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How Much Does Offering A 401(k) Cost An Employer? Pricing And Fees

by John Stebbins on May 31, 2022 8:42:57 AM

93% of employers offer a traditional 401(k) or similar plan. Since retirement plans like 401(k)s are an important recruitment and retention tool, you may be considering offering one at your workplace, especially in today’s tight labor market. But, if you’re like many businesses, you’re probably asking yourself, “What will a 401(k) cost my business?” 

At Complete Payroll Solutions, we’ve set up 401(k) retirement plans for hundreds of businesses, so we understand that cost is often a top concern when weighing options that will boost your benefit offerings. 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 involved with providing this employee benefit. 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contributions from their paychecks and invest them, without having to pay taxes on the money they set aside until it’s withdrawn. Many plans also offer a Roth contribution option that allows employees to make contributions from money that’s already been taxed so they don’t pay taxes upon withdrawal.

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).

How are 401(k) fees charged?

When it comes to 401(k) fees that the employer pays, the costs generally fall into three categories:

401(k) Set-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. You can claim the credit to cover the costs to set up and administer your plan as well as educate employees about it.

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:

  1. informational materials
  2. statements
  3. annual nondiscrimination testing
  4. completion of Form 5500
  5. 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. In addition to this 401(k) cost, 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. Since 82% of employers that provide a traditional 401(k) offer a match, this feature can help ensure workers see your benefit as competitive. Just be sure the match is also on par with what other companies are offering. For example, last year, Vanguard reported the average match was 4.5%.

Also, a safe harbor match will eliminate the need for non-discrimination compliance testing. There are 4 different types of safe harbor 401K(k) plan designs:

  1. Non-elective: With this type of safe harbor plan, you’ll make a year-end contribution, giving everyone who is eligible a contribution equal to 3% of their pay. That’s the case even if they’re not contributing to the plan.
  2. Basic match: A basic safe harbor 401(k) plan has a required employer match. You’ll need to match 100% of the first 3% of an employee’s contribution, then 50% on the next 2%.
  3. Enhanced match: In this safe harbor plan arrangement, you match 100% of the first 4% of an employee’s contribution. 
  4. Auto-enrollment: A qualified automatic contribution arrangement (QACA) must have a minimum automatic contribution percentage of 3% for the first year of an employee’s participation, which increases to 4% in the second, 5% in the third, and 6% in the fourth year. You would have to match 100% of the first 1% of an employee’s contribution plus 50% on the next 5% for a maximum of 3.5% on the first 6%. Alternatively, you can make a non-elective contribution of at least 3% of compensation to all eligible non-highly compensated employees. 

Are there any hidden 401(k) fees that can drive up costs?

In addition to these standard fees behind your 401(k) cost, there may be some surprise expenses 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
  • Loan and withdrawal administration

Just be sure to carefully check your quote or fee schedule so you know what you’re being charged.

How can I lower my 401(k) cost as an employer?

While all TPAs will charge you for the set up and administration of your plan, it’s worth shopping around because the fees can vary by provider. If you’re looking to bring down your 401(k) cost, another way you can save is through plan design. For example, you’ll be charged less in administration fees if you have a safe harbor 401(k) since the TPA doesn’t have to worry about compliance testing because your plan will be exempt from the requirement. 

Can I afford a 401(k)?

Since a 401(k) is one of the top benefits employees want, it may be time to offer one at your workplace. However, when evaluating the 401(k) cost your business would incur, it’s understandable to be worried; 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. 

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. 

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. 

To help compare costs and find the right TPA that can help you launch a 401(k) for your business, read our guide on the best third party administrators in the northeast. If you think that Complete Payroll Solutions might be a good choice for your company, learn more about CPS' 401(k) offerings.


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