When you’re evaluating how much an employee retirement plan costs, you need to consider two sets of prices: your costs to sponsor the plan and your employees’ costs to participate in it. These costs vary by type of plan and provider. There are also tax incentives associated with some of these plans, which can lower your overall expenditures.
Tax Advantages of Offering Employee Retirement Plans
The government offers tax incentives to small businesses that sponsor retirement plans for their employees. As you calculate what it would cost to sponsor an employee retirement plan for your business, consult your accountant or tax advisor to determine which tax credits and deductions you’re eligible for and how they would affect your tax strategy.
- Eligible employers can claim a tax credit of up to $5,000 for three years for the costs associated with starting a SEP IRA, SIMPLE IRA, or 401(k) plan. A tax credit reduces the taxes you owe on a dollar-for-dollar basis.
- Contributions you make to your employees’ plans are tax deductible.
- Contributing to and participating in a retirement plan may lower your income tax bracket.
401(k) Plan Costs
A 401(k) plan used to be rare for small employers to offer, given the costs and complexity of complying with federal regulations. You needed a plan administrator, custodian, recordkeeper and financial advisor. Each of these parties charge fees; some are fixed, while others are based on plan assets. Some companies offer multiple in-house services but charge extra for some of them. Sounds confusing? We think so too.
In our opinion, hiring multiple companies to handle different aspects of the same overall task is burdensome and expensive, so in our search for the best retirement companies, we looked for all-inclusive 401(k) providers that cater to small businesses. They handle all the duties of an administrator, recordkeeper, custodian, and advisor, so you only need to work with one company. They also act as an ERISA 3(38) fiduciary, which lowers your liability risks. Some of these companies use robo-advisors that rely on algorithms to manage assets, allowing them to forgo fund management or advisory fees, so you only pay the fund expense ratio. Most of these companies offer low-fee index funds, ETFs, target-date funds, and mutual funds to keep expense ratios down. Here’s an overview of the fees you can expect to pay.
- Setup or establishment fee: Most retirement plan companies charge around $500 to set up your plan, but some offer discounts or promotions that reduce or waive this fee. If you’re converting an existing plan, this fee is often higher.
- Monthly or annual administration fee: Most retirement services charge this fee, which can run the gamut from $50 to $130 per month, sometimes even higher. Some of the vendors we reviewed charge this fee quarterly.
- Monthly or annual cost per employee: This fee is sometimes included in the monthly administration fee. For those that charge it separately, the average price is around $6 per employee per month. Usually, the employer pays this fee, but sometimes the employee (plan participant) pays it.
- Investment, advisory, custodian or other asset-based fees: Most companies charge some sort of asset-based fee that the plan participant pays. It ranges from fund expense ratios that cost around 0.06% to 0.1% for index-based funds to advisory services that cost up to 0.75% annually. All told, the average investment fees for 401(k) plans are around 1.65%.
- Termination fee: Every provider charges this fee, which is usually around $1,000, if you terminate your plan (though a few companies charge less). Shutting down a plan and transferring assets is more involved on their end than setting up a plan.
- Nonstandard or event-based fees: If plan participants take out loans from their 401(k) plans or reach the age where they’re required to take minimum distributions, they’ll pay various related fees, such as loan origination and loan maintenance fees.
- ERISA bond (also called a fidelity bond): Small business 401(k) plan providers don’t offer this, but you’ll be required to have it when you sponsor an employee retirement plan. You should be able to get it from your liability insurance company, or your retirement services provider can recommend a source.
IRA Plan Costs
Employer-sponsored IRAs are much simpler to set up and maintain than 401(k) plans, but they don’t allow employees to set aside as much money in their workplace retirement plans. IRAs have a very different pricing structure from 401(k) plans, and there’s a lot of variance between brokerages. Here’s a sample of the fees you should look out for when setting up this type of employee retirement plan.
- Setup fee: Most brokerages don’t charge a fee to set up an IRA retirement plan.
- Account minimums: Some brokerages have a minimum investment threshold that you must meet to establish an account, but many don’t.
- Account service fees: Some brokerages charge an annual fee for each fund if your balance doesn’t meet a certain threshold. Waivers may be available.
- Investment trade fees: Plan participants pay this fee, or commission, when they trade shares. There’s a lot of variance for this fee, depending on the brokerage you use and the funds you trade. Advertised fees for ETFs that you trade online range from $4.95 to $19.95. However, if plan participants trade over the phone or have a broker place the trade for them, this fee is higher. Participants can save money on this fee by choosing from the commission-free trades that many brokerage firms offer.
- Advisor services (optional): Brokerages frequently offer management services for an extra fee. Usually, this fee is a fraction of a percentage of the account balance, but some cost more than 1% of your assets. You may be required to meet account minimums to qualify for this service. However, most brokerages, even those that offer this service, provide complimentary access to brokers who can give your plan participants custom investment advice, helping them select funds and create a sound investment strategy.
- Nonstandard or event-based fees: As with 401(k) plans, participants may pay various fees for actions like withdrawing or transferring money out of their retirement accounts.