Why the 401(k) System Never Became a Market

Much has been written about why health care in the United States does not function like a free market. Prices are opaque. Buyers are displaced. Costs flow through third parties. Market discipline never fully forms.

What is discussed far less is that the same structural defects exist, often more severely, inside the retirement system.

Employer-sponsored retirement plans did not emerge through voluntary exchange between buyers and sellers. They did not evolve through price competition, service differentiation, or consumer choice, even though they are now overseen by founders and executives who operate every other part of their businesses that way.The result is a system that operates inside capitalism while bypassing its most basic mechanisms.

What a Market Requires

In ordinary consumer markets, buyers can see prices, compare alternatives, and decide whether the cost makes sense. Sellers must justify value. Prices are expressed in dollars. Payment is direct. Choice is real.

Those conditions, visibility, comparability, and accountability, are what allow markets to function.

A free market is not defined by the absence of rules. It is defined by voluntary exchange under secure property rights, coordinated by prices that buyers can see, compare, and refuse.

Where those conditions are missing, competition may exist on paper, but price discipline does not.

Now Imagine Buying a 401(k) Plan

There are no posted prices. No standardized invoices. No simple way to compare total cost or service quality across providers.

Most fees are deducted silently from participant accounts, framed as small percentages rather than explicit dollar amounts, and often routed through fund expense ratios or revenue-sharing arrangements that never appear as a bill to the employer.

In many plans, neither the employer nor the participants ever see a comprehensive accounting showing what is being paid, to whom, and for what services.

That contrast exposes the core problem: retirement plan pricing is not undisciplined because sponsors are uninformed. It is undisciplined because the market mechanics required for price discovery never formed.

Why Price Discovery Fails

In functioning markets, professional services are invoiced. Accountants invoice. Lawyers invoice. Consultants invoice. The invoice creates a recurring moment of evaluation: was this worth it?

In the retirement plan system, that moment rarely exists.

Fees are embedded, automatic, and ongoing. When no one receives a bill, no one behaves like a buyer. Without a buyer, prices drift.

This is compounded by asset-based compensation. Most retirement plan work, participant education, compliance coordination, plan administration, does not scale meaningfully with asset growth. Yet compensation often rises automatically as assets grow, even when services remain static.

Industry observers have acknowledged this inversion for years. Fred Barstein has described 401(k) advisor pricing as “upside down” because costs are driven by activity while fees are driven by asset balances. Ted Benna, the inventor of the 401(k), has called the system “bizarre” and “much too expensive” for the same reason.

In a functioning market, prices reflect work performed. In the retirement system, compensation often reflects balances observed.

When Transparency Still Isn’t Enough

One might assume that disclosure would correct these distortions. If fees are revealed, surely competition would follow.

But disclosure layered onto a system without comparability, direct payment, or buyer leverage does not create a market. It often produces cosmetic adjustments instead.

Even when fees are reduced, sponsors may still be unable to determine what services remain, whether they are necessary, or whether the price makes sense in absolute dollars. Lowering a percentage does not create understanding. It often just makes opacity feel more acceptable.

A brief example makes this concrete. I recently reviewed a professional services firm with approximately $3 million in plan assets and fourteen participants. The sponsor was paying roughly $12,000 per year in advisory fees, yet could not answer a basic question: how many hours were being spent on the account. When asked directly, the advisor declined to say.

In any other professional context, legal, accounting, consulting, a five-figure annual bill without scope documentation would not survive. Most founders would reject it immediately. Benchmarking does not resolve this. It compares relative pricing across plans, not the value or necessity of the services being delivered. Two plans can appear identical in a benchmarking report while receiving vastly different levels of service.

A System That Suppresses Economic Pain

Another reason retirement plans resist market discipline is that they suppress economic pain.

When employers pay health insurance premiums, the cost is explicit and unavoidable. When employees bear costs, they feel them immediately through payroll deductions or out-of-pocket expenses.

Retirement plan costs operate differently. Most are deducted invisibly from accounts over time. Employers often pay little or none of the cost directly. Participants rarely experience fees as a recurring expense.

As a result, neither party feels the kind of friction that normally triggers scrutiny or renegotiation.

This dynamic intensified with the shift from defined benefit pensions to participant-directed defined contribution plans. Under pensions, employers bore investment risk, paid providers directly, and had strong incentives to manage cost. Defined contribution plans reversed that structure. Risk shifted to participants. Fees migrated into participant accounts. Compensation became asset-based rather than service-based.

The buyer was displaced, but no new buyer emerged.

Why It Took an Insider to See This

Unlike most markets, there is no single place where retirement plan pricing, services, and incentives converge in a way an outsider can observe directly.

The economic reality is fragmented across regulatory filings, platform rules, provider contracts, and compensation arrangements that are rarely disclosed in one place, if at all.

Understanding how the system actually operates requires reconstruction: reviewing Form 5500 filings over time, observing how fees move as assets grow, listening to how providers describe their roles privately versus publicly, and seeing how intermediaries respond when pricing is questioned.

These insights do not emerge from disclosures or best-practice guides. They emerge only through sustained exposure to how the system behaves in practice.

Why Everything Looks the Same

In functioning markets, differentiation is rewarded. Providers compete on price, scope, service model, and innovation.

In the retirement plan system, the opposite dynamic prevails. Because prices are opaque, buyer scrutiny is weak, and compensation is embedded, differentiation increases professional risk rather than reducing it. Advisors are rewarded for defensibility, not originality.

As a result, fund lineups converge. Investment menus look interchangeable. Platforms promote standardized structures designed to be hard to challenge rather than efficient to evaluate.

This uniformity is often mistaken for evidence of best practice. In reality, it is a predictable outcome of a non-market environment where accountability is diffuse and price signals are suppressed.

When Even Obvious Exit Options Remain Invisible

In some plan structures, participants can legally eliminate or materially reduce most recurring plan fees by electing brokerage options that move assets outside default fee plumbing.

In a functioning market, such cost-elimination mechanisms would be widely understood and routinely evaluated.

In the retirement system, they are rarely discussed.

The reason is structural. When participants can opt out of embedded fees entirely, compensation must be justified directly. Automatic, non-negotiated fee extraction no longer works. Incentives across platforms and intermediaries therefore favor obscurity over awareness.

This is not accidental. It is how non-market systems protect themselves.

Markets That Never Formed

The modern U.S. retirement system originated during World War II, when wage controls prevented employers from competing for labor through higher pay. Tax-favored benefits emerged as a workaround. That structure was later formalized through the tax code and ERISA.

At no point did individual savers choose this architecture through voluntary exchange. The system was designed administratively before a market ever had the chance to form.

Regulation can manage such systems. It cannot create market discipline after the fact.

Why This Matters

When buyers cannot see prices, compare alternatives, or refuse costs, markets cannot discipline pricing. Excess becomes normalized. Accountability diffuses. Incentives drift toward opacity.

For leadership teams, this creates a quiet governance blind spot: a material system affecting employees’ long-term outcomes that operates outside the feedback loops executives rely on everywhere else in the business. Business owners who have built companies by reading market signals, managing vendor relationships, and demanding accountability from every other service provider often discover, sometimes years later, that their retirement plan operated under entirely different rules.

Executives who demand market accountability from every other part of their businesses often discover, sometimes years later, that their retirement plan operated under an entirely different set of economic signals.

The persistence of asset-based fees, embedded compensation, and indirect payment structures is not evidence that these arrangements are optimal. It is evidence that the conditions required for a market were never present.

Markets do not fail here.

They never formed.

And until pricing becomes visible, comparable, and directly paid, retirement plans will continue to resemble health care more than a functioning market—no matter how many disclosures are added later. The first step toward market discipline is recognizing when you are not operating in one.

Bio

Paul Sippil has been reconstructing retirement plan pricing from Form 5500 filings and direct sponsor engagement since 2009. His work focuses on how incentive design and market structure shape pricing outcomes inside employer-sponsored retirement plans.