Cost of 401(k) Plans for Small Business


By The Human Interest Team

More and more small businesses are looking into 401(k) plans, only to find the responsibilities and fees overwhelming. In this article, we’ll discuss what are the costs of a 401(k) for small businesses and what they can reasonably expect to pay.

401(k) for Small Businesses

Many employees consider access to tax-advantaged retirement accounts a key factor in deciding where to work and what job offers to accept. By offering a popular retirement account plan like a 401(k), businesses can appeal to applicants and increase their employee retention. Another benefit of having a 401(k) plan is the tax advantages that it gives both employees and the employer itself.

What Types of Small Business 401(k) Costs Are There?

However, traditional 401(k) plans have been cost-prohibitive for many small businesses. Administering the plan can cost a lot in setup fees, administrative fees, and more. The cost of a 401(k) for a small business includes:

  • Administrative fees. Fees for recordkeeping and administering services are either paid for directly by the employer or indirectly by participating employees.

  • Investment fees: Employees pay fees to the brokerages and firms that manage the mutual funds they choose to invest in. This includes asset management and operating expenses.

  • Consulting fees: Having access to fiduciaries and financial advisors is another fee. This broad category includes the cost of fiduciary support, education, advice, management, and enrollment processes. Indirect fees that employees pay for these services can be grouped with investment fees through revenue sharing.

Who Is Responsible for Monitoring 401(k) Fees?

Employees pay most of the fees, especially those for investing. However, employers have to monitor the fees to make sure they’re reasonable. Under the Employee Retirement Income Security Act of 1974 (ERISA), employers have the responsibility to act as fiduciary for the plan (along with several other responsibilities). This role requires the employer to act in the best interest of their participating employees by monitoring fees and ensuring that employees aren’t overpaying for the level of service they receive.

For small businesses, this responsibility offers them personal benefits. Because owners often participate in their business’s 401(k) plans, they have an interest in ensuring the plan is reasonable.

How Much Should My Company’s 401(k) Plan Cost?

But “reasonable” can be vague, especially when it comes to the cost of a 401(k) for a small business. Different plans that offer different degrees of custom services, online features and integration, reliability, and comprehensive management naturally have different fees. Even different investment funds have different management fees. 

One of the best ways to decide if your business’s plan is reasonable is to compare the costs to other, similar plans. Businesses can also look at the expense ratio to determine how reasonable their expenses are.

One simple way businesses can reduce the risk of overpaying is to examine the “share classes” of the investments their plan offers. The same fund has different types based on asset holdings. For example, if your employees have invested relatively few assets into a specific fund or the 401(k) plan overall, the fees will be at a pricy “per unit” cost. As your aggregate plan assets grow, you can switch to a share class with lower fees. You can investigate to make sure your company has been updated to an appropriate share class.

How Do I Know If My Employees Are Getting a Fair Deal?

Ultimately, the best way to know your plan fees are reasonable and your employees are being treated fairly is to review the whole plan. Document the fees and the services you receive.

Want a Low-Cost Small Business 401(k)?

Because small businesses might struggle to pay the upfront cost of establishing a 401(k) plan, it’s important to look into low-cost options. Traditionally, 401(k) plans have been built around the demand from large businesses. However, more and more 401(k) plan providers are starting to offer more dynamic services that meet the needs of small businesses.

Before you start researching different options, it’s important to know the average costs for small businesses. Assuming your business has 10 employees and $100,000 in total assets, those fees may come out to $397 per employee per year due to recordkeeping fees, trustee fees, and investing fees. However, as employees invest more, that fee lowers. The same company with $500,000 in assets instead of $100,000 pays $925 per employee per year.

How 401(k) Costs Are Calculated

Those total costs are made of four key types of costs. Those include:

  1. Asset-based fees, which can cost between 0.08% and 4% of the plan assets.

  2. Per-participant fees, which can cost between $2 and $750 depending on the plan provider.

  3. Transaction fees, which can cost up to $70 for each transaction.

  4. Ranging flat fees depending on the plan provider and services.

What 401(k) Costs and Fees Cover

Those four categories of fees cover six different types of costs. The first one, the plan setup fees, are costly and can make 401(k) plans prohibitively expensive during the first year. After that point, 401(k) plan costs cover these services:

  • Recordkeeping

  • Administration

  • Trustee Services

  • Investing and Advisory Services

  • Termination Fees

Who Pays 401(k) Fees?

Depending on your company’s plan, either the employer or the employees will be responsible for paying different fees. Employers may pay for administrative fees, the account setup, and other flat costs. Employees often pay investing fees. Some plans are even structured so employees pay most or all of the fees.

Keep Employee Costs Below 0.75%

As a general rule, employee costs should stay less than 0.75% to be considered reasonable. Even a 1% increase can result in huge losses for the employee’s retirement nest egg over the course of their employment.

How to Get a Low-Cost 401(k) for Your Small Business

In order to make sure your business is getting a fair, lost-cost 401(k) plan, we recommend you follow these steps:

  • Make sure you know and understand all of the fees.

  • Look for providers that focus on low-cost investments.

  • Research tax credits such as the Retirement Plans Startup Cost Tax Credit, the Administration Costs, Tax Deduction, and the Employer Contribution Tax Deduction. These incentives can help your business choose a good provider with a high setup cost or afford 401(k) plans overall.

  • Consider different fee structures.

  • Choose a plan provider with robust online services.

If you’re ready to start up your company’s plan, Human Interest is here to help. We’re a technology-forward plan provider that offers simple, affordable 401(k) plans. Contact us today to get started.

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.

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