Understanding 401(k) Costs
A guide to 401(k) business costs and participant fees
What will a 401(k) cost?
Answering this important question hasn't always been easy. Complex and hidden fees
make actual costs difficult to calculate, and 401(k)s are usually priced for big
businesses with large numbers of employees.
But there's good news: a few companies have designed Internet-based low-expense
solutions for small businesses. To make sure that you get the best-priced 401(k)
for your business, this page provides straightforward education on fee structures
and how to uncover hidden fees that we believe are all too common in the industry.
Whether you're a sole proprietor or owner of a business with fifty or more employees,
you deserve a fair-priced 401(k) plan that provides complete disclosure on exactly
what you're paying.
401(k) business costs
Like healthcare or any benefit program, 401(k) services come with a cost to your
business. But where healthcare costs can run between $4,479 (for single coverage)
to $12,106 (for family coverage) per employee per year,1 a 401(k) costs
only a fraction of that amount.
Keep your costs low
401(k) charges typically include a one-time fee to establish your plan and an ongoing
annual or monthly fee to manage your account. These costs cover record-keeping,
personal support from an account manager, and product and service improvements.
The per-employee administration cost of a 401(k) varies dramatically across the
industry. Most 401(k) providers concentrate on serving large businesses and are
neither priced nor prepared to serve sole proprietors or businesses with fewer than
50 employees. To ensure you're getting the lowest possible prices, the chart below
provides a general benchmark:
Keep your costs low
A business with ...
should pay less than ...
1 Employee (self-employed)
$200 per year.
2 - 10 Employees
$1,000 per year.
11 - 25 Employees
$1,500 per year.
26 - 50 Employees
$2,300 per year.
51 - 100 Employees
$3,300 per year.
If your company has more employees, costs will be a bit more based on the costs
to support them. However, regardless of your employee size, if your company has
a 401(k) plan and the program has grown to over $500K or $1M in total assets, you
can expect to pay at least 25% less across the board.
ShareBuilder 401k is different. We are dedicated to meeting the needs of any size business, including small businesses, and we price our services accordingly.
Compare the first-year cost of a ShareBuilder 401k for a 10-person company to typical industry pricing:
First-Year 401(k) Cost Comparison
Typical industry pricing2
One-time setup fees
Total first-year fees4
Watch out for surprise fees
Some providers "nickel and dime" businesses with fees for common services
like preparing tax forms, rolling over funds from a previous 401(k) plan provider,
- Determine whether you will be charged by the number of employees at your company
or the number of participants in your 401(k) plan (participants is preferable).
- You'll want to avoid paying excessive or additional charges for expected services
like IRS form preparation, discrimination testing, or the transferring of assets
from another 401(k) plan.
- Make sure you receive a fee schedule or quote that shows every fee your company
could possibly be charged.
You can offset some of your 401(k) costs:
$500 tax credit
If this is your first 401(k) plan and you have at least one employee, your business
will qualify for a $500 tax credit for the first three years of your plan.
Business tax deductions
Your business' 401(k) administration fees, plus any matching or profit-sharing you
do, are typically tax-deductible.
401(k) participant fees
The sad truth is that many 401(k) providers offer funds that have high expense ratios
and charge additional, often hidden fees that can have a big impact on your and
your employees' retirement savings.
Low fees can save you a lot
John and Alan are two 401(k) participants. Each has $50,000 invested in the same
type of fund delivering the same 8% annual return. The only difference is that Alan's
annual participant fees and expenses total nearly 2%, while John pays less than
The graph at right shows that after 40 years, John has $242,524 more in retirement
Participant fees really do impact how much you can potentially earn over time.
ShareBuilder can beat many typical 401(k) providers on price. For instance, for businesses with
less than 250 participants and $8 million in assets, ShareBuilder 401k assesses a 0.45% to 0.75%
annual asset management fee and offers funds with an average model portfolio expense ratio of 0.17%
keeping a total of 0.62% to 0.92%. In general, the more your plan grows in assets, the lower your pricing.
Pay no more than 1% in participant fees
We strongly believe that for long-term investing, keeping total participant fees
less than 1% makes the most sense. The lower the fee, the more money you have to
put to work towards your retirement.
In most cases, employee fees are based on a percentage of the assets in the employees
accounts. They may include mutual fund management fees, 12(b)-1 fees, shareholder-servicing
fees, sub-TA fees, mutual fund sales charges (sales load, CDSC, etc.), wrap fees,
mortality & expense fees, investment management fees, transaction fees, or any
other fee assessed to the participant's 401(k) account.
Keep things simple. We think that a low asset management fee, combined
with a selection of investments that carry low expense ratios (preferably broadly-diversified
index-based funds) is the best solution. The asset management fee should cover all
your individual transactions, rebalancing of your investments, customer-care calls,
and every other usual service needed to manage your contributions and investments.6
Some 401(k) providers may claim that they charge no asset management fees or boast
of low expense-ratio investments, or even that they will refund a portion of 12(b)-1
fees. Just be sure you know the sum total of all participant fees and other upfront
loads or excessive charges that can make these claims irrelevant. The total
cost applied against your contributions is what matters most!
Get a fair price on a 401(k) plan
Three principles of fee transparency
Here are three ways to make sure your 401(k) provider is controlling costs and minimizing
the fees paid by employees out of their retirement savings:
If you have an existing 401(k) program, quantify your current plan's fees.
Simply ask your provider for a full accounting of ALL pricing your business pays
as well as the fees paid from the employee's 401(k) savings. Identifying these fees
is often very difficult and confusing. If a provider has difficulty in sharing this
with you or is unwilling to take you through the fees, it's time to look at other
Limit investment options to low-expense funds. Switch the investments
offered in your plan to low-expense index funds such as ETFs or no-load index mutual
funds that track the major indexes (e.g., S&P 500, Russell 3000, Barclays Aggregate
Bond Index, etc.). Because actively-managed funds often charge expenses that are
1–2% above those of their index-based fund peers, index-based funds can be tough
to beat over the long run (see below).
Try to pay no more than 1% in total fees.
Limit the number and type of fees charged to an employee's retirement savings. Consider all expenses when evaluating costs.
These may include fund expense ratios, investment management, record keeping, sub-ta, wrap and other fees.
Taken together, these fees should total no more than 1% of assets annually. In most cases, larger 401(k) plans with over
$10 million in assets should be able to ask and receive reduced asset management fees of 0.10% to 0.45%.
Index funds are tough to beat
Despite all efforts to the contrary, a large majority of actively-managed funds
perform below their benchmark index. For example, over a five-year period ending
in June 2010:
Funds underperforming the index7
S&P MidCap 400
S&P SmallCap 600
Costs can be a real drag on your fund's ability to produce outstanding results for
you. The reason index-based funds are cost-efficient is that you're not paying for
an expensive active fund manager or the extra costs associated with higher portfolio
turnover that are more typical in actively managed funds.
See our indexing guide to learn more.
Six essential questions to ask your 401(k) provider
The questions and guidance below will help you get the right-priced plan for your
business and ensure your 401(k) investments have low fees so your money has the
opportunity to work harder. For easy provider comparison, download our
1. What fees are charged for our plan, as a percentage of a participant's
- Administrative fees (typically paid by the employer)
- Recordkeeping fees (paid by employer or employees)
- Investment management fees (paid by employees out of 401(k) savings)
- All other fees (e.g. loans, distributions, etc.)
2. What are all of the components of the investment management fees
paid by plan participants?
- Mutual fund expenses: sales loads, administrative fees, 12(b)-1 fees, shareholder-servicing
- All other investment management fees: wrap fees (common for variable annuity 401(k)s),
investment advisory fees, transaction fees, etc.
3. What services do those investment management fees cover?
At a minimum, all 401(k) participants should receive the following services:
- Fund selection – fewer than fifteen high-quality, low-expense index funds
that provide adequate diversification
- Model investment portfolios – risk-based or life-cycle
- Investment guidance – for example, online investment advice tools
- All brokerage services – unlimited purchases, sales, and exchanges
- Automatic account rebalancing – quarterly or annually
- Complete account services – on-demand custom statements, quarterly performance
reports, and annual account statements
- A limited set of additional fees may be charged for participants seeking a loan
or a distribution
4. What is the average "portfolio turnover" for the funds in our plan?
- The average actively-managed equity mutual fund turns over 100% of its portfolio
each year, adding 0.50% or more in hidden costs that are rarely reported.8
- Never offer any fund that's turning over its securities more than 25% in any given
year. Ideally, turnover is less than 5%. Index funds tend to have extremely low
5. What index-based funds do you offer in our plan?
- Switch out of actively managed funds into index funds (e.g., S&P 500, Russell
3000, Lehman Aggregate Bond Index, etc.)
- Provide an adequately diversified set of investment offerings: domestic equities
(small-cap and large-cap), foreign equities (European and emerging markets), and
fixed income (short-, medium-, and long-term bonds)
- Limit total investments to fifteen or fewer, and specialty offerings (like TIPs
or REITs) to a few
- Provide model portfolios that help employees make appropriate investment decisions
6. Do you provide every participant with a complete listing of investment
- Make certain this important fee disclosure is available online and on demand to
- Ensure that the fees are declared in a way that lets every employee fully understand
what they're paying