of workers auto-enrolled into 401(k)s during the 1990s and early 2000s had their contributions parked in cash-equivalents earning roughly the risk-free rate. Real returns after inflation were close to zero. The retirement plan was technically funded — but the money wasn't invested. That was the problem Washington eventually had to solve.

"Safe" defaults meant money market funds. For a 25-year-old auto-enrolled in 1995, a 30-year run at money-market yields would have produced roughly one-third the ending balance of a diversified 60/40 portfolio.

Congress responded with the Pension Protection Act of 2006, signed by President Bush on August 17, 2006. PPA added a new subsection to ERISA — §404(c)(5) — giving plan sponsors a fiduciary safe harbor when they default participants into a "qualified default investment alternative" (QDIA). Congress directed the Department of Labor to write the implementing rule.

The DOL published the final regulation — 29 CFR 2550.404c-5 — on October 24, 2007. That rule, which took effect December 24, 2007, defined the four QDIA categories that plan defaults have followed for the past two decades. Target-date funds became the dominant choice almost immediately.

Part Two · Timeline

How we got here: ERISA to Hughes v. Northwestern.

Six moments that shaped the modern 401(k) default. Note that QDIA came from legislation and regulation — not a single court case — but the fee-litigation wave that followed (Tibble, Tussey, Hughes) is what made plan sponsors start actively monitoring what participants pay.

1974

ERISA is enacted

The Employee Retirement Income Security Act establishes fiduciary duty for plan sponsors. Section 404(c) creates a safe harbor if participants exercise control — but says nothing specific about default investments.29 U.S.C. §1104 · Pub. L. 93-406

1998–2005

Auto-enrollment spreads; money-market defaults proliferate

IRS Revenue Ruling 98-30 clarifies that auto-enrollment is permissible. Adoption grows, but employers — fearing fiduciary liability — default new participants into money market funds, stable-value products, and short-term GICs. Auto-enrolled employees earn near-zero real returns on years of contributions.IRS Rev. Rul. 98-30 · DOL Advisory Opinion 2004-03A

Aug 17, 2006

Pension Protection Act signed into law

PPA Section 624 adds ERISA §404(c)(5), creating a fiduciary safe harbor for default investments. It directs DOL to issue regulations defining which default investments qualify.Pub. L. 109-280 · 120 Stat. 780

Oct 24, 2007

DOL finalizes 29 CFR 2550.404c-5 — the QDIA rule

DOL defines four QDIA categories: (1) target-date / life-cycle funds, (2) balanced / risk-based funds, (3) professionally managed accounts, (4) short-term capital-preservation funds (120-day window only). Effective December 24, 2007. Target-date funds win the market within 18 months.29 C.F.R. §2550.404c-5 · 72 Fed. Reg. 60452

Feb 2009

Congressional hearings after 2010-target TDFs lose ~25% in 2008 crash

Participants five years from retirement lost a quarter of their balance in funds marketed as appropriate for them. SEC and DOL issue joint guidance in 2010; GAO releases a critical report in 2011 recommending clearer TDF disclosures.GAO-11-118 (Jan 2011) · SEC/DOL 2010 TDF Guidance

May 18, 2015

Tibble v. Edison International — SCOTUS, 9-0

The Supreme Court holds that ERISA fiduciaries have an ongoing duty to monitor plan investments — specifically share-class selection. Edison was liable for keeping participants in retail share classes when cheaper institutional shares were available. Resets the standard for 401(k) fee litigation nationwide.135 S. Ct. 1823 (2015)

Jan 24, 2022

Hughes v. Northwestern University — SCOTUS, 8-0

The Court holds that offering a mix of prudent AND imprudent investments does not satisfy the duty of prudence. Fiduciaries must monitor each investment. A plan sponsor cannot defend high-fee funds by pointing to cheaper funds on the menu. Most recent major Supreme Court 401(k) case.142 S. Ct. 737 (2022)

Sean often gets asked whether QDIA exists because the 401(k) market was sued. It wasn't, not directly. QDIA came from Congress and the DOL recognizing the money-market-default problem and writing a safe-harbor rule. The fee lawsuits — Tibble, Tussey v. ABB (2012), LaRue v. DeWolff (2008), Hughes — came after and forced plan sponsors to pay attention to what participants were actually paying. The two stories run in parallel.

Part Three · The Four QDIAs

What DOL actually approved.

29 CFR 2550.404c-5 defines exactly four types of default investment that qualify for the fiduciary safe harbor. Plans have to pick one. Roughly 80% of plan defaults are now option (1).

QDIA 1 · Dominant

Target-Date Fund (life-cycle)

A fund-of-funds with a glide path that shifts from equity-heavy to bond-heavy as the target retirement year approaches. One decision for the participant: pick the year you turn 65. Stanford's NBER paper estimates ~80% of 401(k) default assets land here.

QDIA 2

Balanced / Risk-Based Fund

A fund allocating between equity and fixed income at a fixed ratio (e.g., 60/40), adjusted for the demographics of the participant population rather than the individual. Shoven and Walton (2020) argue this may actually be a better default than TDFs.

QDIA 3

Managed Account

A professionally managed individual account where a third-party manager builds allocation using age, salary, and any additional data the participant provides. Higher fees (typically +25-50 bps), higher personalization.

QDIA 4 · Restricted

Capital-Preservation Fund

Money market / stable value — but only for 120 days after auto-enrollment. After 120 days the plan must move the participant into one of the other three QDIAs. DOL intentionally limited this option to kill the old money-market default pattern.

Precedent · The Rulings That Made Fees A Liability

When the Supreme Court made your plan watch the fees.

ERISA Section 404(c) gives a plan sponsor a fiduciary safe harbor only if it acts prudently. Two rulings defined what “prudent” means for fees — and why a fee audit is now a fiduciary tool, not a luxury.

Tibble v. Edison International — SCOTUS, 9–0 (2015)

The Court held that ERISA fiduciaries have a continuing duty to monitor investments — specifically share-class selection. Edison was liable for keeping participants in retail share classes when cheaper institutional shares were available. This is the legal root of share-class fee analysis.

Hughes v. Northwestern University — SCOTUS (2022)

The Court ruled that offering some low-cost options does not excuse a plan for also carrying expensive, duplicative ones; each investment must be prudently justified on its own. Translation: “there’s an index fund in the menu” is not a defense for an overpriced default.

What this means for you: your plan sponsor is legally obligated to monitor what you pay — but the duty sits with the employer, not with you, and most participants never see the analysis. An independent fee audit puts the same lens on your own statement. See Today & The Fees →

Case Study · Edwards Lifesciences · Voya Recordkeeping

Thirty basis points sounds like nothing. Here is what it actually costs.

Statement and calculator on a desk — The number is on page two of your participant fee disclosure. Most people never turn the page.

Every Edwards Lifesciences employee gets a Voya participant fee disclosure once a year. It is required by law — DOL 29 CFR 2550.404a-5. Inside it is an administrative charge quoted in basis points. Thirty basis points is 0.30% of your balance, taken every year, whether the market goes up or down.

Point three zero percent. It is designed to sound like a rounding error. So let us do the arithmetic that the disclosure does not do for you.

Balance we modeled

$35K

A typical mid-career Edwards account.

The fee, year one

$105

0.30% of $35,000. Feels harmless.

Cost over 15 years

$3,982

Same account, 7% gross, no new contributions.

Share of the ending balance

4.1%

The fee compounds against you exactly like returns compound for you.

The same account, with and without the 30 bps

$35,000 growing at 7% a year for 15 years, no additional contributions. The only difference between the two lines is the administrative fee.

Illustration only. 7% gross annual return assumed; actual results vary.

Now add the contributions you are actually making

Nobody leaves $35,000 sitting still for fifteen years. Add $6,000 a year of contributions — roughly a 6% deferral on a $100,000 salary — and the same 30 basis points costs:

$7,421 — on a single account, from one line item you have probably never read.
$35,000 start · $6,000/yr · 15 years · 7% gross

The fee stack: admin is only the first layer

The 30 bps is the recordkeeping charge. It sits on top of whatever the funds inside your account charge. A target-date fund at 60 bps plus 30 bps of admin is 90 basis points of total drag — and per the Stanford research on the other tab, high-cost target-date funds do not reliably earn their keep.

Total annual drag	What that stack looks like	Ending balance	Cost vs. no fee
0.30%	Admin only, index funds	$92,584	−$3,982
0.60%	Admin + a cheap active fund	$88,755	−$7,811
0.90%	Admin + a typical active TDF	$85,074	−$11,492
1.20%	Admin + retail share classes	$81,537	−$15,029

Same $35,000. Same fifteen years. Same market. The only variable is what you are paying — and the gap between the top row and the bottom row is $11,047.

Charts and financial documents — Tibble v. Edison established an ongoing duty to monitor share classes. It applies to your plan too.

What we are not saying

We are not saying Edwards Lifesciences chose a bad plan, and we are not saying leave it. Voya is a legitimate recordkeeper and somebody has to be paid to run the plan. We are also not asking you to move your 401(k) — we do not custody it and we do not get paid on it.

What we are saying is narrower: you should know your number, and you should know whether the funds you are in are worth what they cost. That is a fifteen-minute conversation with your statement open, and it is free.

Bring your fee disclosure. We will read page two with you.

Fifteen minutes, on the phone or Zoom. We will find your admin charge, add up the expense ratios inside your funds, and show you what the whole stack costs over your remaining working years. Nothing to sign, nothing to move.

Schedule 15-Min Fee Review →

What our call center asks:Have you ever opened your Voya participant fee disclosure? Do you know what percentage is coming out of your account each year — and what the funds inside it charge on top of that?

Your 401(k), in three parts: the history, the law, and the fees.