Small Business 401(k) Guide: 401(k) Fees to Know Before Starting a Plan

At a time when recruiting and retaining top talent is growing ever more difficult, offering your employees a better way to save for retirement can be a competitive advantage for your business. However, it’s important to understand the fees associated with starting a retirement offering, including those paid by your business and your employees.

In this article, we’ll give a broad overview of the fees associated with offering a 401(k) plan benefit and share statistics on typical 401(k) plan fees, so you can have more information to offer a superior savings experience for your employees.

What Fees Are Associated with 401(k)s?

There are three primary fees associated with 401(k) plans for investment, administration, and individual services. Each type of fee pays for a unique aspect of 401(k) plan stewardship:

Investment Fees

Typically, this is the largest fee associated with a 401(k) plan, covering the cost of investment management and other related services. Generally, these fees are based on a percentage of the assets in your 401(k) plan. Actively managed funds often have higher investment fees than passively managed funds.

Administration Fees

Someone, somewhere, is out there operating your 401(k) plan, and they are compensated for those services. These fees cover general operations like recordkeeping and trustee services. They also cover the costs of maintaining a dedicated help center staffed by a customer success team. Some employers cover these fees for their employees participating in the plan.

Individual Service Fees

Service fees pay for optional transactions that you may select, such as taking out a 401(k) plan loan or rolling 401(k) plan investments over to an Individual Retirement Account.

How Much Do Participating Employees Pay in Fees?

According to PLANSPONSOR, in 2020, the average total plan cost for a small retirement plan amounted to a 1.24% fee for participants. For large retirement plans—those with 1,000 participants or $50,000,000 in assets—the average fee paid by participants came out to 0.93%. That said, most savers may have investment fees ranging from 0.2% to as high as 5%.

What Are Typical 401(k) Plan Fees for a Small Business?

You can expect to pay a one-time start up fee which covers a number of initial costs, including:

  • Creating a plan document
  • Arranging a trust for your plan’s assets
  • Setting up your plan on a recordkeeping system
  • Educating your employees about your plan
  • Onboarding employees into your plan

That said, it’s possible to save money while offering a new 401(k) plan, too: Eligible employers may be able to claim a startup tax credit of up to $5,000, for three years, to cover the “ordinary and necessary costs” of establishing a qualifying plan.

Additionally, Employers can opt to match a portion of their employees contributions up to a certain dollar amount or percentage. Employer matches are entirely optional and businesses can choose to:

  • Match contributions dollar for dollar,
  • Match at a specific percentage, or
  • Establish a hard dollar-based cap (instead of limiting matched contributions to a percentage of the employee’s total salary)

Does Your Small Business Need a 401(k) Plan?

While every small business faces unique challenges, more and more are choosing to offer a 401(k) plan for the competitive advantage it can bring their business. Additionally, 14 states are currently requiring or are considering requiring small businesses to offer a 401(k) plan or other qualified retirement plan.

Some of the perks of starting a 401(k) plan offering for your business include:

Recruitment and Retention

In a tight labor market, it can be difficult to compete for talent. Fortunately, everyone wants to retire eventually and your business can help them do so easier by automating contributions straight from their paycheck.

Tax Benefits

Employers can deduct contributions on the company’s income tax return as long as the contributions don’t exceed certain limitations. Even better, this is on top of the aforementioned $5,000 per year startup tax credit.

Avoiding Potential Fees

As noted, some states are requiring small businesses to set up retirement programs for their employees or they may impose penalties on businesses that do not offer a retirement plan. Setting one up now can help avoid noncompliance fees, which some states are already beginning to enforce.

How Can My Small Business Set Up A 401(k) Plan?

Running a small business is hard, but running your 401(k) plan shouldn’t be. Fortunately, Vestwell can help. Vestwell is a digital retirement plan platform that makes it easier for you to offer and administer a company-sponsored 401(k) or 403(b) plan. By combining technology with a best-in-class experience and user-first design, Vestwell offers a wide range of services to small businesses everywhere.

If you are an employer interested in setting up a 401(k) plan for your business, you can contact Vestwell to determine if you are eligible to receive up to $16,500 in tax credits over three years, which can help offset or even remove administration costs. Interested? Learn more here.

Originally published on Vestwell.com.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.