What a 401(k) Really Costs a Small Business (And Who Pays for What)

When an owner asks what a 401(k) costs, they are picturing an invoice. Something with a number on it that shows up quarterly and hits the operating account.

That invoice exists, and it is the smaller half of the answer.

Every 401(k) has two bills. One goes to the company. The other comes out of your employees' account balances, every year, without ever appearing on a statement anybody reads. And the company chooses how big that second one is.

Bill one: what you pay

Getting it started. Usually $500 to $5,000, depending on how the plan is designed and who you partner with.

Running it every year. Usually $1,750 to $5,000 for a small plan. That buys the annual compliance test, the recordkeeping, the government filing, the required notices, and somebody for your employees to call. Some providers charge a base fee plus a per-person amount, which matters as you hire. Yes... this can all get confusing quick because it really is personalized to the company.

What you put in for employees. A match, a safe harbor contribution, profit sharing, or some mix. This is usually the biggest line, and it is deductible by the business, same as payroll. Knowing your maximum annual outflow is key before committing to any structure... and it's not too "terrible" to ballpark it.

For example, many business owners elect the safe harbor employee contribution method.

Safe harbor plans come in two main forms. The non-elective version means you contribute 3% of every eligible employee's salary regardless of whether they put anything in themselves. If you have 10 employees averaging $60,000, that's $1,800 per person — $18,000 out of the business per year, full stop. The match version works differently: you only contribute for employees who actually participate, typically 100% of the first 3% they put in plus 50% of the next 2%, maxing out at 4% for employees contributing at least 5% of their salary. If participation is low, the match version usually costs less. Either way, safe harbor contributions vest immediately — employees own them on day one, which matters when you are thinking through total compensation.

The non-elective gives you a predictable budget. The match version gives you a lower ceiling if participation is modest. Running the math on both against your actual headcount and salary profile tells you which one fits.

The advisor. Sometimes billed to the company, sometimes charged against plan assets, sometimes a bit of both. Market-wide, advisor compensation on a $5 million plan averages about 0.37% of assets, roughly $18,500. On a $50 million plan, it averages 0.16%. Small plans pay a higher rate for similar work, which is worth knowing when you evaluate what you are getting.

Then subtract the credits, which for a new plan are substantial. A business with 50 or fewer employees can get 100% of qualified startup costs covered up to $5,000 a year for three years, plus $500 a year for automatic enrollment, plus up to $1,000 per employee earning under $100,000 for contributions you make. Should Your Business Start a 401(k)

... you still here? Okay phew... thought I lost ya.

Bill two: what your employees pay

Every fund in the plan menu charges an annual fee called an expense ratio. It is not deducted from anyone's paycheck, and it does not show up as a transaction. It comes out of the return before the return reaches the participant, which is precisely why it can go unexamined for a decade.

Some scale, from Investment Company Institute research:

A fund charging 1.00% costs a participant twenty times what one charging 0.05% costs for similar market exposure.

There is also a term worth knowing, because it explains a lot of otherwise confusing pricing: revenue sharing. Some funds send a slice of their expense ratio back to the recordkeeper or the advisor to cover plan services. The effect is a plan that looks cheap on the employer's invoice, because the participants are funding the services out of their returns instead. It is disclosed, it is legal, and it is most common in exactly the small-plan market where owners are least likely to have heard the phrase.

The number that tends to get people's attention

The 401k Averages Book has benchmarked plan costs since 1995. In its latest edition, a 50-participant plan holding $500,000 shows total plan costs ranging from 0.99% to 3.77%.

A spread of nearly three percentage points a year! That is a wide range.

In dollars on that $500k plan, the low end runs about $4,950 a year and the high end about $18,850. This is why we encourage plan reviews because many business owners chose a provider once, several years ago, probably on a recommendation, and never had a reason to look again. Do you know what you are paying?

For broader context: a $5 million plan averages 1.04% in total cost, and a $50 million plan averages 0.72%. Scale helps and it definitely explains part of the gap. Still... 3.77% versus 0.99% at identical size. That part is provider selection and plan design.

Who is responsible for which part

Sponsoring a plan makes you a fiduciary under federal law. That sounds heavier than it usually feels in practice, and it comes down to four things you should be able to show you did:

• Compare the plan's total cost against similar alternatives on some regular schedule
• Review the investment menu against a written standard and swap out what fails it
• Give employees a real chance to understand the plan and their choices
• Keep a record that you did the first three

Heavy emphasis on the last one. A sound process you cannot document looks the same from the outside as no process at all.

Two arrangements move some of this off your plate. A 3(38) investment manager takes discretion over choosing and monitoring the fund lineup, and takes the fiduciary responsibility for those decisions with it. A 3(21) co-fiduciary advises and shares the responsibility while you keep the final say. Either way, you still have to monitor whoever you partner with, but that is just the nature of the beast.

How to find your number

Ask your provider for one figure: total plan cost as a percentage of assets, with recordkeeping, administration, advisor compensation, and the weighted average fund expense ratio all rolled in. Then ask how much of it participants pay.

You are legally entitled to this. Department of Labor rules require service providers to disclose their compensation to you, and the information arrives in documents that are technically complete and practically unreadable. Any decent provider can produce the summary number within a day or two if you ask plainly.

If it turns out your plan is priced well, you have a document for the file and one less thing to wonder about. If it turns out it is not, you now know something worth knowing. A benchmarking review takes a few weeks, does not interrupt payroll, and does not obligate you to change anything. Is that worth it to you?

Happy to run one if you want a second set of eyes. Is Your Company 401(k) Any Good

Common questions

How much does a 401(k) cost per employee?

Employer administration costs on a small plan typically run $1,750 to $5,000 a year total, which, spread across 25 employees, is roughly $70 to $200 each. Separately, employees pay investment costs through fund expense ratios, which for a well-built menu run about 0.05% to 0.25% of their balances annually.

Who pays 401(k) fees, the employer or the employee?

Both, in different ways. Employers typically pay setup, administration, and any contributions they make. Employees pay the investment costs embedded in each fund's expense ratio. Advisor compensation and recordkeeping can be charged to either, depending on how the plan is arranged.

What is a reasonable total 401(k) plan cost?

Benchmarks vary by plan size. A $5 million plan averages about 1.04% in total cost and a $50 million plan about 0.72%, per the 401k Averages Book. Smaller plans run higher. What matters most is comparing your plan against others of similar size rather than against a single national figure.

What is revenue sharing in a 401(k)?

An arrangement where a portion of a fund's expense ratio is paid back to the plan's recordkeeper or advisor to cover services. It reduces what appears on the employer's invoice by shifting the cost into participant returns. It must be disclosed and is most common among smaller plans.

What is the difference between a 3(21) and a 3(38) fiduciary?

A 3(21) co-fiduciary advises on investment selection and shares responsibility while the employer retains final decision-making authority. A 3(38) investment manager takes discretion over selecting and monitoring investments and assumes fiduciary responsibility for those decisions. The employer keeps a duty to prudently select and monitor either one.

Written byAustin Wolfe & Joe AndersonClearMind Capital · Workplace RetirementView bio →

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