Small Business 401(k) Cost Breakdown

401(k) Plan: Overview

A 401(k) plan is a type of retirement savings account offered by businesses to their employees. It allows participants to contribute a portion of their paycheck towards their retirement savings, and employers may also match funds up to a certain percentage.

Employees can generally choose from various investments within the 401(k) plan, such as stocks, bonds, mutual funds, or other securities. The money grows tax-deferred, meaning that taxes on the investment gains are due later when the money is withdrawn.

401(k) plans help employees build a secure retirement fund while potentially saving on taxes. Businesses also benefit from offering a 401(k) plan, as it can help attract and retain quality employees and qualify the company for tax deductions and credits.

It provides a way to offer additional benefits like matching contributions, which can increase employee morale, leading to better productivity and loyalty.

However, there are certain costs associated with 401(k) plans that employers must be aware of. The setup and continuous management of a 401(k) plan can require significant time and resources, which can be costly, especially for small businesses.

It is crucial to understand the associated costs of offering 401(k) plans to your employees and weigh them against the benefits before offering this retirement savings option.

Startup Costs

The first cost associated with a 401(k) plan is the initial setup, which can range from $500 to over $2,000, depending on the complexity of the plan and how it is managed.

The setup costs usually include legal fees for document preparation and filing, administrative services, and investment selection. Companies will also spend money on educating their employees on the 401(k) plan and how to best use it.

This amount can be significant for small businesses. Nonetheless, the Internal Revenue Service (IRS) offers tax credits of up to $5,000 per year for the first 3 years of a 401(k) plan precisely to cover these startup costs.

The IRS also allows an additional $500 credit to be taken by qualified companies that offer automatic enrollment for their new 401(k) plans.

Optional 401(k) Costs

Aside from the basic costs of setting up the 401(k) plan, companies may also incur other costs if they offer employer match or profit-sharing contributions.

Employer Match

Many businesses offer a matching contribution to their employee's 401(k) plan. It means the employer will match the amount of money an employee contributes, typically based on a certain percentage of periodic salary deferral or annual compensation.

Offering matching contributions effectively increases employee retirement savings. It helps businesses attract and retain top talent, boost employee morale, and foster a sense of loyalty.

Employer matching contributions can also qualify companies for tax deductions. The employer can claim the deduction as part of business expenses up to a certain limit. Employer match ultimately results in increased productivity and long-term financial gains.

It is crucial to note that the employer is responsible for paying this matching contribution, which can be expensive depending on the percentage match, the size of the organization, and the number of employees contributing to the plan.

It is best to do your due diligence and select an optimal employer match formula that meets your small business' financial situation and goals so that it does not erode your company's bottom line.

Employer Profit-Sharing Contributions

Another optional contribution employers can make is a profit-sharing plan. Here, employers contribute a certain percentage of their profits to employees' 401(k) accounts. The total amount contributed depends on the number of participants and the percentage awarded.

It allows employees to receive an immediate boost in retirement savings without having to contribute more from their own pockets. It helps you provide a solid benefit package that pays off in the long run as employees gain a sense of ownership of the business.

Just like with employer matching contributions, companies that offer profit-sharing plans may be eligible for tax deductions on their contributions to employee accounts.

In both cases, employers should ensure they are making compliant contributions according to IRS rules and regulations that change from time to time. It is essential to consider the cost-benefit ratio in order to determine which type of contribution best suits your business.

Careful consideration should also be given when setting up an employer match or profit-sharing contribution plan so that it aligns with the long-term goals of the company. The key is finding the right balance between what you provide and what fits within your budget.

Plan Administration Fees & Expenses

The continuous management of a 401(k) plan also means running costs for your small business. You will pay for plan administration, investment management, service provided, processing, and other ongoing fees.

Plan Administration Fees

These fees cover the day-to-day management of your 401(k) plan, including recordkeeping, administrative tasks, customer service, and legal compliance. These are often charged as a percentage of assets in your plan or a flat fee per participant.

Your small business should also consider whether you need an outside party to provide fiduciary services such as investment advice and monitoring investment performance.

Investment Fees

You may be required to pay fees for any investments held within your 401(k) plan, such as stocks, mutual funds, bonds, and exchange traded funds (ETFs). These are typically set by the fund provider and calculated as a percentage of assets under management (AUM).

You will also need to pay a fee for any third-party services used to manage investments within your plan, such as an investment advisor.

Individual Service Fees

You may need to pay additional fees for services provided by outside parties. For example, you might incur 401(k) audit costs and fees associated with filing Form 5500, the annual report all employers must file with the IRS.

You may have to provide financial counseling services or other education programs; those also come at a cost.

Processing & Ongoing Fees

Your sustainable 401(k) plan may also incur general processing fees for tasks such as payroll deductions, document printing, trading costs, and any other transaction activities. These can range from a few cents to several dollars per trade.

Another fee that should be considered is participant loan processing fees if you allow employees to take out loans from their 401(k) accounts. You should also be aware of ongoing fees such as account maintenance and custodial fees that can add up over time.

Hidden 401(k) Fees to Watch Out For

Other potential expenses that your small business may incur relate to hidden fees and commissions associated with 401(k) plans.

You may be charged a fee when you roll over funds from a former third party 401(k) service provider to a new one. Integrating your 401(k) plan with your company's payroll platform can also come with a cost.

Additionally, modifying and amending plan design and structure usually entails certain expenses. Termination fees may also be charged if you decide to close your plan.

It is important to be aware of all these 401(k) fees and expenses, review them closely when shopping for a provider, and negotiate the terms before committing.

Be sure to review the fine print in the plan documents carefully so that you are aware of any additional costs your business may incur in setting up and managing a 401(k) plan.

How to Choose the Best 401(k) Plan For Your Small Business

Selecting the right 401(k) plan for your small business can be a daunting task. You need to evaluate not just the costs, but also how it will benefit you and your employees. When selecting a provider, consider the following:

Low Investment Fees

Investment fees are one of the most important factors to consider when selecting your 401(k) plan. While you want your employees' retirement savings to grow over time, exorbitant fees can significantly reduce the return on their investments.

It is crucial to select a provider with competitive fees and a wide range of investment options available in the plan. Your employees may consider investing in low-cost funds and ETFs to help reduce expenses, leaving more of the returns for their retirement savings.

Look for providers that offer low-cost index funds and assets with minimal commission fees.

Payroll Integration

Select a provider that offers easy integration with your payroll system. It will make it much easier for you to manage the 401(k) plan and keep track of contributions from both employers and employees.

Look for providers that have seamless integration with popular payroll systems and provide automated processing services, such as online enrollment and automatic contributions, so you do not have to manually manage them.

Safe Harbor 401(k)

A Safe Harbor 401(k) plan is an employer-sponsored retirement plan that meets certain requirements and offers maximum protection from government penalties related to nondiscrimination tests.

If your small business employs fewer than 100 employees, you may be eligible for a Safe Harbor 401(k). This type of plan gives you more flexibility to set your own contribution schedules and allows you to more easily offer match contributions for your employees.

Look for providers that offer Safe Harbor 401(k) plans and can provide clear guidelines to help you get the most out of your plan.

Personalization

Your 401(k) plan should reflect the needs of both you and your employees. Look for providers that can offer a variety of investment options, such as target-date funds or custom asset allocation plans, to help meet different employee goals and risk tolerances.

Also consider providers that offer personalized guidance and advice to help ensure your employees are making the best decisions for their retirement savings.

Accessibility

The 401(k) provider you select should offer an easy-to-use online platform for both employers and employees.

Search for providers that have a user-friendly website, mobile app, or other platform to make it easier for your employees to access their accounts, review their investments, and manage their contributions.

The provider should also provide competent customer support services to help you and your employees with any questions or issues related to the 401(k) plan.

The Bottom Line

A 401(k) plan is an employer-sponsored retirement savings plan that allows workers to contribute pre-tax income from each paycheck toward their retirement savings, which can help plan participants build wealth and save for the future.

Offering 401(k) plans helps companies attract and retain top talent and boost employee morale. It also provides tax benefits to both employers and employees.

Common costs relate to setting up and the ongoing management of the 401(k) plan. Optional costs may also be incurred if your small business provides matching or profit-sharing contributions.

Employers should also consider the potential hidden costs of 401(k) plans, including plan termination fees and rollover expenses. It is crucial to compare costs between different providers to ensure they meet your preferences while staying within your budget.

To ensure the best fit for your small business, consider factors such as low investment fees, personalization, payroll integration, and accessibility. You may also benefit from a provider that offers a Safe Harbor 401(k) feature.

Consult a qualified financial advisor or your accountant to help you select the best 401(k) plan for your small business. Taking the time to research and doing your due diligence can help ensure that both you and your employees are getting the most out of the 401(k) plan.

Small Business 401(k) Cost Breakdown FAQs

What are the startup costs associated with a 401(k) plan?

The startup cost of a 401(k) plan can range between $500 to over $2,000, which include initial set up, document preparation and filing, administrative fees, and investment selection. You may also need to spend money on educating your employees about the 401(k) plan.

What are some hidden fees to watch out for when setting up a 401(k) plan?

Aside from startup and ongoing fees, you may be charged for rolling over funds between 401(k) providers, integrating the plan into your payroll system, or terminating a plan. Ensure that you read the fine print of any plan to prepare your small business for these costs.

What are the key factors to consider when choosing a 401(k) plan?

You must select a 401(k) plan that has a wide range of investment options, with competent fees or commission schedules, smooth payroll integration, personalization and customization options, and accessibility. You may also benefit from a provider that offers a Safe Harbor 401(k) feature.

Can a 401(k) plan be customized to meet the needs of a small business and its employees?

Yes, it is possible to customize a 401(k) plan. You can opt to add features such as automatic contribution escalation and loan options, while also allowing your employees to choose their own investment mix based on their risk tolerance. Additionally, you can ensure that the features of the plan are tailored to meet the needs of both employer and employees by regularly reviewing the plan and making adjustments as needed.

What are the optional costs involved in a 401(k) plan?

You may opt to offer your employees matching or profit-sharing contributions, which increase their retirement savings at no cost to their own accounts. Your small business shoulders these optional contributions. Though they can be costly depending on the number of plan participants and the specific percentage you contribute, it can lead to long-term gains as a result of increased productivity, loyalty, and competitiveness.