No one really talks about how 401(k) plans are paid for. Investment management fees are visible and well documented, but that’s only part of the picture. Beyond the funds you invest in, plans also pay for the day-to-day work of running a 401(k): tracking your account balance, processing contributions from each paycheck, and protecting your information from fraud and cyberattacks.

Those costs have to be funded somehow. And while the mechanics of how plans pay for themselves are often invisible to participants, plan sponsors are now being pushed to rethink them, especially if they are overseeing smaller plans.

At the center of this shift are target-date funds, the most common default investment strategy in 401(k)s. Many small-plan sponsors are being nudged toward versions that slot in the recordkeeper’s stable-value fund, a move that reduces administrative costs. The resulting lower fees benefit participants, but when cost-sharing arrangements start to shape a target-date manager’s allocation decisions, they introduce real trade-offs. We’ll look at what’s driving the trend, how widespread it’s become, and what those trade-offs mean for investors.

How 401(k) Plans Are Paid For

The costs associated with running a 401(k) plan can be covered in three basic ways. The employer pays them directly (more common in larger plans), participants are charged an explicit account-level fee (relatively rare), or, most often in smaller plans, costs are covered indirectly through revenue sharing embedded in the investment lineup.

Smaller plans face a disadvantage: There are fewer participants to spread fixed costs across. That’s why administrative expenses often exceed investment fees in small plans and why 30% of plans under $25 million charge more than 100 basis points in total costs, according to Morningstar’s 2025 Retirement Plan Landscape.

The common practice of covering plan expenses through revenue sharing embedded in fund fees is becoming less popular as excessive-fee lawsuits targeting 401(k) plans continue to mount. In 2025 alone, there have already been 51 such lawsuits, surpassing the 47 filed in 2024 and the 43 in 2023, according to legal services provider Mayer Brown.

A New Way to Pay for Plan Fees

With scrutiny intensifying, plan sponsors are looking for alternatives to traditional revenue sharing. One emerging solution: co-manufactured target-date funds that incorporate stable value.

Co-manufactured target-date funds that include stable value are a new twist in 401(k) investing. They give investors the lower fees of institutional pricing but with a catch: The series often must hold large amounts of the recordkeeper’s stable value fund.

That stable-value fund becomes the recordkeeper’s revenue source, replacing the extra fees that would normally show up. Because stable-value funds usually charge little to nothing, participants don’t see higher fees. And since target-date funds are the default choice for most plans, using a co-manufactured version with stable value can shrink, or even wipe out, the plan’s costs for participants.

The Rise of Target-Date Funds Using Stable Value

As of Sept. 30, 2025, Morningstar tracked 47 target-date series that included stable value as part of their glide path. Although they are a small piece of the more than $4 trillion invested in target-dates, assets in these funds have more than doubled to $52 billion since the end of 2022.

Most of the series have launched since 2020, with 15 of the 47 series launching in the past two years. Notably, all of the series are collective investment trusts, not mutual funds, so they are not available outside of a 401(k) plan. Assets in target-date CITs surpassed target-date mutual funds in 2024.

Co-manufactured target-date series can carry familiar names like Vanguard, T. Rowe Price, BlackRock, and JPMorgan, even when those firms aren’t managing the funds directly. Typically, the asset manager provides the glide path, asset-allocation framework, and underlying investment strategies that form the building blocks. A third-party strategist then steps in to implement the design and, in many cases, decides how much of the fixed-income sleeve to replace with a stable-value fund.

Take the IndexSelect Moderate Target Date Series. It uses BlackRock’s glide path and allocation but swaps most of the fixed-income exposure for a stable-value fund. In retirement, that means 40% of the portfolio sits in stable value, roughly two-thirds of its fixed-income allocation.

For brand-name managers, the appeal is clear: free distribution from recordkeepers that market the series to plan sponsors with the hook that it will lead to lower, or no, plan fees. And with cost pressure mounting on target-date funds, scale through broader distribution is becoming the key competitive advantage.

All Things in Moderation

There’s nothing wrong with using stable-value funds as part of a diversified fixed-income portfolio. Stable-value funds invest in high-quality bonds and use insurance contracts, or the insurer’s general account, to protect principal and smooth returns. The insurance backing makes stable-value funds a good choice for capital preservation. In a year like 2022 when interest rates are rapidly rising, they provided useful diversification for interest-rate-sensitive bonds like US core bonds.

However, some target-date series that use stable-value funds use a lot of them. The exhibit below shows the average allocation to stable value across the series.

On average, stable value makes up the majority of fixed-income exposure for investors in or near retirement in these series. That means there’s less room for higher-yielding asset classes, like US core bonds. Retirees face the dual challenge of outliving their savings and keeping up with inflation, and stable-value funds alone may not provide enough growth to meet those needs.

To highlight the trade-offs, the exhibit below compares IndexSelect Moderate Retirement with BlackRock LifePath Index Retirement, which matches its equity glide path but keeps traditional US core bonds instead of using stable value. The Morningstar US Core Bond Index is included for context.

IndexSelect Moderate Retirement outperformed in 2021 and 2022 when the Morningstar US Core Bond Index fell, but as rates stabilized in 2023 and started declining in 2025, BlackRock LifePath Retirement took the lead. Stable value should continue to provide a buffer during bond market losses, though a diversified bond mix can better handle varied interest rate conditions.

What To Do?

The way 401(k) plans cover their costs is shifting. Revenue sharing, once common in smaller plans, is losing ground as lawsuits and fee pressure mount. In its place, co-manufactured target-date funds that include stable value are emerging as a potential solution. For participants, this can mean lower visible fees without sacrificing principal protection, but there’s a trade-off. Heavy reliance on stable value tilts portfolios toward safety, which may limit long-term growth. The bottom line? These funds are generally a better choice than going it alone, but it’s worth knowing what’s inside your default option so you’re not giving up too much future growth for short-term stability.

Editor’s Note: Emerson Smith, an associate at Morningstar, contributed to this article.