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

"What's this going to cost me?"

It's the first thing owners ask us about starting a 401(k), and most have already decided the answer. More than half of small firms believe a plan would run over $10,000 a year. Close to a third put it above $20,000.

For a plan with twenty or so people in it, the company's bill is usually a few thousand, and a federal credit can cover most of that for three years. The number that gets big is the contribution, and that one is a choice.

Take Marcus. (Marcus is made up, though this is most of our first calls.) He runs a 24-person design-build firm and had been putting a plan off for four years, until two project managers he can't afford to lose asked about one.

The bill the company gets

Two line items, both quotable in advance.

Setup is charged once, from about $500 to a few thousand dollars, covering the plan document, the trust, and wiring the plan into payroll.

Then administration, every year. Published provider schedules compiled by The Pew Charitable Trusts in 2024 show the usual shape, a base fee plus a charge per participant. The examples ran from $1,200 a year plus $60 per participant up to $3,500 plus $96, with the annual government filing sometimes billed separately at $250 to $750.

Marcus expects 19 of his 24 people to join, which puts his administration between $2,340 and $5,324 a year before any credit, depending on which structure he lands in.

That is the part owners brace for. It's the smaller number on the page.

The bill your employees get

Every fund charges an expense ratio, taken out of returns instead of billed, and some arrangements also pull an asset-based fee for recordkeeping or advice straight from balances. Nobody receives a bill for any of it. It shows up as a slightly smaller account, every year, for as long as the money stays invested.

Most of a plan's total cost lives here, and it's the piece a small plan tends to overpay. Morningstar's 2023 review of the market put total plan cost at about 0.84% of assets for plans holding $25 million or less, against 0.40% for the largest plans, with roughly a third of small plans paying more than 1%. On a plan holding a million dollars, the distance between those two rates is about $4,400 a year, and your employees pay it.

Size explains some of it, since fixed costs spread across fewer dollars land harder and a new plan can't avoid that. The rest comes down to the fund menu and how each provider gets paid, and somebody chooses both.

The part you pick yourself

Contributions are the biggest number here and the one nobody can quote, because it follows a design decision Marcus hasn't made yet.

A safe harbor non-elective contribution at 3% of pay, on roughly $1.6 million of eligible payroll, comes to about $48,000 a year. A match costs less while participation is low and more as it climbs. Profit sharing can be zero in a year when zero is right.

Two things change how that sits on the business. It's deductible. And Marcus is a participant, so part of what the company puts in lands in his own retirement account instead of leaving his balance sheet.

Credits, for the first three years

A business with 50 or fewer employees can claim a credit for 100% of eligible startup costs, which the IRS describes as the ordinary and necessary costs of setting up and administering the plan and teaching employees about it. It runs three years, capped at $250 times the number of eligible non-highly compensated employees, up to $5,000 a year.

Eighteen of Marcus's expected participants are non-highly compensated, so his cap is $4,500 a year. At the low end of those quotes the credit swallows his administration bill whole, and at the high end about $800 survives.

Separate credits exist for automatic enrollment and for the contributions themselves. A dollar claimed as a credit can't also be deducted, so your CPA takes whichever is worth more.

Who pays which part is a decision

Ongoing administration can be billed to the company or paid out of plan assets, and both are allowed. The Department of Labor draws the line at design: deciding to start a plan, or how to structure it, is the company's own business decision and the company pays for it, while reasonable costs of operating the plan afterward can come out of plan assets.

The same choice runs through how a fee gets quoted. A flat dollar fee bills the same whether the plan holds $300,000 or $3 million, while an asset-based fee starts small on a new plan and grows with it. A company with more people than assets usually does better on flat dollars, and a plan with a handful of participants and serious money in it does better the other way. A standard proposal shows you a number rather than that trade.

Where Marcus starts

Not with proposals. With his payroll, his headcount, how many people he expects to join, and what he wants the plan to do for the two who asked. The fee structure gets built around those answers and the provider gets picked after them.

Austin Wolfe and Joe Anderson run Workplace Retirement at ClearMind Capital in Columbus, and a first call is that conversation. You can book one here, or start with the plan assessment.

Common questions

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

Administration is usually quoted as a base fee plus a per-participant charge, and published schedules compiled by Pew in 2024 put the per-participant piece at roughly $60 to $96 a year. Divide the whole bill by headcount and the per-person number falls as the plan grows, because the base fee stops moving.

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

Both, in different places. The company typically pays setup and may pay administration, while investment costs come out of participant accounts through fund expense ratios. Administration can also be shifted to plan assets within Department of Labor rules, a choice the employer makes rather than a default.

Does a small business have to match?

No. A 401(k) can run with no employer contribution at all. Plans that skip it face annual nondiscrimination testing, which limits what owners and highly paid employees can defer when participation among everyone else is low. A safe harbor design trades a required contribution for skipping that test.

Are 401(k) fees tax deductible for the employer?

Employer contributions are deductible on the company's federal return within the limits of Internal Revenue Code section 404. Plan expenses the company pays are generally treated as ordinary business expenses, except that costs claimed under the startup credit can't also be deducted. Your CPA should confirm how it lands on your return.

Is my plan's cost public?

Not the fees. The annual Form 5500 filing is public and shows plenty about how a plan is run, but a small plan's filing does not itemize what it pays. Those figures live in the participant fee disclosure and the service provider disclosure your provider has to give you. Is Your Company 401(k) Any Good? walks through what the filing does show, and the 401(k) Scorecard reads it for you.

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

Back to Clarity Corner