Plan Fee Transparency Under ERISA

Summary

This guide covers how advisors can strengthen fee transparency by improving fee clarity, enhancing benchmarking accuracy, and addressing structural issues that distort how plan costs are measured.

Fee transparency has become a defining requirement of modern defined contribution plan oversight. Under ERISA, plan sponsors must be able to demonstrate that fees are reasonable, well-documented, and consistently monitored. For advisors, that standard doesn’t just mean explaining what participants pay. It means building a governance process that can hold up to scrutiny.

In practice, this is harder than it looks. Complex pricing models, layered service arrangements, and a common structural issue (inactive terminated participant accounts) all distort how plan costs get measured and reported.

Why Fee Transparency Is a Fiduciary Obligation, Not Just a Best Practice

ERISA imposes a duty of prudence on plan fiduciaries. This requires ensuring plan fees are reasonable in relation to the services provided and maintaining a prudent process for evaluating and monitoring those fees.

Two key regulatory frameworks establish baseline disclosure requirements:

ERISA 408(b)(2) requires covered service providers to disclose their compensation and potential conflicts of interest to plan fiduciaries before entering into or renewing a service arrangement.
ERISA 404(a)(5) requires participant-directed plans to disclose investment-related fees and expenses to participants on a regular basis.

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These rules create a disclosure floor. They don't create a governance process. That part falls to the advisor.

When fee transparency is weak, three risks typically emerge:

Risk	What it means
Fiduciary exposure	Fees aren’t clearly understood, benchmarked, or documented in a way that supports audit or litigation defense.
Misinterpretation of value	Sponsors cannot clearly connect fees to services delivered, making it hard to justify or renegotiate costs.
Plan inefficiency	Structural issues make cost analysis unreliable and benchmarking comparisons less accurate.

What Strong Fee Transparency Actually Requires

Effective fee transparency is not a single report or annual review. It is a repeatable governance process that connects fees, services, and outcomes in a clear and defensible way.

1. Clear Fee Mapping

Advisors can start by identifying and categorizing all plan-related fees, including:

Recordkeeping fees (often per-participant or asset-based)
Investment management fees (expense ratios on underlying funds)
Advisory and consulting fees
Administrative and trustee fees
Revenue sharing arrangements, if any

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The goal isn’t just disclosure, but clarity. Sponsors should be able to look at a fee summary and understand exactly what they’re paying, who's receiving it, and what service it covers.

2. Benchmarking That Supports Reasonableness

A key component of fiduciary oversight is demonstrating that total plan costs are reasonable relative to services provided. This typically involves benchmarking against:

Plan size and participant count
Service levels and plan complexity
Peer group or industry comparisons

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Benchmarking isn't explicitly mandated in every detail, but it's widely recognized as the practical standard for fee defensibility in DOL audits and ERISA litigation. A fee that looks reasonable in isolation may not survive comparison to market rates.

3. Ongoing Monitoring and Documentation

Fee structures change. Service arrangements evolve. A fee that was reasonable three years ago may not be today. Advisors should ensure:

Annual regular fee reviews
Documented rationale whenever a provider is retained, renegotiated, or replaced
Clear records showing how fees and services evolve over time
Governance committee documentation supporting oversight

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This creates continuity and defensibility over time, not just point-in-time compliance.

4. Evaluation of Services and Potential Conflicts

True transparency also requires evaluating whether:

Services being paid for are necessary and appropriate
Fees align with the actual services delivered
Conflicts of interest exist (including revenue sharing or proprietary investment options)

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This ensures fee transparency reflects real value, not just disclosed numbers.

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Where Fee Transparency Breaks Down in Practice

Even well-intentioned plans following established governance processes run into a structural problem: inactive terminated participant accounts.

When employees leave and don't take action on small balances, those accounts stay in the plan. Under SECURE 2.0, balances up to $7,000 are eligible for distribution through a Safe Harbor automatic rollover IRA process. Many sponsors don’t have a consistent force-out program in place, so accounts accumulate over time. The fee transparency consequences are direct:

Per-participant cost calculations are inflated. If a recordkeeper charges $50 per head per year and 15% of accounts belong to terminated employees who left three years ago, the per-participant cost analysis reflects a participant population that doesn't match the plan's active membership.
Benchmarking comparisons become less reliable. Peer plan comparisons are based on total participant counts. A plan carrying a large backlog of inactive accounts will show different cost ratios than a plan of identical size that's been actively managed.
Form 5500 reporting is harder to interpret. Participant count data on the Form 5500 rolls forward from year to year. A growing gap between active and total participants shows up in the numbers, even if no one is tracking it. For advisors, this can create a blind spot that can go unnoticed. Fee transparency may appear accurate on the surface, while the underlying data used to evaluate it is partially skewed by inactive balances that no longer reflect the active participant base.

How Automatic Rollovers Improve Fee Clarity

An automatic rollover IRA process provides a compliant mechanism for removing small-balance terminated accounts from the plan when participants don’t make an active election. Under SECURE 2.0, balances between $1,000 and $7,000 can automatically be rolled into a Safe Harbor IRA, and balances under $1,000 may be distributed as cash (or rolled over).

From a fee transparency perspective, this is where the impact really shows up most clearly:

Challenge	Solution Provided
Automatic rollovers	Use automatic rollover programs to remove small dormant balances and reduce audit burden.
Complex transition management	Apply structured processes to manage M&A and plan terminations.
Dormant plan inefficiencies	Consolidate or offboard legacy accounts to improve efficiency.
Fiduciary & admin exposure	Use compliant rollovers and proper tracking to reduce ERISA risk.

What Improves When Plan Data Is Cleaned Up

When inactive accounts are properly addressed, fee transparency becomes easier to measure and communicate:

Area	Improvement
Per-participant cost metrics	Better reflects the active participant base rather than the full plan.
Benchmarking	Comparisons are more defensible when participant counts are clean.
Form 5500 reporting	Participant data is clearer and easier to interpret year over year.
Fiduciary oversight	Cost analysis reflects true drivers, not administrative backlog.

These improvements are especially meaningful in mid-sized plans, where even a relatively small number of inactive accounts can visibly distort cost ratios and create audit questions that take time to explain.

PensionBee's automatic rollover IRA solution handles this process end-to-end, from the initial distribution to managing participant communications. It's designed for advisors who need a consistent, documented workflow for ongoing plan administration and for sponsors working through plan terminations or M&A events.

Building a Fee Transparency Framework That Holds Up

Strong fee transparency is not a standalone exercise, it is part of ongoing plan governance. In practice, this means continuously identifying and managing the risks that can undermine transparency, accountability, and compliance.

These risks typically fall into a few recurring categories, each requiring specific governance controls and mitigation strategies:

Risk	Impact	How to Mitigate
Excessive fees	Quietly erodes participant returns over time	Benchmark fees annually; renegotiate when costs aren't justified
Inadequate monitoring	Problems go unnoticed, affecting performance	Build structured review cycles for investments and service providers
Lack of documentation	Reduces accountability, creates audit exposure	Maintain detailed records of all plan decisions and processes
Conflicts of interest	Biases can subtly influence decisions	Proactively review relationships and disclosures
Terminated employee account backlog	Fiduciary liability for small-balance distributions	Use an automatic rollover IRA solution to comply with SECURE 2.0

Together, these elements create a system where fees are not only disclosed but consistently understood, measured, and defended.

Supporting Dormant Account Management

Dormant small-balance accounts create ongoing administrative, compliance, and fiduciary strain in retirement plans. As they accumulate, they increase costs, complicate reporting, and make plan oversight more difficult for sponsors and advisors.

For advisors, these accounts are a recurring challenge across client plans, particularly during M&A activity, plan terminations, or periods of workforce turnover. Addressing them can improve plan efficiency, may help reduce fiduciary exposure, and support a cleaner, more defensible retirement strategy.

For plan sponsors, dormant accounts add operational burden and cost while also making it harder to maintain accurate records and an effective participant experience. They can increase fiduciary risk if force-out and termination processes are not handled consistently and in compliance with regulatory requirements.

PensionBee manages this end-to-end, handling Safe Harbor automatic rollovers under $7,000 as well as voluntary rollovers above that threshold, and full support for M&A and bankruptcy plan terminations. The process reduces administrative burden, improves plan governance, and transitions former participants into a modern IRA platform designed to support long-term retirement outcomes.

Frequently Asked Questions (FAQs)

What fees must be disclosed under ERISA?

Under ERISA, all compensation paid to service providers for plan services must be disclosed, including recordkeeping, investment management, and advisory fees. These fees must be reasonable in relation to the services provided, and fiduciaries are responsible for monitoring them.

What does “reasonable fees” mean under ERISA?

ERISA doesn't define a specific dollar amount or percentage cap. The standard is a prudent process: a fiduciary must review the fees, compare them to market alternatives, consider the services received, and document the rationale. A fee that might be considered high in isolation could be reasonable given the plan's complexity and the level of service provided. The key is the process and the documentation, not the number alone.

How often should plan fees be reviewed?

There is no mandated frequency, but fiduciaries must maintain an ongoing monitoring process. In practice, annual reviews are the standard. For plans experiencing significant changes (a recordkeeper transition, a spike in participant turnover, or an M&A event), more frequent reviews are appropriate. The review process and any resulting decisions should be documented in governance committee records.

What is a Safe Harbor IRA?

A Safe Harbor IRA is an individual retirement account used to receive distributions from retirement plans for terminated employees with small account balances (under $7,000). Under ERISA and SECURE 2.0, plan sponsors are required to roll these balances into Safe Harbor IRAs rather than distributing them as cash.

How do automatic rollovers affect per-participant fee calculations?

Most recordkeepers charge on a per-participant basis. This participant count is used for per-participant fee billing until they're removed. Every inactive account belonging to a terminated employee who left years ago is a fee the plan is paying for someone who isn't contributing, isn't receiving advisory services, and isn't likely to respond to plan communications. This inflates the total per-participant cost and makes the plan look more expensive than it would be if only the active participant base were measured. Removing inactive accounts through a consistent force-out process brings cost analysis in line with the population the plan is actually serving.

What did SECURE 2.0 change about automatic rollovers?

SECURE 2.0 raised the involuntary cash-out limit from $5,000 to $7,000, effective for plan years beginning after December 31, 2023. This means plan sponsors can now process distributions for terminated participants with vested balances up to $7,000.

Why does fee benchmarking matter for ERISA compliance?

Benchmarking is the practical mechanism for demonstrating that fees are reasonable under ERISA's prudent-process standard. Without a comparison to market rates for similar plan sizes and service levels, a sponsor has no basis for saying fees are appropriate other than the fact that they agreed to them. DOL auditors and plaintiffs' attorneys in ERISA litigation consistently look for benchmarking documentation. Plans that can't produce it are in a weaker defensive position, regardless of whether the fees were actually reasonable.

How are plan investments monitored under ERISA?

Fiduciaries must continuously monitor investments. This includes establishing an Investment Policy Statement (IPS), that defines selection criteria, performance benchmarks, and conditions for removing an underperforming option. Investment options should be reviewed at least annually against stated benchmarks and comparable alternatives. The review process and any resulting decisions should be documented in committee minutes.

Disclaimer

Your investment can go down as well as up. This post, and any associated customer testimonial or third party endorsement, is provided solely for informational and educational purposes, should not be taken as tax, legal, financial or investment advice and is not an offer, solicitation, or recommendation to buy or sell any securities or investments.

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The Advisor's Guide to Plan Fee Transparency Under ERISA

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