How Much Does It Cost to Manage a 401(k) As a Small Business

Here’s a quick breakdown of the potential costs associated with 401(k) management:

• A setup fee
• Administrative fees
• Investment transaction fees
• Matching contribution funds
• Annual 401(k) plan audit fees
• Miscellaneous fees for rollovers, investment advice, consulting, nondiscrimination testing, or loans

Initial Setup Fee

Most plans charge an initial setup fee to establish your plan or roll over assets from another type of plan. Generally, this fee ranges from $500 to $3,000, depending on the size of your company and the benefits selected. Fortunately, the SECURE Act allows business owners tax credits for setting up a new plan:

• Startup Cost Tax Credit: Up to 50% of the employer’s necessary and reasonable 401(k) startup costs to the greater of a maximum of $500 OR $250 per eligible non-highly-compensated employee up to $5,000. The maximum allowable credit would be $15,000 over a three-year span.
• Auto-Enrollment Tax Credit: Employers can claim up to $500 per year for three years when they choose to add auto-enrollment to their plan. The maximum allowable credit is $1,500 over three years.

Ongoing Maintenance Fees

Diverse 401(k) plan provider fee structures can make it difficult to compare apples to apples. Ongoing plan fees may fall under one or more of the following payment models:

• Asset-based: The cost of the plan is based on the total assets under management. Typically, you are charged 2-3% of the plan account balance, but the range is from 0.08 to 4 percent.
• Per-participant: The cost of the plan is based upon the number of eligible or actual participants in the plan. This fee can range from $2 to $750 per month, per person.
• Transaction-based: The cost of the plan is based on the execution of a particular service like a rollover or loan. Transaction fees are usually between $0-$70.
• Flat rate: The cost of the plan is a fixed monthly, quarterly, or annual charge that does not vary based on the size of the plan. Expect to pay $90 – $125 per month.

The ongoing maintenance fee covers the cost of record-keeping, payroll administration, account manager support, IRS documentation, and employee customer service.

Investment Costs

Some 401(k) plan providers perform advisory services and fund selection, while others allow you to work with a broker of choice. These fees are often referred to as “expense ratios.” The average expense ratio is 0.52%. Anything over 2% is considered high. Consider index, institutional, target-date, and low-cost mutual funds for cheaper investment vehicles. Rather than paying 1-2% for investment advice, consider a self-directed brokerage window that allows you to choose from a wide array of investment options.

Employee Match

Half of employers do not offer any type of matching contribution. The 50% of companies who match employee contributions, match an average of 4.3% of an employee’s pay. The most common matching formula is 50 cents on the dollar up to 6% of the employee’s pay. Another popular formula is dollar-for-dollar up to 3%.

Employer matches encourage employees to participate in the plan and save more while giving the employer a boost in reputation as a generous benefactor. Contributions below 25% of the employee’s annual compensation are exempt from federal, state, and payroll tax.

Despite the complexities, there are many ways to ensure you’re getting a fair deal on 401(k) administration.

1. Request a fee disclosure.

The Department of Labor offers a helpful tool – the Plan Fee Disclosure Form — you can print and send to potential plan providers to get a transparent understanding of what fees you’ll be responsible for paying.

2. Choose a plan provider with a flat fee model.

AUM fees, per-participant fees, and transactional fees can really escalate. When you combine these expenses with a plan provider who also happens to offer investment advice and brokerage service with kickbacks and commissions as well, and you could easily find yourself paying double what others pay to run their 401(k) programs.

3. Save with SIMPLE or Safe Harbor 401(k)s.

How you structure your 401(k) plan can also affect the cost. Some small business owners opt for a “SIMPLE 401(k),” which requires less overhead administration compared to a Traditional plan. A SIMPLE 401(k) may cost $500 to $1,000 per year, plus $20-$50 per plan participant, with administrative services billed at $100 to $300 per hour. Other fees may include $800 – $1,500 to roll over assets from another plan and $800 to $2,500 per year for IRS-required discrimination testing. Note: Safe Harbor 401(k)s do not require annual nondiscrimination testing.

4. Limit fund selection to low-cost investments.

Passively-managed index funds can be a low-cost option that provides a big yield over time. Choosing a broker with an open architecture, allowing you the freedom to build your fund lineup with any fund on the market, will provide the best opportunity to keep expense ratios low.

Ubiquity Offers Low-Cost 401(k) Solutions for Small Businesses

A 401(k) provider may command a higher price by locking you into an overinflated contract with services you’ll never need. The best small business 401(k) providers operate on a low-cost, small business-friendly model that has optional services, allowing you a fully customized package that only delivers what you need and value.

Ubiquity was one of America’s first flat-fee-for-service small business plan providers in 1999. We help clients in all 50 states manage more than $2.5 billion in assets with no hidden fees. We offer free financial wellness tools and full employer/employee support.  Contact our team to learn more.