In order to examine how benthic crustaceans affect the fates of phytoplankton-derived lipid biomarkers (fatty acids and alkenones) in coastal marine sediments, we incubated Emiliania huxleyi cells in microcosms (pre-sieved sediment cores with and without the grass shrimp Palaemonetes pugio ) over six weeks. Crustacean, transport of surface sediments, and distributions of algal lipids were followed during incubations. Crustacean activities enhanced degradation of algal fatty acids (2–4× faster) but had a small impact on algal alkenone degradation (<1.4×) compared to the controls. During the first few days of incubations, alkenone concentrations were enriched while algal fatty acid concentrations were depleted in suspended particles in the overlying water of cores, indicating that P. pugio selectively grazed algal material from sediments and preferentially assimilated fatty acids over alkenones through digestion. Unlike algal fatty acids, alkenones were degraded primarily by microbial processes rather than by crustacean grazing. A substantial fraction (20–30%) of algal lipids was moved downward to the subsurface of sediments by P. pugio but algal fatty acids were more rapidly (3–6×) degraded than alkenones. In the presence of P. pugio, fatty acids bound in cell membrane and intracellular storage components degraded similarly, indicating that the crustacean activities minimized the effects of structural associations on fatty acid decomposition. Furthermore, there was no preferential degradation of 37:3 and 37:2 alkenones in both crustacean and control cores, suggesting that the U37k' index (a paleotemperature indicator) was not significantly altered by P. pugio's grazing or microbial decomposition.