Where Do Small Business 401(k) Fees Hide?
Helping your team work toward that goal means offering retirement benefits. But as a small business leader, you likely can’t afford to set up a defined-benefit plan like a pension.
The alternative? A 401(k) plan. Although 401(k) plans have the same big-picture structure — a tax-advantaged investment account that your employees contribute to regularly — their details differ.
The Fine Print of 401(k) Plans
To make sure your 401(k) plan pays off, keep a particular eye on the following types of fees:
1. Base 401k Fees
A small business 401(k) plan is a service, and like most services, it comes with some costs at the beginning of service. This fee can vary from a couple of hundred dollars to a thousand dollars, depending on the plan you choose and the number of employees you plan to enroll.
Consider not just your company’s current size, but how greatly you plan to grow. If you think there’s a chance you might switch plans in a few years, going with a smaller upfront fee might make more sense. If you’re committed to your plan of choice for a number of years, though, a higher fee for more coverage or service might be a better fit.
The good news about the setup fee is that it’s a one-time expense. While you won’t have to worry about the cost again and again, you’ll still want to do your research and make sure you’re comfortable with the price.
2. Asset-Based 401k Fees
Many small business 401(k) providers will assess fees based on the company’s assets included in the plan. Asset fees cover custodial, record keeping, and administrative services.
The more assets in the plan, the more you’ll pay. You’ll be quoted a percentage by your 401(k) provider — typically between 0.2% and 5% — that you’ll owe each year on the invested assets.
Remember that even a fraction of a percentage point can equal hundreds or even thousands of dollars more in fees. Asset-based fees vary greatly from company to company, making this category a key one to check when shopping for plans.
3. Per-Participant 401k Fees
When getting 401(k) plan quotes, you’ll also be quoted for a per-participant (or per-person) fee. This is the amount you’ll pay for each employee who signs up for your plan.
It’s important to remember that this fee applies to each contribution period. For example, if your per-participant fee is $8 per month and there are 100 people enrolled in the 401(k) program you offer, you’d pay $800 in fees each month that you make 401(k) contributions.
These fees add up fast. If you’re a smaller company, you are likely better off paying a higher base fee and a lower per-participant one.
4. Miscellaneous Fees
As you sift through different 401(k) plan options, remember to look for and ask about hidden fees. These go under various names: administrative fees, compliance fees, level-load fees, and investment management fees are common.
When in doubt, look at the bottom line: the 401(k) expense ratio. This number is expressed as a proportion of the assets under management. If you’ve invested $100,000 in a fund with a 4% expense ratio, you’ll pay $4,000 per year in fees.
When in doubt, check with a trusted financial advisor. An independent advisor can tell you which fees are reasonable and which aren’t. If your preferred 401(k) provider won’t negotiate them, the advisor can point you toward similar plans.
5. Employee Fees
Although they don’t affect your company’s bottom line directly, the fees employees pay toward their 401(k) could in other ways.
Employees are less likely to use the plan when it costs them more money, making the benefit less valuable to your business. Workers who put retirement benefits above all others might even jump ship if they’re losing all their gains to these fees.
Most small business 401(k) plans charge employee fees around 1%. If you know retirement is on your team members’ minds, look for a provider with employee fees closer to the 0.1% mark. Across decades, the difference to your employees’ retirement account balances could be thousands of dollars.
As with most things in life, there’s no single best small business 401(k) plan. And given how complex 401(k) fee structures can be, choosing one can be a struggle by itself.
Remember that you have options. Do you research, ask the hard questions, and don’t be afraid to switch providers down the road. A robust 401(k) plan is a good way to attract top talent, but a cost-effective one is even more important — to your bottom line and that of your team members — in the long run.