Can my small business afford a 401k? How much will it actually cost? How time-consuming will it be to manage it?
These are common questions from small business owners considering a 401(k). And those concerns are extremely valid. From the beginning, 401(k)s have been built and priced for big businesses - making them too expensive and time-consuming for the average small business to handle.
But we’re here to tell you that it doesn’t have to be this way.
Times are changing. The 401(k) industry is changing. Innovative, tech-enabled providers are making it possible for small businesses to get the same level of service & investment quality enjoyed by Fortune 500s - without the whopping Fortune 500-size costs!
But before we launch into how to get the best low-cost plan for your business, let's actually answer some of the most burning questions about 401(k) costs. Starting with...
How Much Does a Typical Small Business 401(k) Cost?
Well, naturally, it depends. But it’s always useful to get a general idea of the costs you’re up against.
We’ll lay out all the fees and factors that go into a 401(k)’s total price, but first, here's what the average cost of a 401(k) looks like for small businesses (10 participants and $100,000 in assets) - based on data from the 401(k) Book of Averages:
Average Small Business 401(k) Cost Example
|Asset-Based Fee||Total Cost||Cost-Per Employee|
|Investment & Advisory Fee||1.74%||$1,740||$174|
Oof. $3,970 in the first year alone? No wonder so many small businesses feel like they have to pass on a 401(k). That's not exactly an encouraging number.
Now let’s have a look at how the costs change after the plan has grown for a few years. Let’s say the plan has grown to $500,000 (though the company has stayed at 10 employees).
Here’s how the average costs would play out:
Average Small Business 401(k) Cost Example - $500,000 in Plan Assets
|Asset-Based Fee||Total Cost||Cost-Per Employee|
|Investment & Advisory Fee||1.44%||$7,200||$720|
And for good measure, here’s the same plan at $1,000,000 in assets...
Average Small Business 401(k) Cost Example - $1,000,000 in Plan Assets
|Asset-Based Fee||Total Cost||Cost-Per Employee|
|Investment & Advisory Fee||1.34%||$13,400||$1,340|
As you can see, the asset-based percentage fees drop as the plan assets grow. 401(k) providers favor larger plans, as it means more money for them. But in our opinion, $14,700 a year (or 1.47% of plan assets) is still much too high. Whether you’re starting a brand new plan, or have some assets ready to invest, there are a few simple tactics you can use to get yourself a low-cost plan that’ll help you maximize your savings.
But in order to get a low-cost 401(k), it helps to understand how 401(k) pricing is actually calculated. We’ll quickly break that down next.
How 401(k) Costs Are Calculated
The 4 Methods of 401(k) Pricing
There are four ways by which 401(k) fees and costs are charged - each with its own applications and cost range.
1. Asset-Based Fees
These are expressed as a percentage of the plan’s total assets and are taken to compensate for investment advice, trustee or custodial, and investment fees.
Range: Asset-based fees can range anywhere from 0.08% to 4% of plan assets.
2. Per-Participant Fees
As the name implies, this is a hard-dollar fee charged per active or eligible employee in your plan. Participant fees are usually intended to cover recordkeeping and plan administration.
Range: Anywhere from $2 to $750 per participant.
3. Transaction Fees
These are expenses charged for the execution of a particular plan service or transaction - like changing up the plan funds or applying for a loan.
Range: Anywhere from $0 (for a plan or fund with no transaction fees) to $70+/per transaction.
4. Flat Fees
These are fixed fees charged as a flat dollar amount - usually each year.
Range: These can vary widely depending on the provider and what the fixed fee covers.
Depending on the plan and provider, you could pay in several of these ways, and which you select will almost certainly have an enormous impact on the success of your 401(k).
So let’s look at what those fees and costs actually cover.
What 401(k) Costs and Fees Cover:
1. Plan Setup
Often ranging between $500 and $3000, the initial setup fees for a 401(k) can come as a surprise to small business owners. However, with good judgment and the right information, you can find a provider with small-business appropriate (or even non-existent) setup fees.
2. Recordkeeping & Administration
Sometimes charged as asset-based fees, sometimes as per-participant fees, and sometimes as annual flat fees, recordkeeping and administration fees pay for an essential 401(k) plan services: keeping track of which employees are in the plan, how much money they have invested, and how much is invested in each of the plan’s funds.
3. Trustee Services
Every 401(k) needs a designated trustee, who is responsible for making investment decisions that are in the best interest of plan participants. Oftentimes this might be the business owner or an executive, but many providers offer Directed Trustee Services, assuming some of the fiduciary liability by managing the entity holding the plan assets (the custodian) and executing investment decisions as directed by participants, the plan sponsor, or the investment manager.
4. Investment & Advisory
Investment and advisory fees include both mutual fund expense ratios, as well as fees for investment management services.
Fund expense ratios are the percentage of retirement fund assets that plan participants pay for their investments, and are often one of the most significant 401(k) costs. Advisory costs cover the services of a 401(k) advisor, who might assist with plan design, building and monitoring the mutual fund lineup, providing investment advising services to participants, and more.
5. Miscellaneous Administration Fees
Employees wishing to do pretty much anything with their plan assets may need to pay a small fee for the transaction. This includes fees for rollovers, fund transactions, loans, and withdrawals.
For example: An employee withdrawing money from their 401(k) account might have to pay a $50 distribution fee.
6. Termination Fees
Plan sponsors can opt to terminate a plan that isn’t performing to their satisfaction - though the provider may charge fees for closing the plan down.
Next, let’s go over who is paying those 401(k) expenses...
Who Pays 401(k) Fees?
At the risk of sounding like a broken record, when it comes to who pays 401(k) fees, we have to say: “It depends”.
Often, employers pay the hard-dollar costs - things like setup costs and administrative fees, while employees pay the asset-based fees.
In some instances, all 401(k)-related fees and costs are taken from the plan assets, or alternatively, paid entirely by the employer.
Either way, somebody is paying those fees. Everybody wins when we keep them as low as humanly possible. But what exactly do low fees look like?
Keep Employee Costs Below 0.75%
You've already seen how average 401(k) costs can cut into annual the bottom line. Here's how those fees can impact employee retirement over the years:
For a 30 year old employee contributing $4,000 a year, with a 6% yearly return, with all-in fees of $0.6%, they’ll have $390,028 in their account when they retire at age 65. Drop those fees to 1.9%, and they’ll have $291,519 in their accounts… a difference of almost $100,000!
About $100,000 less in your retirement savings is a significant and unsettling sum - something that neither employees nor plan sponsors want to see. Prevent this kind of unpleasant situation by picking a low-cost 401(k) from the get-go.
How to Get a Low-Cost 401(k) For Your Small Business
This might sound like a huge project, but don’t worry… it’s easier than you think. Here are a few simple tactics to help you get it done:
Understand ALL the Fees a Provider is Charging
When considering 401k costs, don’t be shy about asking questions about a company’s income. Any provider that you actually want to work with should be transparent and honest about the plan costs you’ll face.
Still, it’s a bit of a “buyer beware” situation out there. Hidden fees are an issue with many 401(k) plans and providers. So we’d like to equip you with a tool against unfair fees - The ForUsAll Fee Evaluation Checklist. Use this checklist to quickly and easily get to the bottom of any provider price.
You can also send the DoL's fee disclosure worksheet to each of the providers you're evaluating. They’ll fill it out and return it - giving you a thorough report of all fees and plan costs.
Limit Fund Selection to Low-Cost Investments
There are many investment options available, so whenever possible, you want to go with low-cost, passively-managed index funds. Funds like Vanguard’s 2045 Target Date Fund (TDF) can offer impressive returns at impressively low costs.
To make sure your plan has access to these high-quality, low-cost funds, be sure to go with a provider that has an open architecture, which means the provider allows you to build your fund lineup with any fund on the market.
Don’t Forget About the Tax Benefits!
There are 3 big tax benefits that can help offset the cost of a 401(k):
1. Retirement Plans Startup Cost Tax Credit
Qualified employers could receive a $500 tax credit for the first 3 years of the plan. This can cover anything from setup and administration costs to participant education fees.
2. Administration Costs Tax Deduction
Some administrative costs can be deducted as a business expense.
3. Employer Contribution Tax Deduction
Whether they are profit sharing, non-elective contributions, or matching contributions, if your employer contributions fall below 25% of the employee’s annual compensation, they are exempt from federal, state, and payroll taxes.
Factoring in these tax breaks can make a 401(k) a lot more feasible for your business.
Pick A Fee Structure That Fits Your Business
Not all businesses have the same needs. To avoid surprisingly high fees later on down the line, pick a 401(k) provider with fees that will scale well with your specific business situation.
For example, if your employees are contributing a lot of money to the plan, and you don’t foresee adding a large number of employees to your operation, you might expect your plan’s assets to grow faster than your participant count. In that case, you might want to go with a provider who favors per-participant fees.
Doing this lets you and your employees avoid paying more fees as plan assets grow, potentially saving tens of thousands like we saw in our example above. And that’d be a big win, right?
Here’s another winning idea:
Go With a Tech-Enabled Provider
A new crop of 401(k) providers are using technology to offer quality retirement plans at prices that accommodate the budgets of small and medium-size businesses.
Automatic compliance checks, payroll integration, virtual advisors, and online access to financial guidance services are some of the compelling capabilities of tech-enhanced plan providers.
These capabilities are immensely useful to small businesses - many of whom might not have the time, resources, or inclination to do everything 401(k)-related on their own.
And of course, the fees can be incredibly low.
Hidden fees, complex charges, and less-than-transparent pricing have been pretty standard fare in the world of 401(k) pricing. Luckily, those days are coming to a close! Whether you’re self-employed or a skyrocketing startup, Your chances of getting a low-cost 401(k) for your business have never been better.
We've answered a lot of questions in this post, so we'll end by asking one of our own:
What are you waiting for?