When a school district in the Midwest switched its 401(k) plan from a lineup of actively managed funds to a set of low-cost index options in 2019, one longtime employee ran the numbers and realized the old plan’s fees had cost her more than $40,000 over 18 years. She had never seen a single charge on her statements. The money had simply been absorbed inside the funds themselves, deducted from returns before they ever reached her account. Her story, versions of which play out in workplaces across the country, illustrates a problem that federal investigators have documented for more than a decade but that most workers still do not know exists.

Consider a straightforward scenario: a worker contributes $6,000 a year to a 401(k) for 30 years and earns a 7 percent average annual return before fees. This calculation assumes annual contributions made at the end of each year, with no employer match factored in. At an expense ratio of 0.25 percent, a rate common among index funds, that worker retires with roughly $538,000. Raise the expense ratio to 1.0 percent, a level still found in many actively managed funds, and the balance drops to about $474,000. The difference is nearly $65,000, and it never appears as a line item on any statement. It is subtracted inside the fund itself, invisible unless you know where to look.

That is not a scare tactic: the U.S. Department of Labor’s own consumer guidance on 401(k) plan fees warns that participants routinely absorb administrative and investment costs through deductions from returns rather than through visible charges. Among the most common culprits are 12b-1 fees: marketing and distribution charges baked into a mutual fund’s expense ratio. Because the money is subtracted before returns are credited to your account, the cost is effectively invisible unless you dig into fund prospectuses or fee-disclosure documents that most people never open.

How revenue sharing tilts the playing field

The problem runs deeper than the fees themselves: the system that determines which funds end up on your 401(k) menu can be shaped by who gets paid what behind the scenes.

Revenue-sharing arrangements allow mutual fund companies to funnel a portion of their fees back to the plan’s recordkeeper or service provider. In return, those providers may favor higher-cost funds when building or maintaining a plan’s investment lineup. The result: your menu of choices may be designed around someone else’s financial incentives, not your best interest.

A Government Accountability Office investigation, report GAO-11-119, documented this dynamic in detail. The GAO found that revenue-sharing models can bias fund recommendations inside 401(k) plans, giving service providers a financial reason to steer menus toward options that pay them more, even when cheaper alternatives would deliver better net returns to workers.

Staff at the Securities and Exchange Commission’s Division of Investment Management flagged a related concern. In a set of frequently asked questions on adviser conflicts, the staff explained that indirect compensation arrangements can push advisers toward favoring certain investments. When those same advisers help employers design 401(k) menus, the conflict flows directly into the retirement accounts of everyday workers.

A follow-up GAO analysis, report GAO-14-310, found that managed-account services inside 401(k) plans can layer additional fees on top of underlying fund expenses, compounding the drag on long-term balances. For a worker already paying elevated fund costs, the extra layer can quietly erase years of compounding growth.

Disclosure rules changed the paperwork, not necessarily the outcome

Federal regulators have tried to address the problem. Under ERISA’s prohibited-transaction rules, specifically 29 CFR 2550.408b-2, covered service providers must disclose indirect compensation to plan fiduciaries. A companion rule, the 404a-5 participant fee notice, has required plans to send workers an annual breakdown of fees and investment performance since 2012.

Those mandates put more information on paper. Whether they changed behavior is a different question. A GAO survey of plan sponsors, documented in the GAO-12-550SP e-supplement, found that many employers did not fully understand the indirect compensation flowing through their plans or how those payments shaped the investment options offered to workers. The GAO recommended increased educational outreach and broader oversight in a related report, GAO-12-325, but no comparable federal follow-up with updated data has been published since.

Market forces have applied their own pressure. Asset-weighted average expense ratios for equity mutual funds held in 401(k) plans have fallen over the past decade, driven largely by the growth of index funds and target-date funds, according to data tracked by the Investment Company Institute in its annual Investment Company Fact Book. A wave of excessive-fee lawsuits has also forced employers to pay closer attention. The Supreme Court’s 2022 ruling in Hughes v. Northwestern University made it harder for plan sponsors to dismiss claims that they allowed unreasonably expensive options to persist on a plan menu, and similar cases against institutions like Emory University have reinforced the legal risk of inaction.

Yet lower industry averages do not mean every plan has improved. Workers in smaller plans, or those with employers who have not revisited their fund lineups in years, may still be paying well above the going rate.

What you can do right now

Start with the fee-disclosure notice your plan is required to send you each year. That document lists every investment option in the plan along with its expense ratio, any shareholder-type fees, and a comparison to a benchmark. If you have never seen it, or if it landed in your inbox and you deleted it, ask your HR department or plan administrator for a copy.

Once you have the notice, focus on expense ratios. For a broad U.S. stock index fund, anything above 0.10 percent deserves scrutiny. Many large index funds now charge 0.03 percent to 0.05 percent. For an actively managed fund, ratios above 0.50 percent to 0.75 percent should prompt a hard question: is this fund’s performance, after fees, actually beating a cheaper alternative?

If your plan offers only high-cost options, raise the issue with your employer. Plan sponsors have a fiduciary duty under ERISA to ensure fees are reasonable, and many have renegotiated terms or swapped in lower-cost share classes after employees flagged the problem. You do not need to be a benefits expert to ask the question. A simple written request noting the expense ratios in your plan compared to widely available index fund alternatives puts the issue on the record.

If your plan’s lineup remains expensive after those conversations, consider contributing only enough to capture any employer match, then directing additional retirement savings to an IRA where you control the investment menu and can choose low-cost index funds directly.

A well-documented problem still waiting for a real accounting

The federal record on hidden 401(k) fees is unusually clear about the mechanics: revenue sharing creates conflicts, indirect costs reduce returns, and small annual differences compound into large retirement shortfalls. A 2024 GAO follow-up confirmed that conflicts of interest still affect the multi-trillion-dollar retirement-investment system, even after a decade of disclosure rules and litigation. What the record cannot fully measure is how those conflicts translate into outcomes for individual workers inside individual plans, which is where the burden of vigilance still falls.

That leaves workers in a position that should feel familiar by now: responsible for their own retirement security inside a system whose incentives are not fully aligned with their interests. The tools to fight back exist. Fee disclosures are available, low-cost funds are more accessible than ever, and fiduciary obligations give employees legal ground to demand better options. But none of those tools work if they sit unopened in an inbox or unread in a benefits packet.

The thousands of dollars at stake will not announce themselves; you have to go looking.