How Much Does Offering A 401(k) Cost An Employer? Pricing And Fees
According to SHRM, 93% of employers offer a traditional 401(k). Since retirement plans, like 401(k)s, are an important recruitment and retention tool, it’s important to consider offering one at your workplace. But, if you’re like many businesses, you may be worried about just how much it will cost you to provide the benefit.
Since 2003, Complete Payroll has been helping clients create competitive benefit plans for their workers. Many of our clients include a 401(k) as part of their overall benefits strategy. But before they do, “What will a 401(k) plan cost me?” is a question we get a lot.
To help you understand what expenses you’ll be responsible for if you decide to offer a 401(k), we’ll explain all the costs. After reading this article, you’ll be equipped to decide if a 401(k) fits within your budget.
What is a 401(k)?
A 401(k) plan is a retirement savings plan that allows workers to make pre-tax contributions from their paychecks and invest them, without having to pay taxes on the money they set aside until it’s withdrawn.
Unlike pension plans, you don’t have to manage the funds. Instead, employees control how their money is invested. But there are still costs to you for running a 401(k).
The Basic Costs Of A 401(k)
When it comes to fees that the employer pays, the costs generally fall into three general categories:
401(k) Start Up Costs
When you decide to start a 401(k) plan at your company, you’ll likely have a one-time initial fee to set it up. This will cover activities like setting up the new plan and educating your employees about the plan.
For these services, you can expect to pay anywhere between $500 to $2,000. Keep in mind that there’s a tax credit for start-up costs for small businesses with less than 100 employees, which the SECURE Act increased to up to $5,000 annually for the first three years.
401(k) Administration Costs
Because of the complexities involved in managing 401(k)s, if you’re like most companies, you’ll hire a third-party administrator (TPA) to maintain your plan. That means you’ll be responsible for covering their costs, which include everything needed for the day-to-day operation of the plan like:
- informational materials
- annual nondiscrimination testing
- completion of Form 5500
- approving loans and distributions
The more complicated the plan design, the higher the administration fees may be, but you will generally see costs ranging from $750 a year to $3,000. On top of these costs, you’ll pay what’s known as a per-participant fee that will be somewhere in the range of $15 to $60 a year for each person enrolled.
401(k) Matching Costs
A 401(k) match means that you’ll contribute an amount that matches what your employee put into their plan up to a certain percentage or amount. As an employer, you don’t have to offer a 401(k) match. But there are some advantages.
First, it can make your plan more attractive to new and existing employees. Also, a safe harbor match will eliminate the need for compliance testing. While a common match is the safe harbor match, which is up to 4% of pay, last year, the average match was 4.7%. However, during COVID-19, 11% of employers suspended their company match in the second quarter of 2020.
Hidden 401(k) Fees That Can Drive Employer Costs Up
In addition to the standard costs you’ll pay for having a 401(k), there may be some surprise fees that you’ll want to watch out for. These could include costs for services like:
- Terminating the plan
- Rolling over funds from a previous provider or to a new one
- Changing your plan design, which requires a plan amendment
- Integrating your 401(k) with your payroll platform
Just be sure to carefully check your quote or fee schedule so you know what you’re being charged.
Ways To Save On Employer 401(k) Expenses
While all TPAs will charge you for set up and administration of your plan, it’s worth shopping around because the fees can vary by provider. Another way you can save on your costs is through plan design. For example, you’ll be charged less in administration fees if you have a safe harbor 401(k), a plan that provides for employer contributions that are fully vested when made, since the TPA doesn’t have to worry about compliance testing because your plan will be exempt from the requirement.
401(k) Employee Fees
While you cover the hard dollar costs like set-up and administration fees, you’ll also want to consider the fees your employees are charged. This directly impacts how attractive they find the plan and, ultimately, their participation. Moreover, as an employer, you have a fiduciary responsibility to make sure the fees employees pay are reasonable and validated – or you can face fines for breaching your fiduciary duty.
Like employer costs, there are three categories of costs:
- Recordkeeping: A recordkeeper is like a bookkeeper for your plan and will use a platform to value your employees’ 401(k) accounts on a daily basis. Employees will log into this platform and access information about their plan, like how much of their savings are pre-tax dollars, after-tax, or matching funds. Recordkeeping is also integrated with a trading platform so the fee paid by employees not only covers the daily accounting of their accounts but trading as well. For employees, the recordkeeping fee could run from .10 to 2% of plan assets.
- Mutual Funds: Any mutual fund your employees invest in will have fund management fees. These fees cover the management of the mutual fund and reflect the fund’s level of trading activity. The type of fund(s) your employees select will dictate the fee. For example, a bond fund may be less costly for employees than an international fund because there’s less trading. And index funds will have lower fees than an actively managed share class, which could have fees of .05% to 1.5% of plan assets.
- Investment Advisory: Another fee that employees may pay is the cost to review and provide fiduciary oversight on the plan-level investment choices. The advisory fee could include things like 3(38) or 3(21) fiduciary support, periodic plan-level investment reviews, and ongoing employee education. Typically, it’s about .25% to 1.0% of plan assets.
There may also be some ancillary fees for employees like loan and distribution costs.
Can I Afford To Offer A 401(k)?
A 401(k) is a sought-after benefit by workers, ranked one of the top five benefits for employee satisfaction. By offering one, you’ll improve your ability to attract new talent and show employees you value them and care about their financial futures. This, in turn, can encourage employees to stay with you over the long-term, setting up your business for future success.
But as you now know, there’s a cost associated with providing a 401(k).
For example, using the basic costs we outlined above, a company with 10 employees can expect to pay $1,400 to $5,600 to get a plan up and running and cover the administration of it for the first year. And that figure doesn’t take into account an optional employer match.
There are tax breaks that can help you reduce these costs, including the start-up cost tax credit, a deduction for some administrative costs, and a deduction for contributions if they’re less than 25% of an employee’s compensation.
If this range is still outside your budget, there are other retirement savings vehicles you could consider, like a SIMPLE IRA. This can be a good choice for smaller companies with 100 or fewer employees who don’t want to pay a 401(k)’s annual administrative fees and want limited annual reporting and testing requirements. With a SIMPLE IRA, all you’ll be responsible for is a nonelective employer contribution of 2% of compensation or a dollar-for-dollar match up to 3%.
However, if you want to give your employees more choices when it comes to investments, deeper planning tools, the ability to save more, and different plan designs, like a loan feature, which isn’t available with a SIMPLE IRA, then the benefits may outweigh the costs and a 401(k) may be the way to go.
If you’d like to see if a 401(k) is a good fit for your business, check out our benefits page for more information.