The Cost of Managing a Small Business 401(k)

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: Eligible employers can receive a tax credit of up to $5,000 over three years for starting a 401(k) plan, subject to IRS requirements. Employers with 50 or fewer employees qualify for a 100% tax credit, while those with 100-50 employees can receive a 50% tax credit. Additional eligibility criteria include having at least one non-highly compensated employee, an employee who received at least $5,000 in compensation in the preceding year and having substantially the same employees receiving contributions or benefits from another plan sponsored by the employer, a member of a controlled group, or a predecessor within the three tax years prior to becoming eligible. Employers with automatic enrollment plans can receive an extra tax credit of $500 per year for a three-year taxable period. 
• Auto-Enrollment Tax Credit: Employers with 50 or fewer employees can receive a tax credit for contributing to their employees’ retirement plans. The credit is a percentage of the amount contributed by the employer, up to a per-employee cap of $1,000. The credit percentage is reduced over five years, with 100% in the first and second years, 75% in the third year, 50% in the fourth year, and 25% in the fifth year. No credit for subsequent tax years thereafter.

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.

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.

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.