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401k Options For Small Businesses – Can my small business afford a 401k? How much will it really cost? How long will it take to manage it?
These are common questions from small business owners considering a 401(k). And these concerns are very valid. From the beginning, 401(k)s have been built and priced for large companies, making them too expensive and time-consuming for the average small business.
401k Options For Small Businesses
Is changing Innovative and tech-savvy providers allow small businesses to receive the same level of service and investment quality enjoyed by the Fortune 500, without the huge costs of Fortune 500 size!
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But before we get started on getting the best low-cost plan for your company, we’ll answer some of the burning questions about 401(k) costs. From…
Well, of course it depends. But it’s always helpful to have a general idea of the costs you’re facing.
We’ll lay out all the fees and factors that go into the total price of a 401(k), but first, here’s the average cost of a 401(k) for a small business (10 participants and $100,000 in assets) – based on in 401(k) Book of Averages data:
Phew. $3,970 in the first year alone? It’s no wonder that many small businesses feel they need to give a 401(k). Not exactly an encouraging figure.
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Now let’s see how the cost changes after the plan has grown for several years. Let’s say the plan grew to $500,000 (even though the company had 10 employees).
As you can see, asset-based percentage charges decrease as plan assets grow. 401(k) providers favor larger plans because that means more money for them. But in our view, $14,700 per year (or 1.47% of plan assets) is still
. Whether you’re starting a new plan or have some assets ready for investment, there are some simple strategies you can use to get a low-cost plan that will help you maximize your savings.
But to get a cheap 401(k), it helps to understand how the 401(k) is actually priced. We’ll break it down quickly next time.
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There are four ways to collect 401(k) fees and expenses, each with their own schedules and cost ranges.
They are expressed as a percentage of total plan assets and are taken to offset investment advisory, trust or custodial and investment fees.
As the name suggests, this is a rate for each active or eligible employee in your plan. Participant fees are usually intended to cover record keeping and organizational management.
These are fees charged to carry out a specific plan service or transaction, such as changing plan funds or applying for a loan.
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Depending on the plan and provider, you can pay in several of these ways, and the one you choose will almost certainly have a big impact on your 401(k) performance.
Often ranging from $500 to $3,000, initial setup fees for 401(k)s can surprise small business owners. However, with good judgment and the right information, you can find a service provider with reasonable (or even no) setup fees for small businesses.
Sometimes charged as asset-based fees, sometimes as per-participant fees, and sometimes as a flat annual fee, enrollment and administration fees pay for essential 401(k) plan services: monitoring which employees are in the plan, how much money they have invested, and how much is invested in each plan fund.
Every 401(k) needs a designated trustee, who is responsible for making investment decisions that are in the best interests of plan participants. This can often be the company owner or an officer, but many providers offer managed fiduciary services, taking on some of the fiduciary responsibility by managing the entity that owns the plan assets (the custodian) and making investment decisions based on instructions for the participants, the plan. sponsor or the investment manager.
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Investment and advisory fees include both mutual fund expense ratios and fees for investment management services.
Fund expense ratios are the percentage of pension fund assets that plan participants pay for their investments and are often one of the most important expenses of a 401(k). Advisory costs include the services of a 401(k) advisor, who can assist in planning, building and monitoring the mutual fund pipeline, provide participants with investment advice and more.
Employees who want to do almost anything with their plan assets may have to pay a small transaction fee. This includes fees for transfers, fund transactions, loans and withdrawals.
For example: An employee who withdraws money from their 401(k) account may have to pay a distribution fee of $50.
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Plan sponsors may choose to terminate a plan that is not performing to their satisfaction, although the provider may charge fees to close the plan.
At the risk of sounding like a broken record, when it comes to who pays 401(k) fees, we have to say, “It depends.”
Employers often pay hard dollar costs such as setup costs and administrative fees, while employees pay property-related fees.
In some cases, all fees and expenses related to the 401(k) are taken out of plan assets or, alternatively, are paid in full by the employer.
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Is paying these fees. Everyone wins when we keep them as low as possible. But what exactly do low rates look like?
You’ve already seen how the average cost of a 401(k) can reduce your annual benefit. Here’s how these fees can affect employee retirement over the years:
For a 30-year-old worker making $4,000 a year, with an annual return of 6%, with total fees of 0.6%, he will have $390,028 in his account when he retires at age 65. Drop those rates to 1.9% and they’ll have $291,519 in their accounts…a difference of almost $100,000!
About $100,000 less in your retirement savings is a significant and unsettling amount, something neither employees nor plan sponsors want to see. Avoid these kinds of awkward situations by choosing a low-cost 401(k) early on.
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It may seem like a huge task, but don’t worry… it’s easier than you think. Here are some simple methods to help you do this:
When looking at 401k expenses, don’t be shy about asking questions about company income. Any provider you want to work with should be transparent and honest about the plan costs you incur.
Still, there is a bit of a “buyer beware” situation. Hidden fees are a problem with many 401(k) plans and providers. That’s why we want to equip you with a tool against unfair fees: the ForUsAll Fee Assessment Checklist. Use this checklist to quickly and easily get to the bottom of any price.
You can also send a DoL Fee Disclosure Worksheet to each of the providers you are evaluating. They fill it out and return it, giving you a detailed report of all the plan’s fees and costs.
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There are many investment options available, so whenever possible, you want to go for low-cost passive index funds. Funds like Vanguard’s 2045 Target Date Fund (TDF) can deliver impressive returns at incredibly low costs.
To ensure your plan has access to these high-quality, low-cost funds, be sure to go with a provider that has an open architecture, meaning the provider allows you to create your own line of fund with any fund in the market.
Eligible employers can receive a $500 tax credit for the first 3 years of the program. This can cover everything from setup and administration costs to participant training expenses.
Whether participating, non-discretionary or matching contributions, if employer contributions fall below 25% of the employee’s annual salary, they are exempt from federal, state and payroll taxes.
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Not all companies have the same needs. To avoid outrageously high fees later, choose a 401(k) provider with fees that fit your specific business situation.
For example, if your employees contribute a lot of money to the plan and you don’t plan to add more employees to your business, you might expect your plan assets to grow faster than your participants. In this case, you may want to go with a provider that favors per-participant fees.
By doing this, you and your employees can avoid paying more fees as plan assets grow, saving you tens of thousands, as we saw in our example above. And that would be a big win, right?
A new crop of 401(k) providers are using technology to offer quality retirement plans at prices that fit the budgets of small and medium businesses.
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Automated compliance checks, payroll integration, virtual advisors, and online access to financial advisory services are some of the compelling capabilities of technology-enhanced plan providers.
This capability is extremely useful for small businesses, many of which may not have the time, resources, or inclination to do everything related to a 401(k) on their own.
Hidden fees, complicated fees, and non-transparent pricing have been pretty standard fare in the world of 401(k) pricing. Thankfully, those days are over! Whether you’re self-employed or a high-growth startup, your chances of getting a low-cost 401(k) for your business have never been better.
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A Low Cost Retirement Plan For Small Business Owners
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