What does "reasonable compensation" mean for retirement plan providers?
Last updated October 2, 2026
ERISA permits paying plan service providers only reasonable compensation for necessary services. Reasonableness is proven by disclosure (408(b)(2)), benchmarking against comparable plans, and periodic market testing — total compensation including revenue sharing and float, not just invoiced fees.
Every dollar of plan-paid compensation must clear ERISA's reasonableness bar, and the analysis covers total compensation: direct fees, asset-based charges, revenue sharing from funds to the recordkeeper, float, and other indirect streams.
The working framework:
- Disclosure: covered providers must give 408(b)(2) fee disclosures; a missing or inadequate disclosure makes the arrangement a prohibited transaction.
- Benchmarking: compare total costs to similar plans by size and services — via benchmarking reports or adviser data — at least annually.
- Market testing: periodic RFPs supply the strongest evidence, actual competing bids.
"Reasonable" doesn't mean cheapest — it means defensibly priced for the services received, with the analysis written down. Per-participant fee framing (rather than pure asset-based drift) has become a favored discipline as plans grow.
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