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How much does a 401k cost an employer?

A 401k is a necessary consideration for all employers. Offering benefits that go beyond health insurance can help you find and retain the best possible talent. Those with years of experience will demand top-notch benefits from their current and future employers. In fact, a 401k can make or break a job applicant’s decision.

401k plans ensure that your employees prepare for retirement and can be an important recruitment and employee retention tool. You can use a guide to 401k to learn more about what a 401k is and how it can benefit your business and your employees.

If you’re like many businesses, you might be wondering how much a 401k will cost you. Keep reading to find out how much a 401k program might cost your business.

401k fees and costs

Before you start calling 401k retirement plan providers, it’s important that you understand the basic costs. While you might understand the need to retain employees through these benefits, jumping at the first available plan could end up costing you and your employees.

Learning about the fees associated with a 401k can help you prepare, giving you insight into the ways plan sponsors determine their costs. There are four basic costs of a 401k for employers. These include:

Initial investment fees

Most 401ks come with a one-time startup fee, which covers plan setup and employee education. Depending on the company chosen, the cost of these services can be as low as $500 to as high as a few thousand dollars. Don’t let these fees scare you away, though. There is a tax credit for these startup costs for small businesses that have less than 100 employees under the SECURE Act [2.0].

Administration fees

There are a lot of intricate pieces of the 401k puzzle. For this reason, many small businesses prefer to hire a third-party administrator (TPA) to maintain the plan. You can also hire an investment management company to assume fiduciary responsibility. Unfortunately, that means that you’ll have to cover their costs and management fees as well. These plan administration fees can include:

  • Informational materials for employee education
  • Statements
  • Annual nondiscrimination testing
  • Form 5500 completion
  • Loan and distribution approvals

Higher fees are associated with more complicated plans, typically those involving many employees. The more complicated the retirement plan, the higher the administration fees will be. There are different types of 401k plans, so you’ll need to have an understanding of the specific plan your business will offer.

Matching costs

Matching costs occur when an employer makes contributions that match the amount an employee puts into their retirement plan up to a certain percentage or amount as dictated by the total plan. As an employer, you don’t have to offer a company match. However, offering one can make your company more attractive to new and existing employees.

Additional costs

In addition to the basic standard annual fees of setting up a 401k, you might be surprised to know that there are additional service fees that you need to watch out for. These costs will be outlined in your contract and can include:

  • Terminating the 401k
  • Rolling over funds from one provider to a new one
  • Amending your plan
  • Integrating the plan with a payroll program

When you receive a quote for your retirement plan, make sure to check it along with the fee schedule so you know your total cost.

How to reduce your 401k costs

One major reason that many companies choose not to invest in 401k plans is because of the cost, especially if they’re small businesses. Yes, all 401k plans cost employers money, but there are ways that you can reduce your overall costs.

Review a variety of plans and compare

Most, if not all TPAs will charge you for a variety of tasks, including setup and administration. However, these fees differ depending on the company, which is why it’s always worth comparing shopping providers.

Do your research and choose at least three service providers you think would be a good fit for your company and its employees. Next, hop on the phone with providers to get a quote so that you can determine what their fees are. Make sure that you can give them as much information about your business as possible so that they can give you the most accurate pricing over the phone.

Understand all fees

It’s important that you understand the fees you’ll be paying and why you are paying them so that you can shop around and find the best quote. One provider may offer you a lower setup fee than another but charges hidden fees.

To understand the fee structures and schedules, request a Department of Labor (DOL) 401k Plan Fee Disclosure Form from potential plan providers. This form includes a list of all possible startup and administrative fees, along with termination fees and pricing terms.

Select low-cost investment options

Because there are many different types of 401k plans that employers can offer, it’s possible to find low-cost investment options that help you retain your valuable employees without spending too much on retirement plans.

The Vanguard 401k, for example, is a basic investment with optional administration services. This plan also offers low expense ratios with high returns. However, all retirement plans differ from one another, so you might find more savings by researching other plans.

Consider tax benefits

Again, 401k plans will cost your business money, but they’ll help you retain the most qualified employees. Other than offering employees a great reason to stay with your company, a 401k offers you tax benefits to offset your total costs.

  • Administration costs tax deduction

This deduction allows you to deduct some administrative costs as a business expense.

  • Retirement plans startup cost tax credit

Employers might be able to receive a $500 tax credit for the first three years of their retirement plan. This can help you cover setup and administration costs.

  • Employer contribution deduction

If you offer a company match or revenue sharing, employer contributions that fall below 25% of the employee’s annual compensation are exempt from federal, state, and payroll taxes, according to the IRS.

How 401k plans are priced

Between the complex fee structures and amount of plans to choose from, it’s difficult to identify the costs for every plan available. Types of fees and their costs can vary widely depending on the provider. Retirement plan costs are handled in a variety of ways, but they are typically divided into four categories.

  • Asset-based fees

These investment expenses are based on the number of total assets (account balance) in the plan. They are represented as percentages or basis points.

  • Transaction fees

Transaction fees are based on the execution of a plan service or a transaction.

  • Flat fees

Flat rate fees are fixed costs that don’t vary, regardless of the size of the plan.

  • Per participant fees

Per-person fees are expenses based on the number of plan participants in the plan. This number might also be based on the number of employees eligible for the retirement plan. Businesses with fewer eligible employees will have the option of smaller plans.

401k costs: Frequently asked questions

  • How much does a 401k cost a small business?

It’s difficult to determine how much a 401k can cost a small business without talking to multiple plan sponsors first. Fees vary widely depending on a number of factors. You can expect to have a startup fee to cover activities like setting up the plan and educating your employees.

  • What are average fees for 401ks?

401k plans cost between 1% to 2% of the plan’s assets (the money saved in the account). Many factors impact the total cost of the plan, from the provider you work with to the plan you choose. For lower fees, make sure you find the best available 401k provider.

  • Can owners of an LLC contribute to a 401k?

Yes, owners of an LLC can contribute to a 401k. They can also set up a simplified employee pension IRA retirement savings plan, which allows employers to contribute to an employee’s retirement plan. Rules regarding contributions vary on whether the LLC has employees or is a sole proprietorship.

If you are a self-employed member of an LLC, you can set up a 401k for yourself to get the advantages of solo 401k plans.

Final notes

Offering a 401k plan can help you find and retain the best employees for the job. Remember, the best and brightest are looking for employers who offer them the best benefits and show that they care about their employees. While you might think that investing in a 401k will cost you more money than you can afford, there are solutions to help you save money while you keep talent.

With so many costs and fees to consider, many employers question how they’re going to manage their costs once they determine what type of retirement plan they can afford. QuickBooks Payroll software not only manages the employee payroll but can integrate with small business 401k plans so that they’re easy to manage. You can also set up automatic contributions so that employees decide how much will come out of their paycheck every month.

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