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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
  ShareBuilder 401k Typical industry pricing2
One-time setup fees $495 $685
Administration fees3 $1,320 $1,866
Total first-year fees4 $1,815 $2,551


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, and more.

  • 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

Understanding 401k costs more in 40yrs

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 1%.

The graph at right shows that after 40 years, John has $242,524 more in retirement than Alan.5

Participant fees really do impact how much you can potentially earn over time.

ShareBuilder 401k 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 0.10% 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 providers.


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:

Fund category Comparison index Funds underperforming the index7
Large-cap core S&P 500 65.7%
Mid-cap core S&P MidCap 400 79.8%
Small-cap core S&P SmallCap 600 62.6%
International S&P 700 84.5%


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 free worksheet.

1. What fees are charged for our plan, as a percentage of a participant's savings?

  • 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 fees, etc.
  • 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 turnover.

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 management fees?

  • Make certain this important fee disclosure is available online and on demand to all employees
  • Ensure that the fees are declared in a way that lets every employee fully understand what they're paying

Next Steps

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See how your 401(k) compares

Employee fees can take a big bite out of your and your employees' retirement savings. Many small and mid-size companies pay 1.5% or more in employee expenses. Find out how your plan stacks up with our free, no obligation Cost Comparison.