In short – not as much as you might think! We’re extremely transparent about our pricing: with no hidden fees, you’ll know exactly how much you’ll pay. At first glance, it’s easy to see why some HR directors or small business owners might think they can’t offer a 401(k) to their employees: “The cost to set up a 401(k) plan is too high.” “The administration is too much work.” “Our company is too small to offer retirement benefits.”
What is a 401(k)?
A 401(k) plan is a tax-advantaged, employer-sponsored retirement account plan. Offering this plan can help your employees save money for their retirement. Individuals can generally contribute up to $19,000 in 2019 (or $19,500 in 2020). Employees over 50 years old can also make a catch-up contribution of $6,000 in 2019 (or $6,500 in 2020). It offers tax incentives to both the employees and the employer itself. There are two types of 401(k) plans: traditional 401(k)s, which accept pre-tax contributions, and Roth 401(k)s, which accept post-tax contributions.
In order to offer a 401(k) plan, employers have to meet several obligations. This includes:
- Selecting a plan that fits your company’s budget and your employees’ needs.
- Determining if your company will offer an employer match; that is if you will offer partial or full matching contributions to incentivize your employees to contribute to their accounts.
- Create a plan document and clearly communicate the details of the plan to your employees.
- Monitoring your plan program, meeting reporting requirements, and managing your employees’ contributions.
401(k) plan costs to employers
Although many small businesses may want to provide this benefit to recruit and retain employees, financial fears often get in the way of taking action. Those fears aren’t unfounded. In the past 401(k) plans were focused on — and priced for — corporations with a lot of employees. However, in recent years, 401(k) providers like Human Interest have designed internet-based, low-expense, and easily-administered solutions for small businesses. These new plans allow owners to provide employees (and themselves) a way to save for retirement at an affordable price.
By offering a 401(k), small businesses are also eligible for a tax deduction, which helps reduce the overall cost of the retirement plan. Given the new solutions available, it’s a good idea for small to mid-size businesses to re-examine the fees to determine if a 401(k) plan might now be an option. For a small business, 401(k) costs don’t have to be prohibitive.
Here’s a quick breakdown of potential costs your business might encounter:
- Plans with less than $1 million in assets may cost $5,000-$10,000 per year: $800-$1,000 in administrative fees, quarterly per-participant charges of $15-$40, and an initial fee of $500-$3,000.
- Simple 401(k)s: $500-$1,000 per year in administrative fees, $20-$50 per participant, and may incur hourly administrative service fees.
- Miscellaneous fees, including rollover asset fees, investment advice and consulting fees, and nondiscrimination testing fees to remain compliant with ERISA requirements.
While 401(k) setup fees are a one-time cost, they can heavily influence your choice.
Understanding 401(k) employer costs: What are the fees?
Complex fee structures, as well as the assortment of plans available, make it difficult to identify specific costs for every 401(k) on the market. Costs of managing a plan are handled in a variety of ways. As described by the Department of Labor (DOL), plan fees are generally divided into four categories:
- Asset-based: expenses based on the amount of assets in the plan, represented as percentages or basis points. This also usually lumps in “custodial fees.” Typically 2-3%, but they can range between 0.08%-4% of the total plan assets.
- Per-person, or per-participant: expenses based upon the number of eligible employees or actual participants in the plan. Can range from $2 to $750+ per month per person
- Transaction-based: expenses based on the execution of a particular plan service or transaction. They can range from $0-$70+.
- Flat rate: fixed charge that does not vary, regardless of plan size.
Unfortunately, it’s difficult to get accurate average ranges for these types of fees, because as you can see, they can vary widely, and most plans charge fees based on a combination of these categories (e.g. a high per-person fee combined with a lower flat rate). 401(k) administration fees for small businesses are especially variable if you’re planning on growing to include more than 100 employees. These expenses can be charged as one-time fees as or an ongoing fee, for example, a one-time fee to start the plan or convert from one provider to another, or an ongoing monthly or annual fee to administer and manage your account (e.g., record-keeping, account manager support, fund section, account balancing, etc.) Some employers that sponsor 401(k) plans pay for everything, including investment fees and costs. Some pay for almost nothing, with fees paid out of the plan’s assets (i.e. the employees bear the burden of all of the fees). Or, in many cases, plan costs are shared by plan sponsors (the employer) and participants (employees). Other small business 401(k) plan fees that you may want to ask about:
- Recordkeeping fees
- Investment management, consulting, or advisory service fees
- Revenue sharing fees
- Higher fees due to size of the company (smaller companies generally pay higher fees, and unfairly so)
- If you’re a new plan, you may have to pay for an annual, legally required ERISA bond
Don’t forget the “human cost”: depending on the HR resources you have in-house, you may want to ask if the 401(k) provides any services related to 401(k) compliance, IRS deadlines, taxes, investment advising, payroll administration, and any help with employee questions, or if you’ll have to handle these yourself.
Related article: Outsourced 401(k) Administration
The 401(k) business model and pricing
If you’re examining what it would cost to offer a 401(k), the first step is to ask the plan provider to explain how they generate revenue. Vendors with whom you want to partner will be upfront about the way they work and how they generate income by managing your investments. Specifically, ask if they receive any kickbacks or commissions based on the funds they recommend to you.
Use a Fee Disclosure Form to collect information
Given the complexity of fee structures and schedules, begin by requesting that potential plan providers fill out a 401(k) Plan Fee Disclosure Form. This sample form provided by the DOL is a helpful tool and includes a list of possible administrative expenses, start-up expenses, termination fees, and the definition of pricing terms. Bottom line: yes, 401(k) plans cost money; however, requesting a fee schedule that details every cost will help ensure that you’re informed (rather than surprised) about the costs required.
Small business 401(k) costs
To determine which 401(k) providers offer what you need for a reasonable fee, identify the costs and services based on your needs. As you look at the cost, carefully consider what you’ll need:
- Is the provider charging for a call center service that your employees won’t use?
- What are the fees (if any) for tasks such as preparing tax forms, rolling over funds from a previous 401(k) plan provider, transferring assets, etc.?
- If you need to end the contract, will termination fees be prohibitive?
Keep in mind that a plan may have higher or lower costs based on the specific needs of your business and employee population (number of plan participants, turnover rates, average balances, participants’ abilities to make investment decisions, your tax/accounting capability in-house, etc.).
- How Much Does an Employee Cost?
- 401(k) Tax Advantages
- Small Business 401(k) Match: Why It’s Worth It
- 401(k) Benefits for Interns and Part-time Employees
Seek out innovative solutions for lower 401(k) fees
Gone are the days when investors sat behind large desks in New York City offices and managed your retirement investments with paper, pen, and a calculator. Look for providers who are using technology in ways that will help you reduce overall plan costs. New and innovative providers, such as Human Interest, are using technology to make retirement investment benefits a reality for startups and small businesses. While a traditional 401(k) provider might require paper payroll documents to get a plan up and running, Human Interest is pulling data directly from payroll systems, thereby reducing the 401(k) set-up costs, as well as administration fees. Administrative expenses include costs for service providers that collect fees from employees or directly from the employer. The product also offers automated investment advising, which reduces costs and makes 401(k) management fully automatic for employees. We wrote this article to help people critically evaluate 401(k) costs, no matter which providers you’re looking at. If you’re interested in Human Interest’s pricing, it’s available on this public pricing page. And we’ve included it below:
As you can see, we try to make it as upfront and straightforward as possible, without any “gotcha” costs or hidden fees in fine print.
Choosing the right 401(k) costs for your business
Examining 401(k) costs to employers and employees is not a simple task because of the variety of plans available and the fact that vendors make money in ways that may not be obvious. Don’t wait for plan providers to tell you what you need to know; you must ask the questions based on the fee information they provide. Then be ready to discern which plan is right for the business, and for your employees. Keep in mind that you’re looking for a cost-effective plan, but also for one that adds value. Use your research to determine if your organization is ready to offer a 401(k), and which provider can best meet your needs. Whether you’re a small business owner or the HR director for a company with hundreds of employees, you deserve a cost-effective 401(k) plan that discloses the fees and costs required to make this benefit a reality for your organization.
There are also some financial breaks small businesses can receive for starting a 401(k) plan. For example, qualified employers may receive a $500 tax credit for the plan’s first three years. Some expenses may also qualify as deductible business expenses. Employer contributions that fall below the threshold of 25% of an employee’s salary are also exempt from federal, state, and payroll taxes.
Once you find a plan with prices that fit your budget, you’ll be able to answer in the affirmative when asked whether or not your company provides great, low-cost retirement benefits. If you’re looking for a great 401(k) for your employees, click here to request more information about Human Interest.