A silent revolution is transforming the way 401(k) plans are funded, and it's time we shed some light on this hidden trend. While investment management fees are often the focus, there's a whole other side to the story that's rarely discussed. Beyond the funds you invest in, 401(k) plans incur daily operational costs, from tracking your account balance to safeguarding your data. These expenses need to be covered, but how they're paid for has become a controversial topic, especially for smaller plans.
The Cost of Convenience
Traditionally, there are three ways to cover these costs: the employer pays directly, participants pay an explicit fee, or, most commonly, costs are covered indirectly through revenue sharing embedded in investment fees. Smaller plans face a challenge here, as fixed costs are spread across fewer participants, leading to higher administrative expenses. According to Morningstar, 30% of plans under $25 million charge over 100 basis points in total costs.
The Legal Landscape
But here's where it gets controversial: excessive-fee lawsuits targeting 401(k) plans are on the rise. With 51 such lawsuits in 2025 alone, plan sponsors are under pressure to find alternative funding methods. This legal scrutiny has made revenue sharing, once a common practice, less popular.
A New Funding Model
Enter co-manufactured target-date funds with stable value. This emerging solution offers institutional pricing with lower fees, but there's a catch. These funds often require a significant allocation to the recordkeeper's stable value fund, which becomes the revenue source, replacing extra fees.
The Rise of Stable Value
As of September 2025, Morningstar tracked 47 target-date series incorporating stable value, with assets doubling to $52 billion since 2022. Most of these series launched post-2020, and all are collective investment trusts, not mutual funds. Names like Vanguard, T. Rowe Price, and BlackRock are associated with these funds, even if they're not directly managing them. The appeal for these brand-name managers is clear: free distribution and the promise of lower plan fees.
The Trade-Off
While stable-value funds provide capital preservation and diversification, some target-date series rely heavily on them. This limits the room for higher-yielding asset classes, which can impact long-term growth. For retirees, this dual challenge of outliving savings and keeping up with inflation may not be adequately addressed by stable-value funds alone.
A Comparative Analysis
Take the IndexSelect Moderate Retirement and BlackRock LifePath Index Retirement. While IndexSelect outperformed in 2021 and 2022, BlackRock LifePath took the lead as interest rates stabilized in 2023 and declined in 2025. Stable value provides a buffer during bond market losses, but a diversified bond mix can handle varying interest rate conditions better.
The Bottom Line
The way 401(k) plans cover costs is evolving, and revenue sharing is losing ground. Co-manufactured target-date funds with stable value are a potential solution, offering lower visible fees and principal protection. However, the heavy reliance on stable value may limit growth. It's crucial to understand what's inside your default option to strike a balance between short-term stability and long-term growth.
