Many small business 401(k) plans are still operating on fee structures that were standard a decade ago but are now significantly more expensive and less transparent than what is available today. If your plan was set up before 2018, a review of its fee model, investment options, and plan design could reveal meaningful savings for both the business and the employees in it.
What Revenue Sharing Is and Why It Became a Problem
Revenue sharing was the dominant fee model for small business 401(k) plans for years. In these arrangements, mutual funds include embedded fees, typically labeled as 12b-1 fees or sub-transfer agent fees, that flow to service providers behind the scenes. The effect was that plans appeared free to employers because there was no visible invoice, while the actual cost was paid by plan participants through higher expense ratios in their investment options.
The problems with this model are structural. Participants in higher-cost funds pay more without knowing it. Employers have difficulty analyzing what the plan actually costs. The fiduciary risk is elevated because compensation flows are opaque rather than disclosed. According to Callan's Defined Contribution Trends Survey, revenue sharing was used in 67% of plans in 2012. By 2021, that number had dropped to 17%, reflecting both regulatory pressure and a broad shift toward transparent fee structures. Plans that have not been reviewed since before this transition may still be operating on the older model.
While reviewing a business owner's 401(k) recently, the plan was still using a revenue sharing structure, and the provider mentioned that fees could be lowered if requested. That kind of passive fee structure, where savings require the plan sponsor to ask rather than being offered proactively, is exactly the pattern that warrants a closer look.
What Modern 401(k) Plans Look Like
Best-in-class plans today are designed for transparency, efficiency, and cost control. The features that distinguish them include flat fee structures rather than asset-based pricing, institutional-quality index fund investments with expense ratios in the 0.03% to 0.08% range, automated payroll integration and compliance management, and access to 3(38) investment fiduciary and 3(16) plan administration services that shift fiduciary responsibility away from the business owner.
The shift to flat-fee pricing is particularly significant. Asset-based pricing means fees grow automatically as account balances grow, even if the services provided do not change. A plan with $500,000 in assets at a 1% asset-based fee costs the same as running a $5 million plan at 0.1%, which is rarely justified by the underlying service.
Plan Design Options Worth Knowing
Small businesses now have access to several plan structures that were either unavailable or prohibitively complex a decade ago.
Safe Harbor 401(k)s have been adopted by approximately 69% of small businesses because they eliminate discrimination testing and allow business owners to maximize their own contributions without the plan failing compliance tests. The trade-off is a required employer contribution, either a match or a non-elective contribution, but the ability to contribute up to $70,000 annually as the owner typically justifies the cost.
Tech-enabled providers such as Guideline and Vestwell offer flat-fee pricing, automated payroll integration, and streamlined administration that removes much of the operational burden from the business owner. These platforms have made modern plan design accessible to businesses that would previously have needed a larger plan to justify the infrastructure.
Pooled Employer Plans, enabled by the SECURE Act in 2021, allow unrelated businesses to join a shared plan with centralized administration and fiduciary oversight. For very small businesses or sole proprietors, a PEP can provide access to institutional pricing and professional administration that would be difficult to achieve with a standalone plan.
Modern plan features including auto-enrollment, Roth contribution options, and profit-sharing are now standard even in small plans and should be part of any plan design conversation.
The Cost of Not Reviewing Your Plan
The fee difference between an outdated revenue-sharing plan and a modern flat-fee plan compounds significantly over time. A 1.5% all-in fee versus a 0.5% all-in fee reduces a participant's retirement savings by more than 30% over 30 years, assuming 7% annual returns. For business owners who use their 401(k) as a primary wealth-building vehicle, that drag is particularly meaningful because the largest balances in the plan are typically the owner's.
Four signs that a current plan may be worth reviewing: fees are not clearly disclosed or the plan appears to cost nothing, investment options have expense ratios above 0.75%, pricing is asset-based rather than flat per participant, or the plan lacks features like Roth contributions, auto-enrollment, or profit-sharing that are now standard.
Tax Credits That Can Offset Plan Costs
Under the SECURE Act and SECURE 2.0, qualifying small businesses can receive up to $5,000 per year for three years to offset plan startup and administration costs, plus an additional $500 per year for plans that include auto-enrollment. The total available credit is up to $16,500, which can make a plan upgrade cost-neutral or even cash-positive in the first few years.
For businesses that do not yet have a plan, these credits make the establishment cost significantly lower than it was before the SECURE Act passed. For businesses with existing plans, a plan redesign that adds auto-enrollment may qualify for the additional $500 annual credit.
Frequently Asked Questions
What is revenue sharing in a 401(k) plan and why is it a problem?
Revenue sharing is a fee arrangement in which mutual funds include embedded fees that flow to recordkeepers, administrators, or advisors behind the scenes. The fees are built into the fund's expense ratio rather than charged as a visible line item, which makes the plan appear free to the employer. The problem is that participants pay these fees through lower investment returns without full transparency about what they are paying or why. Revenue sharing also creates fiduciary risk for the plan sponsor because it is difficult to demonstrate that the plan's fees are reasonable when the compensation structure is opaque.
What is a flat-fee 401(k) and how is it different from asset-based pricing?
A flat-fee 401(k) charges a fixed amount per participant or a fixed annual fee regardless of how large the account balances grow. Asset-based pricing charges a percentage of total plan assets, which means fees increase automatically as balances grow even if the services provided remain the same. Flat-fee pricing is generally more favorable for plans with growing balances and provides more predictable costs for the employer. It also makes it easier to evaluate whether the fees are reasonable for the services being received.
What is a Safe Harbor 401(k) and why do most small businesses use one?
A Safe Harbor 401(k) is a plan design that satisfies IRS nondiscrimination testing automatically by meeting specific employer contribution requirements, either a dollar-for-dollar match on the first 3% of employee deferrals and 50 cents on the next 2%, or a 3% non-elective contribution to all eligible employees. By satisfying the test automatically, the plan allows highly compensated employees, including business owners, to contribute the maximum allowable amount regardless of how much lower-paid employees contribute. The required employer contribution is the cost, but for owners who want to maximize their own retirement savings, the Safe Harbor structure is typically the most efficient path.
What are the SECURE 2.0 tax credits for small business retirement plans?
SECURE 2.0 provides qualifying small businesses with a credit of up to $5,000 per year for three years to offset the startup and administration costs of a new retirement plan. Businesses with existing plans that add auto-enrollment can receive an additional $500 per year. To qualify for the startup credit, the business must have 100 or fewer employees who received at least $5,000 in compensation in the prior year and must not have had a substantially similar plan in the prior three years. The credits can make establishing or upgrading a plan significantly less expensive than before.
How much can a business owner contribute to a 401(k) in 2025?
For 2025, the combined employee and employer contribution limit for a 401(k) is $70,000, or $77,500 for participants aged 50 and older. A business owner contributing through a Safe Harbor plan can contribute up to $23,500 as an employee deferral, plus employer contributions of up to 25% of compensation, up to the combined limit. For high-income owners who want to shelter more than the defined contribution limit, adding a cash balance plan on top of the 401(k) can increase total annual contributions to $150,000 or more depending on age and income.
Related Reading
- Mid-Year Tax Strategy for Business Owners (Part 1 of 2)
- Business Owner, Meet CEO You: How to Align Personal and Business Finances at Tax Time
- Year-End Tax Considerations for Business Owners (2025)
- How to Build Wealth Alongside Your Business
- The Gap That Shows Up in December
This article is for informational purposes only and does not constitute financial, legal, or tax advice. Please consult a qualified financial advisor or plan administrator for guidance specific to your situation.
