LAST REVIEWED Nov 08 2021 12 MIN READ
By The Human Interest Team
Think that 401(k) plans are an expensive benefit reserved exclusively for large businesses with deep pockets? Think again. While this may have been a reality in the past, many companies— including small businesses—aren’t aware that 401(k) plans can be affordable and attainable.
These days, modern 401(k) providers use technology to cut costs. Additionally, there are tax credits that help cover startup costs for new plans. Finally, offering a 401(k) can provide businesses with tax deductions, which helps reduce the overall costs of the plan. Given the options available, it’s a good idea to re-examine if a 401(k) plan might now be an option for your business.
Does your business qualify for 401(k) tax credits?
Learn if starting a plan comes with tax incentives.
Small business 401(k) plan costs for employers
The costs associated with launching and maintaining a 401(k) plan for your small business, can be broken into three general categories:
Employer match (optional)
Plan administration fees & expenses
1. 401(k) startup costs
There are generally initial costs to establish a 401(k) plan, which cover:
Setting up and administering your plan
Educating your employees about your plan
For example, set up fees generally cover the plan design and implementation phases essential to kickstart a new plan. You can expect to pay a one-time start-up fee between $500 to $1,500* However, eligible employers may be able to claim a startup tax credit of up to $5,000, for three years, to cover the “ordinary and necessary costs” of establishing a qualifying plan.
2. Optional 401(k) matching costs
Employers can opt to match a portion of their employees contributions up to a certain dollar amount or percentage. Employer matches are entirely optional and businesses can choose to:
Match contributions dollar for dollar,
Match at a specific percentage, or
Establish a hard dollar-based cap (instead of limiting match contributions to a percentage of the employee’s total salary)
How much you match dictates how much your business is responsible for paying. 72% of plans that offered a matching contribution provide a single-tier match formula, such as $0.50 on the dollar on the first 6% of pay. However, businesses can write off contributions and receive ongoing tax benefits (more on this below).
3. 401(k) plan administration fees & expenses
Financial institutions charge administrative costs for managing a 401(k) plan. This extensive category covers day-to-day operations of a plan, essential administrative services, and other fees that both participants and employers may face. According to the Department of Labor (DOL), plan fees can be broken out into three categories:
Plan administration fees (Employers): The costs associated with accounting, recordkeeping (i.e., year-end compliance testing, IRS paperwork preparation, and filing) and day-to-day operation of a plan (i.e., ongoing operation of plan, conducting trades, customer service, and account management).
Investment fees (Employees): The expenses associated with managing plan investments, these fees are generally charged as a percentage of fund assets.
Individual service fees (Both): Some providers charge service fees for taking advantage of specific plan features (i.e., loans, hardship withdrawals, and more).
Understanding the true cost of 401(k) administration fees and expenses
Because plan fees can vary widely, it’s difficult to get accurate ranges on a 401(k) plan's average cost. For example, plans with less than $1 million in assets may cost $5,000-$10,000 per year: an initial startup fee of $500-$3,000, quarterly per-participant charges of $15-$40, and $800-$1,000 in administrative fees*.
Employees generally pay most 401(k) fees, especially those related to investing. Depending on plan design, employers may cover 401(k) administration costs—or, pass them to employees as flat fees or as a percentage of assets in the plan.
Hidden 401(k) transaction fees
In addition to the standard employer costs, there may be hidden transactional fees that employers (or their employees) may have to pay. Also known as individual service fees (as mentioned above), 401(k) transaction fees are charged to companies and/or plan participants when specific actions or events occur.
Below are a few of these fees (and their average costs):
Form 5500 preparation fee: Form 5500 is a report that businesses must file annually to provide the IRS and DOL details such as the investments, operations, and conditions of a company’s employee benefit plans. Generally, all retirement plans, including 401(k) plans, must file a Form 5500 every year the plan holds assets. The registered filing signer is the plan administrator, or employer plan sponsor responsible for electronically signing the form. And with many plan providers, preparation of Form 5500 can cost between $250 and $750.
Deconversion fee: The term ‘deconversion’ refers to the process of switching your plan to another 401(k) provider. It’s common for 401(k) providers to charge between $500 and $2,000 for the deconversion process.
Plan restatement fee: As laws change, documents must be updated—and a 401(k) plan restatement is a rewriting of these plan documents. To comply with laws and regulations enacted by the IRS, the DOL, and Congress, most retirement plans must update those documents to a newer version that incorporates any legislative and regulatory changes. Many providers charge $400 for 401(k) plan restatements.
The 401(k) transaction fees mentioned above are just a few of the fees passed along to employers. However, at Human Interest, you won’t have to worry about tracking and calculating transaction fees. Why? Because we never charge transaction fees. Eliminating all 401(k) transaction fees helped us take our affordable pricing model one step further and helped us stay true to our commitment to the financial wellness of our customers and their employees.
Who is responsible for monitoring 401(k) fees?
The plan’s fiduciaries must monitor fees to ensure they’re reasonable. The Employee Retirement Income Security Act of 1974 (ERISA) includes a set of standards (or “duties”) often referred to as “ERISA fiduciary duties,” which include running the plan in the interest of participants and beneficiaries, and for the exclusive purpose of providing benefits and paying plan expenses.
All 401(k) plans must have a “Named Fiduciary” who has ultimate authority over the plan’s fiduciary decisions. Plan documents will identify (or outline a procedure to identify) the Named Fiduciary. It’s common for the Named Fiduciary to be the same entity serving as the 3(16) Plan Administrator (if the plan sponsor is also the plan administrator, it’s often the “named fiduciary” as well, by default). Ultimately, if a plan sponsor does not wish to wield fiduciary responsibility, it should specifically identify another entity as the ERISA 3(16) Plan Administrator and Named Fiduciary.
Benefits of offering your employees a 401(k)
Improved employee retainment and morale
Did you know that retirement plans are the most-wanted benefit after health insurance? Plus, adding a 401(k) to your benefits package is a cost-effective way to compete for great talent and reduce turnover of current employees. Because a majority of employers provide a match (86% of small businesses and 95% of large businesses, according to the Plan Sponsor Council of America), providing a match can help you remain competitive.
401(k) plans offer small business employers additional tax credits
There are also some financial breaks small businesses can receive for starting a 401(k) plan. To encourage businesses to start providing a workplace retirement savings plan—or to improve an existing one—legislators included two tax credits in the SECURE Act:
The SECURE Act expanded the maximum tax credit for startup costs, increasing them from $500 to $5,000 per year, for the plan’s first three years.
The SECURE Act also created a new tax credit of up to $500 per year, for three years, to cover startup costs for new 401(k) and SIMPLE IRA plans that include automatic enrollment.
Some expenses may also qualify as deductible business expenses. According to section 404 of the IRC, employer contributions are deductible if they don’t exceed set limitations. In 2021, this limit is 25% of all eligible employees’ compensation (eligible compensation is limited to $305,000 per participant in 2022); while combined employer and employee contributions are limited to the lesser of $61,000 or 100% of an employee’s annual compensation.
Employers can contribute to their own retirement savings, too!
Of course, offering a 401(k) plan means contributing to your own retirement savings as well. Basic employee deferral limits for 401(k) plans are $20,500 ($27,000 for those aged 50 and over) in 2022. However, if you have owners or other highly compensated employees (HCEs) who are interested in maxing out their deferrals, it’s worth considering a safe harbor 401(k) plan.
Safe harbor plans contain provisions that enable HCEs to max out deferrals without risking nondiscrimination failure. Below are a few circumstances when safe harbor plans may be advantageous to protect your company:
Your company’s HCEs want to be able to contribute more to the 401(k) plan without risking nondiscrimination testing failure.
You will have 60% of more of the plan assets allocated to key employees (also known as “top-heavy” plans).
You think your 401(k) plan may have a lower level of engagement due to factors such as personal financial insecurity or an inability to contribute.
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 your whole plan. Benchmarking can help you get a read on your plan fees. Comparing plan costs against industry averages can help you uncover if your plan is designed to empower your business and your employees—or if you’re overpaying.
Keep employee costs low
Average fund expense ratios have been in decline for two decades. In fact, over one decade (between 1999 and 2019), the average (asset-weighted) annual fund fee dropped from 0.87% to 0.45%. To stay competitive, it’s important to ensure you keep costs low. Every bit counts; even a 1% increase can result in significant losses for an employee’s retirement nest egg over the course of their employment.
Choosing the right 401(k) for your business
Whether you’re a small business owner or an HR director for a company with hundreds of employees, you deserve a cost-effective plan that makes a 401(k) a reality for your organization. Keep in mind that a plan may have higher or lower costs based on the specific needs of your business (i.e., number of participants, turnover rates, average balances, your in-house tax and/or accounting capabilities, etc.).
Reducing 401(k) costs and fees with an integrated payroll system
While a traditional 401(k) provider might require paper payroll documents to get a plan up and running, Human Interest generally pulls data directly from payroll systems, thereby reducing set up costs and administration fees. Our 401(k) platform provides a simple, streamlined administrative experience, which helps keep costs low. Visit our pricing page to learn more.
The Human Interest Team
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 education, and integration with leading payroll providers.