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.

The short answer

The employer typically pays $500 to $3,000 to set the plan up and $1,750 to $5,000 a year to run it, plus whatever match or profit sharing you choose. Employees pay the investment costs through fund expense ratios, deducted from returns rather than billed.

Across the market, a 50-participant plan with $500,000 in assets carries total costs ranging from roughly 1% to nearly 3.8% depending on the provider. Same size plan, same basic services.

Bill one: what you pay

Getting it started. Usually $500 to $3,000, depending on how the plan is designed and who you hire. Several of the newer providers have dropped setup fees entirely to win business, which is good news for you.

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.

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 to the business, same as payroll.

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)]

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:

#### Index equity mutual funds

0.05%

What 401(k) participants paid on average for equity funds

0.26%

Target date funds, where most default money sits

0.29%

A menu leaning on proprietary or actively managed funds

0.75% to 1.00%

A fund charging 1.00% costs a participant twenty times what one charging 0.05% costs for similar market exposure. Neither one sends them a bill.

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%.

Same headcount. Same balance. Same core services. A spread of nearly three percentage points a year, entirely a function of which provider the business happened to sign with.

In dollars on that plan, the low end runs about $4,950 a year and the high end about $18,850. Nobody chose the expensive version on purpose. They chose a provider once, several years ago, probably on a recommendation, and never had a reason to look again.

For broader context: a $5 million plan averages 1.04% in total cost, and a $50 million plan averages 0.72%. Scale genuinely helps, and it explains part of the gap. It does not explain 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

That last one gets skipped most often, and it is the one that matters when somebody asks. 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 hired, but both beat carrying all of it without realizing you were carrying it.

How to find your actual 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.

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.

Sources

• 401k Averages Book, 26th Edition (Pension Data Source, 2026): total plan cost ranges, advisor compensation averages, and plan-size benchmarks.
• Investment Company Institute, The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, and Trends in the Expenses and Fees of Funds, 2025, published March 2026.
• SECURE 2.0 Act of 2022, sections 102 and 111; IRS Instructions for Form 8881, revised December 2025.
• ERISA sections 3(21), 3(38), and 404(a); Department of Labor service provider disclosure rule, 29 CFR 2550.408b-2.

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