401(k) cost to employersAlthough 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.
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%.
- Per-person: expenses based upon the number of eligible employees or actual participants in the plan. Can range from $8 to $750+ per month per person
- Transaction-based: expenses based on the execution of a particular plan service or transaction.
- Flat rate: fixed charge that does not vary, regardless of plan size.
- Recordkeeping fees
- Investment management, consulting, or advisory service fees
- Revenue sharing fees
- Higher fees due to size of 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
The 401(k) business model and pricingIf 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.
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Use a Fee Disclosure Form to collect informationGiven 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 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) costsTo 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?
- 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