How Much is 401K Planning Costing Your Business?

401(k) plans help your employees save for a future for themselves and their families. They’re a wonderful retirement planning tool, but they also benefit employers who offer them. Still, many small to mid-sized businesses don’t include 401(k) matching as part of their benefit packages. In fact, a survey conducted by J.P. Morgan in 2020 reported that among businesses with fewer than 50 employees, half did not offer a retirement savings plan.

Cost is a chief concern for businesses who would offer 401(k) plans in an ideal world. Interested in offering a retirement plan to your employees, but unsure of where to start or how much it will cost your company? The employee benefit experts and business advisors at DHJJ have you covered. Read on to learn more about the basics of 401(k) retirement planning and what it costs your business.

What is a 401(k)?

Named after the section in which it’s found in the Internal Revenue Code, a 401(k) plan is a retirement savings plan offered by an employer. The premise is simple: employees make pre-tax contributions directly from their paycheck and into their 401(k) accounts. Employees can decide what percentage of their paycheck will be deposited into the 401(k) account. The money is invested within the 401(k) account, and no taxes are charged on the funds until they’re taken out (hopefully in the employee’s retirement).

Employers then have the option to match the employee’s contribution, either in part or in full. Employers are not required by law to match any portion of the employee’s contributions just because they’ve offered the plan.

401(k) funds are not managed by the employer, unlike pension plans. Employees are free to invest the funds in their 401(k) accounts however they please.

Traditional versus Roth 401(k)s

Employers can opt to offer a traditional 401(k), a Roth 401(k), or both. With a traditional 401(k), the money that employees contribute to their 401(k) accounts will be deducted from their gross income. This is great for employees in a few ways: their taxable income is reduced by the amount that was paid into the 401(k) account. The amount is reportable as a tax deduction and the employee does not need to pay taxes on the money (yet). When the employee withdraws the money, they’ll be taxed on the funds at that time ( which will hopefully be when they retire).

Employers can also offer Roth 401(k)s. These are still beneficial to employees, but are structured a bit differently. With a Roth 401(k), employee contributions to the account will be deducted from the employee’s after tax income. In other words, the employee is assessed income taxes on their entire paycheck, and then the funds are removed and placed into the Roth 401(k). This offers a unique advantage in that the employee will not have to pay taxes on funds that are withdrawn during their retirement years. Employers who offer a 401(k) plan are not required to offer a Roth 401(k) option.

How are 401(k)s charged?

Just because a 401(k) plan isn’t managed directly by the employer does not mean that the employee won’t incur fees for offering the plan. In general, 401(k) fees can be categorized in three ways: (1) initial startup expenses, (2) administration expenses, and (3) matching expenses. We’ll cover each in turn.

(1) 401(k) Startup Expenses:

These are initial, one time expenses. Startup costs cover the expenses incurred by a financial institution for setting up the plan and teaching your employees how to use it. For small businesses, initial startup fees can be as $500; for larger companies, they can reach $2,000. If you are a small business (employing less than 100 people), you may be eligible for a tax credit to help with the initial startup expense involved in offering a 401(k) plan.

(2) 401(k) Administration Expenses

If a third party administrator will be handling your 401(k) plan, you will need to account for administration expenses. 401(k) administrators take care of many aspects of maintaining the plan, including completing your company’s Form 5500 and approving loans made against the 401(k) and distributions made from the accounts. If, like many small businesses, you don’t have an extensive finance department, hiring an experienced third party administrator may be the way to go to avoid mistakes along the way. These fees involve either an annual or monthly expense in addition to a small fee for each participant.

(3) 401(k) Matching Expenses

As previously mentioned, offering a match to employee 401(k) contributions is entirely optional. If you do offer a match, you can choose what percentage of contributions you will match. While these expenses can be high, there are some advantages for employers who choose to go this route. Besides bolstering your organization’s ability to attract and retain talent, you could also be dismissed from otherwise mandatory non-discrimination compliance testing. Plans that meet these eligibility requirements are called “safe harbor plans,” and they do bring with them certain rules and regulations, including mandatory match percentage minimums for participation.

How Can You Save on Your 401(k)?

Businesses can save money on 401(k) planning by partnering with an experienced third party administrator and by choosing a plan design that keeps costs low. Electing for a safe harbor plan design, for example, will eliminate the cost of non-discrimination compliance testing as part of your plan administration fees.

There are also a few alternatives to 401(k) plans for employers who still wish to offer retirement planning options to their workforce, including SIMPLE IRA plans.

To learn more about offering a cost-friendly 401(k) plan for your employees, reach out to the employee benefit experts and business advisors at DHJJ.

DHJJ: Your Business Advisory Partner for 401(k) Planning and More.

DHJJ offers business advisory, accounting, audit, and tax services (and more) to organizations across many industries. Whether your company is interested in adopting a new retirement planning structure or taking a look at cutting costs for your current plan, give us a call at 630-420-1360 or contact us online anytime and we can help you get started.