American Funds 401(k) plans can carry high fees. Some sit inside fund expense ratios. Others hide in revenue sharing or 12b-1 charges you may never see on a statement. A plan sponsor has a duty to check these costs. A fee review weighs the plan’s full cost against similar plans.
Why an American Funds 401(k) Can Carry High Fees
American Funds, managed by Capital Group, is one of the largest active fund families inside workplace retirement plans. The funds themselves have a long track record. The problem is rarely the fund. It is the share class your plan sits in.
American Funds offers retirement share classes labeled R1 through R6. The lower-numbered classes carry the highest internal costs, including a built-in 12b-1 fee that can run as high as 1.00%. The R6 class, by contrast, strips out revenue sharing and 12b-1 charges. If your company was placed in an R1 or R2 share class years ago and never moved, you may be paying several times what the same funds cost in R6. This is where American Funds 401(k) high fees usually begin.
Higher share classes pay part of their cost back to the recordkeeper and the broker through revenue sharing. That arrangement can make a plan look free to the employer while participants quietly absorb the cost inside their returns.
What Counts as High: Benchmarking the All-In Cost
There is no single number that defines high. A small plan with $1 million in assets tends to pay more, as a percentage, than a plan with $50 million. The fair test is benchmarking. You compare your plan’s all-in cost against plans of similar size and design.
The all-in cost combines three layers. The first is investment cost, meaning the expense ratios of the funds. The second is recordkeeping and administration. The third is advisor compensation, which may be paid through revenue sharing rather than a visible invoice. Add them together and you get the figure that matters.
The chart below shows how those layers stack into one all-in cost.
Once you know your all-in cost, American Funds 401(k) high fees become a measurable question rather than a worry. From there, you can judge whether the rate is reasonable for the size of your plan.
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Where the Fees Hide: Revenue Sharing and 12b-1 Charges
Two costs do the most damage because they are the hardest to see. Revenue sharing is a payment from the fund to the recordkeeper, taken out of fund assets before your statement is printed. A 12b-1 fee is an annual marketing and distribution charge baked into the share class. Neither one shows up as a line item the participant can point to.
American Funds 408(b)(2) disclosures are where these costs are required to appear. Service providers must send plan sponsors a written breakdown of direct and indirect compensation. Many sponsors file these documents without reading them. That is the moment the cost goes unquestioned, and the moment American Funds 401(k) high fees keep compounding.
What Plan Sponsors Can Do About High Fees
You have more control than the paperwork suggests. The duty to monitor plan costs is a fiduciary obligation, reinforced by a 2015 Supreme Court ruling that sponsors must keep watching fees over time, not just at the point of hire. These four steps put that duty into practice.
- Request the current 408(b)(2) disclosure and read the indirect compensation section.
- Ask your provider which American Funds share class your plan uses, and whether the R6 class is available.
- Benchmark the all-in cost against plans of similar size.
- Document every review and decision in writing.
If your plan includes higher-balance participants who want professional management, a self-directed brokerage account is a plan design option the sponsor elects to offer. It is not a switch a recordkeeper flips on. It lets a participant access a wider menu, including a Schwab Personal Choice Retirement Account, without forcing anyone out of the plan. The decision sits with the sponsor and belongs in the plan document.
The steps below turn the duty to monitor into a repeatable process you can show in writing.
Switching share classes is often the fastest win. Moving from R2 to R6 on the same fund can lower investment cost without changing the underlying strategy at all. Your provider can usually map the conversion in a single cycle. The goal is the same one behind getting more out of a 401(k) plan: keep more of every dollar working for the people in it.
How Often Should a Plan Sponsor Review These Fees?
There is no fixed rule, but many advisors suggest a formal fee review at least every two to three years, and sooner after a plan grows, changes recordkeepers, or adds participants. A documented schedule helps show that the sponsor is meeting its ongoing duty to monitor costs.
A strong fee review pairs naturally with a look at how the fund menu itself manages investment risk. Cost and quality belong in the same conversation. That discipline is the one Holland Capital Management brings to client portfolios, summed up as Preserve. Strengthen. Grow.™
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Frequently Asked Questions
Are American Funds 401(k) Fees Really Higher than Other Options?
Not always, and not by design. American Funds expense ratios are competitive in the R6 share class. The cost problem usually comes from a plan sitting in a higher share class like R1 or R2, where revenue sharing and 12b-1 fees inflate the total. Benchmarking tells you which side you are on.
What Is Revenue Sharing in a 401(k) Plan?
Revenue sharing is a payment made from a fund’s assets to the plan’s recordkeeper or broker. It is taken out before your return is reported, so it does not appear as a separate charge. It can make a plan look inexpensive to the employer while participants carry the real cost.
How Do I Find My Plan’s All-In Cost?
Start with your 408(b)(2) disclosure, which every service provider must give you. Add the fund expense ratios, the recordkeeping and administration fees, and any advisor compensation, including indirect revenue sharing. The combined figure is your all-in cost, and it is the number worth benchmarking.
Can a Plan Sponsor Switch to Lower-Cost Share Classes?
Yes, and it is often straightforward. If your plan qualifies for the R6 share class, your provider can usually convert the same funds without changing the investment strategy. Sponsors carry a documented duty to use a lower-cost share class when the plan is eligible for one.
What Is a 408(b)(2) Disclosure?
A 408(b)(2) disclosure is a written statement of the direct and indirect compensation your plan pays its service providers. Federal rules require providers to send it. Reading the indirect compensation section is where many sponsors first see revenue sharing spelled out.
Does Offering a Brokerage Window Lower Plan Fees?
Not on its own. A brokerage window gives certain participants access to a wider investment menu, but it does not reduce the core plan’s costs. It is a plan design choice a sponsor elects to offer, and it works best alongside a regular fee review, not in place of one.
Who Is Responsible for High 401(k) Fees?
The plan sponsor holds the fiduciary responsibility. Even when an advisor or recordkeeper sets the share class, the duty to monitor and benchmark costs stays with the employer. Pairing a fee review with broader tax-efficient investing planning keeps the whole plan working for participants. Our 401(k) Plan Fees & Conflicts guide covers related considerations in more depth.
