How You Can Get a Low Cost Small Business 401(k)

Small business 401(k) plan providers charge based on a number of pricing structures. Commonly, they will bill using Assets Under Management (AUM) fees combined with a Per-Participant charge. So, for instance, a company with $1 million in assets might pay $1,000 in annual administrative fees, plus a quarterly charge of $15 to $40 for each person in the plan. These fees are designed to compensate custodians and incentivize brokers to grow the plan, but they can really escalate the total cost of plan administration.

At Ubiquity, we charge NO AUM or per-participant fees. Your monthly fee, which can be as low as $75/month, covers:

• Plan amendments
• Record-keeping
• Facilitating payroll contributions
• Account manager support
• IRS document submission
• 401(k) loan administration, if necessary
• Monday through Friday employee customer service

How you structure your 401(k) plan can also impact the cost. Here are a few affordable options:

• A SIMPLE 401(k) requires less overhead administration compared to Traditional 401(k) plans. Open to business owners with 100 or fewer employees, a SIMPLE 401(k) is not subject to annual nondiscrimination testing and IRS auditing expenses, but employers must agree to make 100% vested matching contributions up to 3% of an employee’s pay or a nonelective contribution based on 2% of employee pay. There are a few caveats – the annual contribution limits are lower for a SIMPLE 401(k), and employees must have received at least $5,000 in compensation in the previous year to qualify – but these rules can also save you money, while still providing benefits to a good deal of employees.
• A Safe Harbor 401(k) is not always the least expensive option, but it allows higher contribution limits and a great way to maximize savings for Highly Compensated Employees without worrying about nondiscrimination tests. You can choose from two matching formulas – either 100% match on the first 3% of employee contributions plus a 50% match on the next 2% or a 3% nonelective contribution, regardless of participation.

For most 401(k) plans, employer matching is completely optional, which can also save money on a new plan, though you will be subject to IRS nondiscrimination tests. Ubiquity’s compliance team will assist you in remaining informed as to employee contributions and letting you know if you might benefit from a Safe Harbor provision.

Work with a broker who can put together a low-cost investment lineup.

Ubiquity can recommend a flexible, low-cost partner if you’re not sure who can best manage your investments OR you are free to use whichever broker you’d prefer. Some employers may use a DIY brokerage or automated system to save money. Here you can try a default lineup based on long-term growth and your risk profile, with automatic rebalancing added, or you can customize your investments from over 30,000 funds.

Generally speaking, you’ll want a broker who can provide you with access to low-cost investments, rather than vehicles with notoriously high commission loads. The average expense ratio is 0.52%, so look for lower percentages if possible. Anything over 2% is considered high. Consider options like low-cost Vanguard index funds, which offer lower expense ratios and outperform many actively-managed funds.

Take advantage of tax savings for small businesses

Generous tax deductions make 401(k) plans more affordable for small businesses. You can write off the following:

• Plan administration – Plan administration can be written off as a business tax deduction.
• Plan startup costs – Deduct up to 50% of all necessary and reasonable 401(k) startup and participant education expenses to a maximum of $5,000 for 2020, 2021, and 2022.
• Auto-enrollment – Add another $500 off in 2020, 2021, and 2022 when you choose to add automatic enrollment to your plan.

Keep in mind that any matching contributions that fall below 25% of the employee’s annual compensation (or $285,000) can be deducted from federal, state, and payroll taxes.

Learn More About Low-Cost Small Business 401(k)s

Contact Ubiquity to get started on your low-cost small business 401(k). Since 1999, we have helped companies with 100 or fewer employees find affordable and effective ways to save for retirement.