cost of 401 k plan for small business

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Keys to Getting the Most from Your 401(k)

If you’re like about 50 million other people in the United States, your retirement financial planning includes a 401(k) account. Though these company-sponsored retirement savings plans are ubiquitous, they’re also quite frequently the sources of many questions regarding regulations, rollovers, benefits and other queries that consumers need to make to ensure their finances are as sound as possible in retirement. Put most simply, a 401(k) is a tax-deferred savings plan, and at its most basic, the more money you put into it, the more money you will get out.

Benefits for Employees

A 401(k) is sponsored by an employer as a retirement investment vehicle for employees. Employees contribute to the plan, if offered by their employer, and deductions are automatically taken from each paycheck. Employers use employees’ contributions to buy investments in the account, and often match employees’ contributions.

The money you invest in the plan is called a pre-tax contribution, because it is not taxed until you withdraw the money, at retirement. So, for example, if you make $100,000 a year and put $40,000 into your (401)k, you pay annual income tax on $60,000.

Maximize Your Benefits

Keeping the money in the 401(k) is the key to maxing out its benefits. You’ll be penalized a 10% early-withdrawal penalty fee, plus any applicable taxes, if you take funds from it before you retire or before age 59 1/2.

One benefit of using a 401(k) as a kind of savings account is that you can contribute to it for as long as you are actively working.

Mandatory 401(k) Distributions

However, even if you work until you reach age 90, you’ll be subject to mandatory, required distribution guidelines. This is because 401(k) plans have strict rules about required minimum distributions, also known as RMDs. In general, you are required to take your first RMD when you are age 70 1/2;. You will be penalized if you do not do so.

Like traditional IRAs, 401(k) plans come with strict rules regarding required minimum distributions, or RMDs. Generally, you must take your first 401(k) withdrawal once you reach age 70 1/2, and if you don’t take your mandatory distributions, you could face some pretty stiff penalties.

How Distributions Work

Your actual RMD is calculated based on your 401(k) balance and your life expectancy. If you do not take the RMD that is required, you are required to pay a 50 percent penalty on the amount you do not withdraw.

That is a significant amount, and if you are getting close to age 70 1/2, familiarize yourself with the rules associated with your 401(k) so that you don’t lose potentially thousands of dollars that you worked very hard to earn.

To avoid this scenario, you may be able to move your 401(k) to a Roth IRA, which does not impose required minimum distributions. If you have any questions, speak with someone at your job or with your financial advisor to plot the right route for you. The Internal Revenue Service also provides a table that maps out mandatory distributions at set ages.

Learn About Rollovers

Since 401(k) plans are tied to your job and your employer, you may have some decisions to make when you leave a particular job, since you will be able to make some changes to your 401(k) if you wish. You can leave it as it is with your employer, particularly if you are satisfied with your employer’s investment strategy. Or, you can opt to transfer it to your new employer. And, you can also move your funds, particularly if you want more input into investment approaches. In such circumstances, many consumers opt to move it to what is called a rollover IRA.

If you move your funds directly to a traditional IRA, you will incur no taxes. You simply move your saved money from one kind of account into another. In the case of an IRA, you may opt to set it up at a bank or with a financial advisor. The best thing you can do when you have the opportunity to make a change to your 401(k) is to ask questions about transfer fees, rules regarding your old and new 401(k) and investment strategies and outlooks.

About Hardship Withdrawals

In some circumstances, hardship withdrawals are permitted before the mandated age and other qualifications. Hardships may include unexpected medical expenses, expenses to avoid home foreclosure or eviction, and funeral or burial expenses.

If you have hardship circumstances that may qualify you for such a withdrawal, speak to your fund administrator, who may have other ideas for you, such as taking out a 401(k) loan or borrowing money.

Whatever your situation is relative to a 401(k), ask questions to be sure you get the most out of this popular savings tool to set yourself on a steady financial course.

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How Much Does Offering A 401(K) Cost An Employer? Pricing & Fees

The vast majority of employers offer a traditional 401(k) or similar plan. Since retirement plans like 401(k)s are an important recruitment and retention tool, you may be considering offering one at your workplace, especially in today’s tight labor market. But, if you’re like many businesses, you’re probably wondering what expenses you may incur that will contribute to your business’s overall 401(k) cost. Let’s find out.

Since we know cost is often a top concern when weighing options that will boost your benefit offerings, in this article, we’ll help you understand what 401(k) fees  you’ll be responsible for if you decide to offer a plan. After reading this article, you’ll know all the costs involved with providing this employee benefit to your workforce to decide if a 401(k) fits within your budget. 

How much does a 401(k) cost as an employer? 

The cost of offering 401(k) depends on a number of factors and can range considerably. For example, while a company with 10 employees can expect to pay anywhere from $1,400 to $5,600 to get a plan up and running and cover its administration for the first year, a larger business may pay more or possibly even less depending on things like plan design, the number of employees, or their TPA service provider. 

To help you understand the various expenses, the 401(k) fees that the employer pays generally fall into three categories:

401(k) Set-Up Costs

When you decide to start a 401(k) plan at your company, you’ll likely have a one-time initial fee to set it up. This will cover activities like setting up the new plan and educating your employees about the plan. 

For these services, you can expect to pay anywhere between $500 to $2,000. Keep in mind that there’s a tax credit for start-up costs for small businesses with less than 100 employees , which the SECURE Act increased to up to $5,000 annually for the first three years . You can claim the credit to cover the costs to set up and administer your plan as well as educate employees about it.

401(k) Administration Fees

Because of the complexities involved in managing 401(k)s, if you’re like most companies, you’ll hire a third-party administrator (TPA) to maintain your plan. That means you’ll be responsible for covering their costs, which include everything needed for the day-to-day operation of the plan like:

• informational materials
• annual nondiscrimination testing
• completion of Form 5500
• approving loans and distributions

The more complicated the plan design, the higher the 401(k) fees for administration may be, but you will generally see costs ranging from $750 a year to $3,000. In addition to this 401(k) cost, you’ll pay what’s known as a per-participant fee that will be somewhere in the range of $15 to $60 a year for each person enrolled.

401(k) Matching Costs

A 401(k) match means that you’ll contribute an amount that matches what your employee puts into their plan up to a certain percentage or amount. As an employer, you don’t have to offer a 401(k) match. But there are some advantages. 

First, it can make your plan more attractive to new and existing employees. Since most employers that provide a traditional 401(k) offer a match, this feature can help ensure workers see your benefit as competitive. Just be sure the match is also on par with what other companies are offering, which is typically between 4% and 6% of pay.

Also, a safe harbor match will eliminate the need for non-discrimination compliance testing . There are 4 different types of safe harbor 401K(k) plan designs:

• Non-elective : With this type of safe harbor plan, you’ll make a year-end contribution, giving everyone who is eligible a contribution equal to 3% of their pay. That’s the case even if they’re not contributing to the plan.
• Basic match : A basic safe harbor 401(k) plan has a required employer match. You’ll need to match 100% of the first 3% of an employee’s contribution, then 50% on the next 2%.
• Enhanced match : In this safe harbor plan arrangement, you match 100% of the first 4% of an employee’s contribution. 
• Auto-enrollment : A qualified automatic contribution arrangement (QACA) must have a minimum automatic contribution percentage of 3% of pay for the first year of an employee’s participation, which increases to 4% in the second, 5% in the third, and 6% in the fourth year. You would have to match 100% of the first 1% of an employee’s contribution plus 50% on the next 5% for a maximum of 3.5% of pay on the first 6%. Alternatively, you can make a non-elective contribution of at least 3% of compensation to all eligible non-highly compensated employees. 

Are there any hidden 401(k) fees that can drive up costs?

In addition to these standard fees behind your 401(k) cost, there may be some surprise expenses that you’ll want to watch out for. These could include costs for services like:

• Terminating the plan
• Rolling over funds from a previous provider or to a new one
• Changing your plan design, which requires a plan amendment
• Integrating your 401(k) with your payroll platform
• Loan and withdrawal administration

When choosing a 401(k) provider , just be sure to carefully check your quote or fee schedule so you know what you’re being charged.

How can I lower my 401(k) cost as an employer?

While all TPAs will charge you for the set up and administration of your plan, it’s worth shopping around because 401(k) fees can vary by provider. If you’re looking to bring down your 401(k) cost, another way you can save is through plan design. For example, you’ll be charged less in administration fees if you have a safe harbor plan since the TPA doesn’t have to worry about compliance testing because your plan will be exempt from the requirement. 

Boost Your Employee Benefits By Offering a 401(k) Plan 

Since a 401(k) is one of the top benefits employees want, it may be time to offer one at your workplace. However, when evaluating the 401(k) cost your business would incur, it’s understandable to be worried. 

To help you compare 401(k) fees and find the right TPA that can help you successfully launch a plan for your business, you’ll want to review the best third-party administrators in the Northeast . If you think that Complete Payroll Solutions might be a good choice for your company, learn more about CPS’ 401(k) offerings .

This blog was originally published in May of 2022 and was updated in June of 2023 for accuracy and comprehensiveness. 

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How Much Does a 401(k) Plan Cost Employers?

Cost is (and should be) one of the key considerations when setting up a 401(k) plan . We've helped a lot of companies set up a new 401(k) plan for the first time. Most companies that are ready for a 401(k) plan (5-15 employees) should expect to pay somewhere from $2,000 - $4,500 in total annual fees. But there are some very generous annual tax credits that can knock this down to $800 - $1,400 per year for the first three years.

If you're a company that has a 401(k) and is looking to add an advisor and/or switch recordkeepers, we often find that not only can we offer better, mission-aligned portfolios for your employees, but we often can link you with a recordkeeper that can save you and your team on fees. Learn how much we can save your company every year in fees.

A Breakdown of 401(k) Costs

Pricing varies between 401(k) investment advisors and recordkeepers. The graphic below illustrates the cost of a 401(k) plan with Carbon Collective as your 401(k) investment advisor, and what you can expect to pay in fees to a recordkeeper.

Not sure what the difference between an investment advisor and a recordkeeper is? Let’s break it down.

Investment Advisor: Builds and maintains the plan, manages the portfolios, and helps navigate compliance. As your investment advisor, Carbon Collective can also help you evaluate recordkeepers and select one that will work best with your plan and payroll system. Learn more about how our 401(k) payroll integration works. We generally charge $100/month if the plan is below $500k in assets under management (AUM – the cumulative amount of all of the participants’ holdings). Once it’s above $500k, we switch to charging 0.25% of AUM, which is our standard management fee.

Recordkeeper: Their primary role is to keep track of the money in the plan — who is participating in the plan, what each participant owns, and what money is coming in or out. They handle other parts as well, including sending out account statements and they own the portal employees log in to review balances and make adjustments. The recordkeeper will generally charge you three monthly fees: 

• Recordkeeping Fee: This is a fee billed to the company for administering the plan. We've seen this fee range from $90 - $360 per month depending on the size of company and complexity of the plan. 
• Participant Fee: This is a fee billed per participant in the plan (not every employee may choose to participate). It usually can be billed to the company or deducted from the participant's holdings. We've seen this fee range from $5 - $14 per month. 
• Onboarding Fee:  All of the recordkeepers we've worked with charge a one-time onboarding fee. We've seen it range from $500 - $1,000. 

How Much Are Employees Charged?

In addition to the fees that the company pays, it’s important to be aware of the fees that the employees investing in the plan are paying. Many plans allow the employer to pass the employee—or ‘participant’— fee (cost of managing the plan, typically $5-$14 per month) on to the employees. 

The second cost to employees is the expense ratios of the portfolios and funds available to them in their 401(k). Every fund you invest in has some kind of expense ratio. The company offering the fund or portfolio uses this expense for administrative, marketing, and portfolio management costs.

As an investor, the lower the expense ratio, the better! The average expense ratio for most 401(k) plans is still really high – 1% ( Investopedia ). There is no historical relationship between fees and performance. So if you want a general rule, lower is better. As a fiduciary, we work hard to keep our (Carbon Collective’s) average 401(k) portfolio expense ratio down around 0.15%.

How Tax Credits Can Potentially Save Your Company Thousands

Whenever researching the cost of a 401(k) plan for employers, it’s important to factor in potential savings from tax credits. These savings can add up to thousands of dollars in the first few years of starting a plan.

Most of these tax credits can be applied towards necessary expenses such as educating employees about the plan and costs to set up and administer the plan (for instance, any set up fees charged by the recordkeeper). We are not tax professionals. It is always recommended to refer to the most recent guidance from the IRS on eligibility and details on tax credits. To confirm whether your company is eligible for a tax credit, please contact a tax professional.

Case Study: Climate Tech Startup Setting Up a Plan for the First Time

Here is an example of a client we helped serve. Note that these prices are subject to change. 

In this example, a climate tech startup is setting up a brand new 401(k) plan. They’re looking for a plan that gives their employees the option to invest in sustainable portfolios. You will most likely want to speak to a tax professional to confirm if your company would qualify for the potential tax credits, but this breakdown gives you a sense of what different fees make up the cost of providing a 401(k).

Case Study: Sustainable Company Wants Mission-Aligned Portfolios for an Existing 401(k) Plan

In this example, a small company with 20 employees has $1 million in their plan, and is paying $483 per month or $5,796 per year to offer their employees a 401(k) plan. Again, talk to a tax professional to confirm which potential tax credits your company will qualify for.

This is the short summary on how much a 401(k) plan costs employers. Book a call with us to dig deeper into the numbers.

Learn how much a 401(k) plan will cost your  business.

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Fidelity Advantage 401(k)℠

Pricing overview.

Our straightforward, low-cost pricing structure lets you participate in Fidelity Advantage 401(k) with no surprises, and you may also be eligible for new tax credits. Use our calculator to estimate your costs .

Transparent fee structure

With only 4 total fees paid by the employer and employee, you can know up front what to expect when it comes to cost. We set this pricing structure to keep it simple and the funds in the lineup do not charge management fees or, with limited exceptions, fund expenses. Employees can choose to enroll and decide how much they want to save for retirement based on their financial situation.

Paid by employer

• $500   one-time for activation
• $300   per quarter for administration

Paid by employee

• $25   per quarter for recordkeeping
• 0.125%   on account balance per quarter for investment service

Learn how affordable a 401(k) plan can be

Use the calculator to estimate plan costs and potential tax savings for your business.

Starting a new 401(k)? You may be eligible to receive up to $5,000 in tax credits per year for your small business over the first three years.¹

Pricing is specific to employers starting a 401(k) for the first time.

Please provide the average employee salary of those eligible to participate. This will help us calculate the estimated employer matching contribution.

What percentage do you anticipate your employees contributing from their paycheck each month? (You can adjust this number and re-calculate to see different employee matching contributions.)

The Fidelity Advantage 401(k) plan uses a mandatory Safe Harbor match. Safe Harbor match is intended to avoid mandatory non discrimination testing. Employees are required to contribute to their 401(k) in order to get the match.

100% of the first 3% and 50% of the next 2% of each employee’s annual compensation contributed to the plan.

Ready to participate?

Tell us a bit about your business, and we'll reach out with more information about joining Fidelity Advantage 401(k).

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Learn more about Fidelity Advantage 401(k).

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Or, continue learning  about offering a 401(k).

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1. The maximum annual credit is the greater of $500 or $250 per eligible non-highly compensated employee up to $5,000. The credit cannot exceed 50% of qualified startup costs paid or incurred during a tax year for businesses with between 51 and 100 employees. For businesses with up to 50 employees, the credit may not exceed 100% of qualified startup costs paid or incurred during a tax year. Estimated based off the number of employees above and assumes two highly compensated employees (defined as having annual gross salaries over $150,000). The employer may benefit from additional tax deductions on fees and matching employer contributions, and may be eligible for additional tax credits for five years of up to $1,000 per employee equal to the applicable percentage of eligible employer contributions to an eligible employer plan. Certain other restrictions apply with respect to these additional tax credits. Please consult your tax or legal advisor for more information.

All employees are considered eligible for the purposes of this illustration. All Employees of the Employer age 18 or over are eligible to participate in this 401(k), includes: full time, part-time, seasonal, long-term part-time, leased Employees. Excludes the following: Non-resident aliens; Employees of FMR, LLC, the Plan Administrator and their affiliates; U.S. citizens working outside of the United States who do not receive any earned income from the Employer which constitutes U.S. source income; Resident aliens that are subject to foreign taxation.

2. Safe Harbor matching contributions made by employer are generally tax deductible as long as they don't exceed any limitations under the Internal Revenue Code. Please consult your tax or legal advisor for further information.

Safe Harbor Employer Match calculated for all employees in the plan, assuming all Employees are contributing 5% or more to receive the full 4% Employer match.

The number of employees, owners, and salaries are considered constant for the purposes of this illustration. Owners and employees with annual salaries over $135,000 are used to estimate the number of non-highly compensated employees in the company.

This illustration is for informational purposes only. It does not take into account an entity’s specific circumstances. Accordingly, it is not intended to provide, does not provide and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before determining any tax filing position.

For plan sponsor and investment professional use only.

Fidelity Advantage 401(k) is a service mark of FMR LLC.

Some products and services described on this website are not available to employees outside the U.S.

Third party trademarks and service marks appearing herein are property of their respective owners.

Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.

Fidelity Stock Plan Services, LLC provides recordkeeping and/or administrative services to your company’s equity compensation plan, in addition to any services provided directly to the plan by your company or its service providers.

The Student Debt Program and Fidelity Workplace Consulting are not products or services of Fidelity Brokerage Services.

Fidelity ® Personalized Planning & Advice at Work is a service of Fidelity Personal and Workplace Advisors LLC and Strategic Advisers LLC. Both are registered investment advisers and Fidelity Investments ® companies and may be referred to as “Fidelity,” “we,” or “our” within. For more information, refer to the FPPA Terms and Conditions. When used herein, FPPA refers exclusively to Fidelity Personalized Planning & Advice at Work. This service provides advisory services for a fee .

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How Much Does a 401(k) Cost a Small Business?

Want to start a 401(k) for your small business, but worried about the cost? Ubiquity offers simple, affordable retirement solutions designed to meet your needs and your budget. 

Cut through the complexity of choosing and customizing the right retirement plan for your small business. You'll be ready to go in just a few clicks.

In the past, 401(k) plans were designed and priced for large corporations. However, given the fact that 99.9% of businesses in America have 500 or fewer employees, providers like Ubiquity now offer low-cost, easily-administered solutions geared toward small businesses looking to start their first plans.

Whether you’re a solopreneur or you have 100 employees, your business is the right size for a 401(k) plan!

As a 401(k) provider for small business Ubiquity is here to help you:

• Get the right-priced 401(k) for your business.
• Understand retirement price structures.
• Learn to uncover sneaky hidden fees that are all too common in the industry.

You deserve a fair-priced small-business 401(k) plan that provides complete transparency on exactly what you’re paying for and why. You don’t necessarily have to match what your employees put in, but there are flexible options and tax savings if you do. No matter what retirement savings plan you choose, offering 401(k) benefits attracts better, long-term employees who feel valued and vested in your company.

Small Business 401(k) Cost: Types of Fees

Financial institutions have a reputation of hiding the true cost of retirement plans. To fully understand what you’re being charged for on your plan statement or the cost of a potential new plan, it’s important to understand all of the different types of fees you can be charged

1. Assets Under Management Fees (AUM)

Most 401(k) providers charge asset-based fees on total account balances for the management of the portfolio, investment advice, investment fees, and custodian compensation.

The problem with AUM fees is that the more your portfolio grows, the more money you pay to the provider, and the less your employees get to keep for their retirement.

Let’s say you have a 1.5% AUM fee. That’s $1.50 you pay to the provider per every $100 in your 401(k) account. If you have invested more than $500,000, you’d be paying $5,000 (with a 1% AUM fee) to $7,500 (with a 1.5% AUM fee). You may also be charged a fee by your provider if your plan fails to reach certain asset levels.

2. Flat Fees

Flat fees are among the most transparent in the industry, as you are charged a fixed rate – either monthly, quarterly, or annually. The dollar amount never changes, no matter the size of your account or the success of your investments. These fees can vary widely, depending on your plan provider, and are typically paired in tandem with per-person fees.

Ubiquity’s flat-fee 401(k) plans for small businesses range from $19 to $257 per month, based on the level of service you provide and whether you are a sole proprietor or a small business owner with employees.

3. Per-Person Fees

Many flat fee providers also charge per-person fees — also known as per-participant or per-head fees – based on how many people are enrolled in the plan. These charges are meant to cover the provider’s administrative and recordkeeping expenses under the justification that it costs them more to manage portfolios for 1,000 employees versus 100. Beware of providers who charge low all-in fees, but sneak in higher per-participant fees. At Ubiquity, we do not charge additional per participant fees.

4. Transaction or Individual Service Fees

Transaction fees may be charged in tandem with asset-based fees or flat-fee structures. Triggers for transaction fees may include changing a fund line up, withdrawing a loan, taking a distribution, or using premium investment advisory services. Frequent or high-cost transaction fees can be a major drain on your savings.

Tips for Comparing 401(k) for Small Business Costs

A 401(k) for small business owners is not the same as a 401(k) for a sprawling multi-national corporation.

If you currently have a 401(k), review your provider’s 408 2(b) fee disclosure.

Since July 2012, the Department of Labor has required plan providers to provide notice of all fees and services provided. Benchmarking to compare competitor fees is the best way to ensure fairness. Review proposals from multiple providers, identifying the compensation paid to each, including indirect compensation paid for with plan investments. Evaluate the experience of each provider to determine if there are any conflicts of interest.

Enter data into the Department of Labor’s 401(k) fee disclosure worksheet to compare.

If this is your first plan, look at the fund lineup expense ratios, setup, and administration costs.

For many plans, the 401(k) expense ratios are way too high. The expense ratio refers to the percentage of retirement fund assets that plan participants pay for their investments. This percentage-based charge includes the cost of administering the plan, operating fees, recordkeeping, management, investment fees, and marketing expenses.

Compare and model out beyond the current year to see the impact of costs over time.

The 401(k) Book of Averages found that employees at a 10-person small business could pay anywhere from 0.25 to 1.92 percent, with the average being 1.34 percent. Hearing that you’re paying a 1.34% expense ratio may not trigger a panic, but learning you’ll have half a million less in retirement savings is certainly a cause for concern.

Assess the compounding effect of any fees or high costs on your employees’ retirement savings.

Much of the total expense ratio derives from the type of funds selected by the plan sponsor or advisor. Actively-managed funds have significantly higher fees than passively-managed funds. Mutual fund share classes may carry additional 12b-1 fees that drive up costs. There is no reason why you can’t replace high-cost actively managed funds with high-quality passive index funds.

Remove any mutual funds that charge the infamous 12b1 marketing fees to put 0.25 to 0.75 percent more money in your pocket. Fund options are always changing, so it’s wise to shop around and re-evaluate your performance one to four times a year.

© 2023 Ubiquity Retirement + Savings Privacy Policy 44 Montgomery Street, Suite 300 San Francisco, CA 94104 Client Support: email us at [email protected]

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

A t 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.

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Work at a small employer? You likely pay high 401(k) fees

• The smallest 401(k) plans charge fees of 0.88% a year, while the largest charge 0.41%, according to Morningstar research.
• Those fees are levied annually as a percentage of a worker's total savings. The extra costs can amount to a lot of money.

Workers who save in a 401(k) plan offered by a small business pay fees that are twice as high as those paid by employees who work at the largest companies in the U.S.

The smallest workplace retirement plans (those with less than $25 million in aggregate savings) charge total fees of 0.88% a year, while the largest (those with more than $500 million) charge 0.41% annually, according to a Morningstar Center for Retirement and Policy Studies report .

Workers pay these 401(k) fees annually to financial firms like investment managers and plan administrators. The fees are automatically withdrawn from workers' accounts as a percentage of their total savings.

"The U.S. [retirement] system does not work nearly as well for people who are not fortunate enough to work for larger, established employers," said the study's authors, Aron Szapiro, head of retirement studies and public policy, and Lia Mitchell, senior policy research analyst.

The study looks at median fees (those right in the middle of a group) in 2019, the most recent year of complete federal data. Many plans within size groups carry fees both lower and higher than the median.

More than 30% of the smallest plans have total costs exceeding 1% a year, according to Morningstar.

The difference between small and large plans can amount to a lot of money over decades of saving for retirement.

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"Workers at employers with smaller plans who are saving just as much as those at employers with larger plans could have around 10% less in assets at retirement because of higher fees," Szapiro said .

Employers with so-called "mega" plans can negotiate much lower fees from investment managers and other service providers than businesses with small 401(k) plans. They've also been more likely to adopt investments other than mutual funds that tend to be lower-cost.

There are just 2,115 employers offering so-called "mega" plans (those with more than $500 million). But their plans account for a big portion (43%) of all 401(k) investors, according to Morningstar.

Meanwhile, there are 649,000 small plans (with less than $25 million), but they account for 27% of all 401(k) savers, Morningstar found.

(The remaining savers fall somewhere in the middle of small and mega plans.)

While many workers have access to a low-cost 401(k) plan at work, the data speaks to a fragmented system that relies heavily on the largest businesses to succeed.

"The jobs of the future may not be with employers who offer these savings opportunities," according to Szapiro and Mitchell. "Moreover, this concentration underscores that policymakers must maintain incentives that these large employers find attractive."

(Possibly) The Biggest Small Business 401(k) Fee Study Ever!

January 25, 2023

Meaningful 401k fee data is hard to come by – and that’s a big problem for small businesses. Sponsors of small business 401k plans have a fiduciary responsibility to keep 401k fees reasonable for plan participants. When this responsibility is not met, the consequences for 401k fiduciaries can be severe - including personal liability.

Required publicly available filings – most notably the Form 5500 – provide only snippets of fee data. And 401k providers are of little help as few disclose fees online or in published documents. Even worse, plan fees are often a tangle of 'direct' fees from employees and sponsors and 'indirect' fees that come from certain investment providers. Following the money is a difficult job even for those plan sponsors willing to invest the time and energy to do so.

To help small businesses understand their 401k fees, Employee Fiduciary launched a no-cost 401k fee comparison service about 2 years ago. When this service is requested, we provide a report that totals all of the compensation a 401k pays plan service providers and fund companies into a single 'all-in' fee . This report is based on the following information, which is supplied by the 401k fiduciary:

• ERISA 408b-2 fee disclosure
• Current fund-line-up with balances
• Participant count

Since launching the service, we’ve accumulated a large database of 401k fees. Below is a summary of the fees we found for 121 401k plans with less than $2M in assets. 401k fiduciaries can use this study to help evaluate their plan fees for reasonableness.

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Fee summary.

(1) Provider Fees - include all direct and indirect compensation received by the various parties servicing the plan.

(2) Net Investment Fees - include only the portion of the investment expenses retained by the investment manager, presented net of fees paid to other providers.

Key findings

We made the following observations during our study:

• Generally, brand name insurance and payroll company 401k providers are the expensive, while lesser-known, 'open architecture' providers are the least expensive.
• The lower the asset-based fees a provider charges, the better! Fixed rate asset-based fees can explode plan expenses as assets grow.
• Nearly all of the insurance company 401k plans use variable annuities in their fund line-up. Variable annuities are basically mutual funds wrapped in a thin layer of insurance with additional fees and redemption restrictions. A 'wrap' fee can be 1% or more, turning low cost mutual funds into costly variable annuities.

Employee Fiduciary fee comparison

In a 2014 presentation , Yale professor Ian Ayres cited Employee Fiduciary fees , paired with low-cost Vanguard funds, as a benchmark for low cost small business 401k plans. So how does Employee Fiduciary stack up against the providers studied?

*Assumes a typical Vanguard fund lineup with an average investment expense of 0.1537% annually.

The lesson – it pays to shop!

Look, I get it. Shopping for a 401k plan is not going to make anybody’s list of fun things to do – most 401k fiduciaries just want to get this chore off their plate. It can be very easy to do that by buying a 401k plan from a provider you see on TV or giving into a salesperson sent by your company’s payroll provider.

Don’t do it! It’s worth your time to shop around. As our study shows, the fees for small business 401k plans can vary dramatically and the consequences for buying an over-priced 401k plan are great – participants must work longer to meet their retirement savings goal while fiduciaries risk personal liability.

The simple 401(k) plan for small businesses

Our 401(k) plan solution makes plan design easier for you and retirement savings more accessible for your clients.

Simply Retirement by Principal ® is a 401(k) plan solution that’s designed specifically for small businesses with fewer than 100 employees. This streamlined product includes the features your clients need without extra complexity they don’t. It’s a simple, affordable option for business owners looking for an easy way to help their employees save for retirement.

Tax credits are available for small businesses just starting a new retirement plan.

New SECURE 2.0 Act legislation could help offset some of your plan start-up costs.

The SECURE 2.0 Act allows small businesses with no more than 50 employees to claim a tax credit of 100% of the qualifying start-up costs for a new employee retirement plan ( up to $5,000 per tax year for the first three years * ). SECURE Act of 2019 allows a tax credit of 50% of the qualifying start-up costs for a new employee retirement plan for 3 years if the employer has 51-100 employees (maximum $5,000 a year).

There’s also an extra tax credit for 5 years of up to $1,000 per employee a year for employer contributions made if employers have no more than 50 employees. For employers with more than 51-100 employees, the credit is reduced by 2% for each employee in excess of 50. Under SECURE of 2019, an employer may also be eligible to claim up to $500 tax credit for including an eligible automatic contribution arrangement, which is an optional feature of the Simply Retirement by Principal ® 401(k) plan. Plus, matching contributions you make to employee retirement accounts as noted above can be tax-deductible. For example, a company with 25 employees can see the 2022 plan start-up fee change from $2,200 per year to potentially offset the expenses by 100% with tax credits. See your tax advisor for guidance on how these credits may apply.

Simply Retirement by Principal ® 401(k) plan features

Features for business owners

Features for participating employees

Investments we offer

Financial professional and third party administrator (TPA) compensation

Automatic employee enrollment. Business owners have the option for employees to be automatically enrolled at a default pre-tax contribution percentage (set by the business owner). Employees must be 21 years of age or older to be eligible for the plan. If the automatic enrollment option is selected, once the employee meets the plan's age and service requirements, they will be automatically enrolled at a default pre-tax contribution percentage set by the business owner and begin making contributions to the plan immediately.* Participants can change their deferral or opt out at any time. They’ll also have contributions directed to the plan’s qualified default investment alternative (QDIA) unless they elect otherwise. If the business owner is working with a TPA, other eligibility, automatic enrollment, and vesting options may apply.

*Regardless of whether they meet the plan's age and service requirements, union employees, nonresident aliens, and independent contractors aren't allowed in the plan.

Optional automatic contribution increases. Business owners can choose to have their employees' contributions remain fixed unless they change them, or auto-escalate 1% each year up to 10%.

Profit-sharing flexibility. Business owners have the option to contribute company profits back to employees’ 401(k) plan accounts.

Payroll provider integrations. Business owners can save time and reduce errors by automating contribution reporting from their payroll provider system directly into Simply Retirement by Principal ® .

Protection through an ERISA fidelity bond. Business owners will get an ERISA fidelity bond to protect the plan's assets (up to $250,000 in assets, which equals a $25,000 bond).

Easy-to-use online platform for plan administration. Business owners will manage their plan using the intuitive Ubiquity Retirement + Savings ® platform.

Automated signup and onboarding. Employees will receive an email from Ubiquity as soon as they’re eligible with instructions to set up a login to their plan account.

Recordkeeping. Services include tracking which employees are participating, the amount they’ve invested, and the amount invested in each of the plan funds.

Compliance testing. Ubiquity's team of compliance experts performs annual plan compliance nondiscrimination testing.

Filing and reporting. We help business owners stay on top of required documentation—like IRS Form 5500, plan document preparation and filing, participant disclosures, QDIA, and annual plan notifications.

Dedicated phone number. There's a team of people just a phone call away if you or your clients have a question.

Owner participation. This isn’t just a benefit for employees; qualifying business owners can also participate and maximize their retirement savings with any available matching contributions.

Preset investment options. Participants can pick from a carefully selected lineup of investment options. Wilshire Advisors LLC is the 3(38) plan fiduciary. See investments we offer.

Vesting schedule flexibility. Business owners can choose to have their employees 100% vested in the 401(k) plan immediately or on a 6-year graded vesting schedule.

Roth contributions. Participants can choose to make both pre-tax and Roth (after-tax) contributions to their 401(k) plan from their dashboard once they set up their online account. Auto-enrollment contributions are only pre-tax contributions.

Loans. Participants can request to take a loan from their 401(k) plan balance and select a loan repayment schedule that best suits them. Only one loan may be outstanding at a time. Loan repayments are made via after-tax payroll deductions. The interest portion of the loan payment is applied to the participant's account.

Rollovers. Participants can roll over eligible accounts into their 401(k) plan. (Rollover contributions can be distributed at any time.)

Financial wellness. Participants will have access to a comprehensive financial wellness platform that provides tools and resources to employees to better manage their current and future financial well-being.

Hardship withdrawals. Business owners can also choose to have the plan allow for hardship withdrawals.

Wilshire Advisors LLC is the 3(38) investment fiduciary. They have an exceptional track record in selecting high-performing investment options.

Wilshire Advisors LLC will provide objective, independent third-party oversight for the screening, selection, and monitoring of the investment options for Simply Retirement by Principal ® and will have discretion for making changes when they deem appropriate. Wilshire Advisors LLC is a diversified global financial services firm with 40-plus years of experience providing investment guidance to some of the largest plan sponsors in the U.S. The firm’s core strength is in the use of market-tested manager research techniques that have been refined over four decades serving the institutional and pension consulting marketplace.

Financial professionals can select one of the available Wilshire 3(38) investment lineups for each plan. Participating employees have the option to choose their mix of investments from the preselected investment lineup.

When you create a proposal online, you'll be asked to set a billing preference for your compensation. You can bill your fee directly to your client, or you can choose to be compensated from plan assets.

Simply Retirement by Principal ® offers investments made available through a group annuity contract. If you or your firm are compensated from plan assets, you can choose a flat fee (not to exceed 50bp annually), or 25, 50 or 75 basis points annually based on assets under management. Group annuity contracts are treated as an insurance product and require appropriate insurance licensing and/or security registration to receive compensation. Our credential validation process will determine if you meet the appropriate criteria. If additional information is required, we will work with you to ensure the appropriate requirements (differentiated by state) are met.

How does this 401(k) plan compare to other types of retirement plans?

When it comes to workplace retirement plans, we know a 401(k) plan isn’t your clients’ only option. Feel free to use this high-level comparison to walk them through their choices as you discuss what type of plan might best fit their needs.

401(k) plans allow employees to set aside a portion of their compensation and also allow business owners to make contributions to the employee’s retirement plan if they choose. Loans can be allowed, providing flexibility for employees. Normally, a 401(k) is designed to help employees save for their retirement where they won't pay taxes until they withdraw the money in retirement. Roth contributions, however, are another option that allows employees to pay taxes before contributing to their retirement so they don't have to pay taxes when they withdraw the money as long as distribution requirements are met.

A 403(b) plan is like a 401(k) plan; however, 403(b) plans are used by tax-exempt businesses, religious organizations, school districts, and governmental organizations. The law allows these organizations to be exempt from certain administrative processes that apply to 401(k) plans.

A Simplified Employee Pension (SEP) Individual Retirement Account (IRA) allows self-employed individuals or small business owners to save toward retirement. Business owners who have employees are required to contribute on the employee’s behalf. Roth contributions (after-tax contributions that grow tax-free) and participant loans are not available.

A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a simpler version of a 401(k) plan that works like a traditional IRA (Individual Retirement Account). Business owners are required to contribute to the plan, regardless of the employee participation and participant loans are not available. Roth contributions, however, are another option that allows employees to pay taxes before contributing to their retirement so they don't have to pay taxes when they withdraw the money.

A defined benefit (or pension) plan is a form of retirement plan in which the business owner sets aside money for their employee while they are working to provide them with guaranteed monthly income in retirement. Money will then be paid out to the employee, usually on a monthly basis, after they have retired. Employees cannot contribute additional money. A formula is used to determine how much the business owner will contribute to a pension plan.

A 403(b) plan is only available to:

• Employees of tax-exempt organizations established under section 501(c)(3)
• Employees of public school systems who are involved in the day-to-day operations of a school
• Employees of cooperative hospital service organizations
• Civilian faculty and staff of the Uniformed Services University of the Health Sciences
• Employees of public school systems organized by Indian tribal governments
• Certain ministers (see irs.gov for criteria)

This allows employees to defer paying income taxes until they start to withdraw the money in retirement. This also lowers their taxable income for their current payroll.

This allows employees to pay income taxes now and not when they start to withdraw the money in retirement as long as distribution requirements are met. This could be beneficial if your employee expects to have a higher monthly income during retirement.

There is a minimum amount that your business would be required to contribute to your employees’ retirement.

Safe harbor is just a type of 401(k) plan that allows you to bypass some of the compliance testing required by the IRS to make sure the plan is fair. In return, you’re required to help your employees save for retirement by making matching contributions to their 401(k) accounts. With safe harbor, you’ll contribute more money, but there’s less paperwork and administrative hassle. With a non-safe harbor plan, you have the option to contribute less, but you can’t bypass compliance testing required by the IRS. For more details, check out our safe harbor resource page .

* Eligible employees must be notified prior to plan start date.

A loan provides the ability to withdraw funds from your retirement account early but it will need to be paid back based on plan terms. Money is taxed again when withdrawn in retirement, so those who take out a loan are subjecting themselves to double taxation.

A hardship withdrawal is an emergency withdrawal of funds from a retirement plan due to what the IRS calls “an immediate and heavy financial need.” There are certain criteria for why the funds are needed and their amount in order to avoid penalty, but, even if penalties are waived, the withdrawal will still be subject to standard income tax.

A vesting schedule is the time frame it takes for employees to own the assets that a business owner contributes to the employee's retirement plan. This is determined by the business owner and may be used as a retainment incentive.

Automatic enrollment is a plan provision which automatically enrolls participants into the retirement plan at a specified pre-tax salary deferral percentage. This can help increase participation, simplify administration, and help employees save for retirement. Participants in the Simply Retirement by Principal ® 401(k) plan are automatically enrolled, but can change their contribution details or opt out at any time.

A rollover is when you transfer the money in your retirement account to a new plan or IRA. The IRS gives you 60 days from the date you receive an IRA or retirement plan distribution to roll it over to another plan or IRA. You’re allowed only one rollover per 12-month period from the same IRA. This one-rollover-per-IRA limit doesn’t apply to plan-to-plan rollovers and some other types of rollovers.

Any acceptable investment under the plan

Only mutual funds and annuities

Individual stocks, bonds, mutual funds, ETFs, and others

1 If client is working with a TPA, eligibility, automatic enrollment and vesting options may vary.

Please contact our financial professional support team at 800-952-3343 or [email protected] to discuss other retirement plan options.

Ready to get started?

Create a proposal

Intended for financial professional and TPA use.

*Up to $5,000 per tax year for the first three years: 1) $500 or (2) the lesser of (a) $250 for each non-highly compensated employee who is eligible to participate in the plan or (b) $5,000. Qualified startup costs (1) In general “qualified startup costs” is ordinary and necessary expenses of an eligible employer which are paid or incurred in connection with -- (i) the establishment or administration of an eligible employer plan, or (ii) the retirement-related education of employees with respect to such plan. (2) Plan must have at least 1 participant: would not apply if plan does not have at least 1 employee eligible to participate who is not a highly compensated employee. Information about the SECURE 2.0 Act is educational only and provided with the understanding that Principal ® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

*Automatic enrollment: Automatic enrollment is a plan provision which automatically enrolls participants into the retirement plan at a specified pre-tax salary deferral percentage. This can help increase participation, simplify administration, and help employees save for retirement. Participants in the Simply Retirement by Principal ® 401(k) plan are automatically enrolled, but can change their contribution details or opt out at any time. This credit is for plans that include the eligible automatic contribution arrangement (EACA) feature only.

*22,500: Up to $30,000 for employees age 50 or older. Amounts are for the 2023 tax year.

*22,500: Up to $30,000 for employees age 50 or older. An employee of a “qualified organization” with 15 years of service may be eligible to contribute an additional $3,000. Amounts are for the 2023 tax year.

*15,500: Up to $19,000 for employees age 50 or older; can’t exceed 100% of compensation. Amounts are for the 2023 tax year

Start-up tax credit modification: Small employers with 50 or fewer employees may apply 100% of qualified start-up costs towards the tax credit formula (up to $5,000 per year).

• Applicable to small employers with 50 or fewer employees.
• For employees with 51-100 employees: The credit is phased out by reducing the amount of credit each year 2% for each employee in excess of 50.

1st and 2nd year = 100%, 3rd year = 75%, 4th year = 50%, 5th year = 25%, 6th year = 0%

No contributions may be counted for employees with wages in excess of $100,000 (inflation adjusted). If taking advantage of this tax credit, employer contributions may not also be counted towards “start-up costs” in the start-up tax credit calculation.

*Eligible automatic contribution arrangement: The SECURE Act of 2019 provided an automatic enrollment one-time tax credit possible to be up to $500 per tax year for each year of the 3-taxable-year period beginning with the first taxable year for which the employer includes an eligible automatic contribution arrangement. This credit is for plans that include the eligible automatic contribution arrangement (EACA) feature only. Information about the SECURE Acts is educational only and provided with the understanding that Principal ® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other financial professionals on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

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