How Much Does a 401(k) Cost Employers?

A 401(k) plan is a retirement savings vehicle employers can offer to their workforce. While a valued benefit for employees, sponsoring a 401(k) involves various financial and administrative obligations for the employer. Understanding these costs is important for businesses, as they include direct contributions, internal resource allocation, and regulatory requirements. These financial commitments are a significant aspect of providing a competitive employee benefits package.

Employer Contributions to Employee Accounts

Direct financial contributions to employee 401(k) accounts often represent the most substantial cost for employers. These contributions can take several forms, each with distinct implications for the employer’s budget.

One common type is matching contributions, where an employer contributes money to an employee’s 401(k) account based on the employee’s own deferrals. Common matching formulas include a 100% match on the first 3% of an employee’s pay, or a 50% match on the first 6% of pay.

Profit-sharing contributions offer employers greater flexibility, as they are discretionary and not tied to whether employees defer their own salary. Employers can decide each year whether to make these contributions, and the amount can be based on a percentage of salary or a flat sum. These contributions can be made even if the company does not show a profit.

Safe harbor contributions help a plan satisfy nondiscrimination testing requirements set by the Internal Revenue Service (IRS), potentially allowing highly compensated employees to contribute more without penalty. These can be a basic match (e.g., 100% on the first 3% of compensation plus 50% on the next 2%), an enhanced match (e.g., 100% on the first 4% of compensation), or a non-elective contribution of at least 3% of eligible employee compensation, regardless of employee deferrals. Employer contributions to a 401(k) plan, including matching and profit-sharing contributions, are generally tax-deductible for the employer up to certain limits, typically 25% of the compensation paid to eligible employees.

Fees for Plan Administration

Beyond direct contributions, employers incur various fees paid to external service providers for the ongoing administration and management of a 401(k) plan.

Recordkeeping fees cover tracking contributions, maintaining individual participant balances, processing loans and withdrawals, and issuing participant statements. These fees can be charged on a per-participant basis, often around $45 per participant annually, or as a percentage of plan assets.

Third-Party Administrator (TPA) fees account for services such as compliance testing, preparing the annual Form 5500 filing, and maintaining the plan document. These fees can range from $750 to $3,000 per year, depending on the plan’s complexity.

Custodial fees are paid to the entity that holds the plan’s assets, ensuring their safekeeping and executing trades. These typically range from 0.01% to 0.05% of plan assets annually.

Investment advisory or management fees compensate professionals for selecting and monitoring the plan’s investment options and sometimes for providing investment advice to participants. These fees are often asset-based, ranging from 0.10% to 0.50% of plan assets annually.

Additionally, there are often one-time setup fees, ranging from $500 to $3,000, to establish a new plan, covering documentation and initial onboarding. While some fees might be deducted from plan assets, the employer ultimately bears the cost either directly or indirectly.

Internal Costs and Time Investment

Sponsoring a 401(k) plan also involves less overt but substantial internal costs related to the time and resources an employer’s own staff dedicates to plan management.

Human Resources and payroll staff spend considerable time on various administrative tasks. This includes processing employee deferral changes, managing enrollment paperwork for new hires, and responding to basic employee questions about the plan.

Staff also coordinate data flow with external service providers, ensuring accurate payroll deductions and timely remittance of contributions to the plan. The Department of Labor mandates that employee deferrals and loan repayments be deposited into accounts as soon as administratively feasible, generally no later than the 15th business day of the month following the contribution. This requires diligent internal processes to avoid potential penalties.

Management oversight represents a significant internal time investment. Business owners or senior management spend time reviewing plan performance, attending meetings with advisors, and fulfilling fiduciary responsibilities to ensure the plan operates in the best interest of participants. These activities divert valuable employee time and productivity, representing a tangible operational cost.

Regulatory Compliance Expenses

Adhering to legal and regulatory requirements for 401(k) plans introduces specific costs, particularly for larger plans, that are distinct from general administrative fees.

One significant expense is the annual independent audit, which is required for plans with 100 or more participants with account balances at the beginning of the plan year. The Department of Labor revised this rule in 2023, shifting the participant count from “eligible” employees to those with actual account balances, potentially reducing the number of plans requiring an audit. These audits, performed by a qualified public accountant, can cost several thousand dollars.

Another compliance-related expense is the preparation and filing of Form 5500, an annual report to the Department of Labor and IRS detailing the plan’s financial condition and operations. While a Third-Party Administrator often prepares this form, the employer remains responsible for its accuracy. Penalties for late or inaccurate filings can be substantial, with the IRS potentially assessing $25 per day up to $15,000, and the DOL up to $1,100 per day with no maximum limit.

Some employers also purchase fiduciary liability insurance to protect against potential claims of fiduciary breach or mismanagement, which is a separate cost for risk mitigation.

Legal counsel fees may be incurred for advice on complex plan design, compliance matters, or in responding to regulatory inquiries. These compliance costs underscore the ongoing responsibility employers have to maintain their 401(k) plans in accordance with federal regulations.