How to Evaluate the Cost Effectiveness of Small Business 401(k) Plans
Author: Andrew Meadows /
Reviewer: Callie Adams Farnsworth, QKA, CAFCA
28 Apr 2023 / 401(k) Plan Information
With so many different 401(k) plans on the market, choosing the right one for your small business can be tricky. So we’re taking the guesswork out of getting yourself (and your employees) set up for the future.
Understanding 401(k) plans: A quick refresher.
By this point in your search, you may be fairly familiar with 401(k) plans and how they can benefit your small business. But just in case: A 401(k) is a retirement savings plan that allows employees to contribute a portion of their pre-tax income to an investment account – and employers can make contributions too.
The contributions made by the employee are deducted from their paycheck and invested in a range of investment options offered by the plan. There are two main types:
- Traditional 401(k): In a traditional 401(k) plan, contributions are made on a pre-tax basis, and any investment gains are tax-deferred. When the employee withdraws the funds from the plan, they are subject to federal income tax.
- Roth 401(k): In a Roth 401(k) plan, contributions are made on an after-tax basis, and any investment gains are tax-deferred. When the employee withdraws the funds from the plan, they are not subject to federal income tax.
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Costs to consider.
- Setup Fees. Every retirement plan costs money for setup and administration. But the good news about setup fees is that you can actually get up to $16,500* in tax credits. You can use these credits to offset the cost of your plan over the first three years.
Even if you set up your plan last year or the year before, you can still qualify for a portion of those tax credits for the remaining years. This governmental boost is intended to help small business owners afford setting up these plans so that more people can save for their retirement.
- Plan Fees. It’s always important to compare the relative prices of any plan you are considering. Look for a plan that charges a flat fee rather than a percentage based fee (sometimes called “employee pricing”).
- Time. The administration of a 401(k) plan can be time-consuming and complex. Make sure you’re factoring in the time it’ll take to maintain the plan. Recordkeeping, compliance testing, and reporting all fall under this, so be sure you or someone on your team can take on these responsibilities – or consider choosing a plan that covers them.
401(k) plan features to consider.
- Plan type. Choose a plan that offers the provisions you may need, such as a Safe Harbor plan that allows you to bypass certain IRS tests when you make a tax-deductible contribution to your employees’ retirements.
- Impact on Employee Retention. How much will offering a 401(k) plan encourage your employees to stick with you? Will offering a 401(k) plan make your company that much more competitive to prospective employees who are considering a job offer from you? A 401(k) plan can help you attract and retain top talent. When you’re picking your small business’s 401(k) plan, make sure you’re choosing one that will positively impact your employees and work with their lifestyles.
- Tax Benefits. 401(k) plans offer tax benefits to both employers and employees. Make sure the potential tax benefits associated with each plan you’re considering are significant enough to warrant any additional costs.
- Investment Options. Different 401(k) plans offer different investment options. Evaluate the investment options offered by each plan and determine whether they align with your employees’ investment objectives and risk tolerance.
- Vesting Schedule. Vesting is the amount of time an employee must work for your small business before they are entitled to any contributions you make to their 401(k) plan. Some plans have a vesting schedule requiring employees to work for the company for a certain number of years before fully vested in the employer contributions.
- Eligibility and Participation Requirements. Some 401(k) plans have eligibility and participation requirements, such as a waiting period before an employee can start contributing to the plan or a minimum number of hours worked per week. Make sure these requirements make sense for you and your employees
Evaluate: Is your 401(k) plan cost effective?
Once you have noted the different 401(k) plans based on the above factors, it’s time to compare these costs and features side by side to determine their overall cost-effectiveness.
What is the overall cost compared with the expected outcome? Ask yourself – are you:
- Saving the cost of setup via those juicy tax credits (see above)
- Maximizing the annual contribution to your own account
- Delivering your business the features it needs to remain in compliance
Find out if a Ubiquity 401(k) plan is right for your small business. Call us toll-free 866.845.5058 for a free consultation.
*Qualify for up to $5,000 each year for three years when you open a new plan. Qualify for up to an additional $500 each year for three years when you add automatic enrollment to your plan.