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Are you losing valuable company dollars to your 401(k) provider’s fees?

It’s hard to believe that nearly 55 million workers in the United States do not have access to an employer-based retirement savings plan. Many small businesses have strayed away from offering a 401(k) plan to their employees due to the misconception that they are very costly. This is a myth that must be debunked.

Complicated fee structures, as well as the vast array of plans available, make it difficult for businesses to identify specific costs for every 401(k) plan on the market. As a busy business owner, you likely do not have time to conduct thorough research into all of the hidden fees associated with implementing a 401(k) at your company. Don’t worry. We have you covered. This article will outline the various types of fees most 401(k) providers charge for servicing, as well as provide you with suggestions to help you pick the best 401(k) provider for your business. Let’s get started.

What you should know about 401(k) provider fees

While there are costs associated with implementing a 401(k) plan at your company, your employees will be looking at what benefits you offer for their years of service. According to a recent study by the New York Times, only 1 in 4 small businesses offer 401(k) plans to their employees. This matters to you as a business owner, because providing your employees with a 401(k) can give you an advantage over your competitors who do not offer retirement savings plans, and can also help you to attract and retain top talent.

So how do you go about evaluating small business 401(k) providers? It starts with understanding the fees associated with each provider’s plan.

401(k) fees are typically divided into four categories:

401(k) Plan’s Per-Participant or Per-Person Fees
Most 401(k) providers charge fees based upon the number of eligible employees you have, or the number of participants enrolled in the plan. This fee can range from as little as $8 to over $1,000 per month per person, depending on the 401(k) provider. Most 401(k) providers focus on serving large businesses and are not priced to serve businesses with fewer than 50 employees, which results in higher costs for small businesses.

If you operate a small business, utilize the following as benchmarks to make sure you are receiving the lowest prices available when it comes to per-person fees.

  • 1 Employee: You should aim to pay less than $200 per year in per-person fees.
  • 2-10 Employees: You should aim to pay less than $1,000 per year.
  • 11-25 Employees: You should aim to pay less than $1,500 per year.
  • 26-50 Employees: You should aim to pay less than $2,300 per year.
  • 51-100 Employees: You should aim to pay less than $3,300 per year.

Asset-Based Fees
Asset-based fees are expenses based on the amount of assets in the plan. These fees are accessed based on a percentage of the assets in the employees’ accounts. Typically, the greater the assets in the plan, the lower the fees. Comparing a startup 401(k) with no assets or money within the plan, your business would pay a higher cost than a company who has $10 million or greater.

Flat-Rate Fees
Flat-rate fees are fixed charges that do not vary regardless of plan size. Examples include charges to start the plan, to convert from one provider to another, or to cover ongoing administration chargers to manage your accounts.

Transaction-Based Fees
These are fees charged for individual services. Transaction-based fees will vary depending on the provider you choose, so it’s important to understand what type of fees fall under this category before you choose a 401(k) provider.

In addition to these four main categories, you also need to be mindful of hidden fees such as:

  • Recordkeeping fees
  • Revenue sharing fees
  • Fees associated with the size a company
  • Investment management, consulting, or advisory service fees
  • ERISA bond fees
  • 401(k) compliance fees
  • IRS deadline fees
  • Investment advising fees
  • Payroll administration fees
  • Charges to answer employee questions

Not All 401(k) Providers Are Equal

A simple Google search for “Best 401(k) provider” will return millions of results, which can make finding the best 401(k) provider for your business a difficult task.

The most important thing to understand is that not all 401(k) providers are created equal.  As we discussed previously, 401(k) providers usually charge small businesses more than large corporations. While this may seem like unfair practice, unfortunately, it’s a reality. 

When you’re ready to speak with providers about your options, do not wait for the providers to tell you what you need to know. You need to be willing to ask the right questions. Some great questions to ask any provider include:

  1. What fees are charged as a percentage of employees’ savings?
    1. These type of fees could consist of administrative feeds, recordkeeping fees, investment management fees, and other fees related to distributions and loans.
  2. What expenses are paid by employees?
    1. This would include fees such as mutual fund expenses, 12(b)-1 fees, shareholder-servicing, and other investment management fees. Asking this question is crucial because you want to make sure you choose a provider that will maximize your employees’ contributions.
  3. What services are included in investment management fees?
    1. For instance, all 401(k) participants should be provided with fund selection services, model investment portfolios, investment guidance, brokerage services, automatic account rebalancing, and essential account services such as on-demand statements, and quarterly performance reports.
    2. 401(k) plans can be difficult to understand, so it’s important you pick a provider who is 100{bc669dfb3651bb8509a96034cbe7494d3a811fc0eedf0ddccb239fb9cb737439} transparent about fees. Providing a complete list of investment management fees will help your employees to avoid confusion and frustration.

Knowing the answers to these questions will help you evaluate provider options so that you can select the right partner for your business.

Some additional areas to consider include:

  • The provider’s ability to handle the amount of assets in your plan.
  • The number of employees who plan to participate in the 401(k) plan. Knowing this is important because providers usually charge more for services to small businesses.
  • Can the provider take over and optimize the administration of your 401(k) plans, or is there is a significant charge for this service? It’s important to pick a provider that doesn’t overcharge for administrative charges so your employees can get the best possible return.
  • Understand how your provider’s service level will change as your company’s plan assets and contribution amounts change.
  • Your Payroll Company May Not Be The Best Option
  • Many businesses small and large choose to enlist the services of their payroll company to administer their 401(k) plans. While this isn’t technically wrong, it may not be your best option.

 Payroll companies are great for saving time in certain aspects of business operations, but when it comes to the administration of retirement plans, it’s a good idea to seek alternative options.


Why do you ask?

The simple answer is because payroll 401(k) providers don’t have much to do with 401(k) plans. Their specialty lies in payroll and human resources. Hiring a company who does not specialize in 401(k) administration could hurt your employees and result in higher costs to your business.

This is important when it comes to reporting data at the end of each year and filing tax forms. A payroll company will not help you collect the necessary data, which could result in incurring fees for failing the all-important discrimination test. Most importantly, TPAs have an obligation to maximize retirement plan savings for your employees, which helps to ensure a better life in retirement for plan participants.

Here are some additional reasons you should consider not trusting a payroll company with your 401(k) plan. Along with the top 10 401(k) providers to consider.

Selecting The Right 401(k) Plan

Once you have chosen a 401(k) provider for your business, it’s time to select the type of plan you will offer. There are four main types of 401(k) plans. These include:

  • Solo 401(k) Plan: This type of 401(k) is created for self-employed business owners. A Solo 401(k) often provides higher contribution limits than other types of plans.
  • Traditional 401(k) Plans: This type of plan helps both employees and employers who are enrolled in the plan and contributing money to their accounts to defer taxes until the funds are withdrawn.
  • Roth 401(k) Plans: This plan is very similar to a traditional 401(k); however with a Roth 401(k), contributions that are put aside by an employee with after tax dollars and the employer with pre-tax dollars.
  • Safe Harbor 401(k) Plan: This type of 401(k) is very popular among businesses with many employees. This plan allows business owners to efficiently administer and maximize contributions to their accounts while reducing the limitations of IRS non-discrimination testing.

Final Thoughts

Finding the right 401(k) provider is of utmost importance to ensure that your employees get the maximum benefit from the plan. While there are costs associated with implementing a 401(k) plan at your business, the benefits of doing so far outweigh the price in the form of happy employees, employee retention, and talent acquisition. Before you choose a provider, it’s important to understand the fees you will be charged for implementation and administration of your accounts. You may be tempted to enlist the services of your payroll company; however, choosing to let your payroll company manage your employees’ 401k plans could be a huge mistake. To make sure your employees get the most out of your 401(k) plan, enlist the services of a TPA. Going with a TPA will result in fewer fees, lower cost, and overall better service. After all, if you are going to put forth the time, money, and effort into implementing a 401(k) plan at your company, you want to do it right.

Find out what your plan costs your company.