Can an SMB Afford a 401(k)?

Updated: March 06, 2008


After health insurance, prospective employees most value retirement plans when considering benefit packages. But small and even midsized companies often lack retirement plans due to perceptions about their costs.

In truth, employers can hardly afford not to offer a retirement plan. It's one effective way to lure and retain top talent. The cost of recruiting and training new people dwarfs the cost of retirement plans in most cases.


The 401(k) plan is one of the most popular retirement plans among employees. A 401(k) is a defined-contribution plan, meaning that each employee has his or her own account into which contributions are made. The plan allows an employee to direct part of his or her pay into the account, and defers taxes on the contributions and investment earnings until they are withdrawn. In most cases, each participating employee can direct his or her contributions into different investment instruments at any time.

401(k) plans have historically been expensive to set up and administer due to complex IRS rules and record-keeping requirements. Also, the mutual funds that traditionally sell 401(k) plans tend to charge high commissions on trades and management fees. All of these factors have discouraged SMBs (small- to medium-sized businesses) from considering 401(k) plans.

But in recent years, competition from other financial institutions has helped drive down the costs of setting up and administering 401(k) plans. Assets-based fees, or commissions, have also decreased or eliminated entirely. The time has never been better to shop for a small-business-oriented 401(k) plan.

Online Management Options

Web technology has additionally helped shave the costs of setting up and running a 401(k) plan. A company called The Online 401(k), founded in 1999, is one of the pioneers in this field. Through the company's Web site and phone support, an employer can set up a 401(k) plan for any size company - even a sole proprietorship. The paperwork and staff savings are passed on to customers. The Online 401(k) charges a $495 setup fee and a flat, all-inclusive management fee of $145 per month for a company of 10 or fewer people. There are no assets-based fees or hidden commissions.

According to ShareBuilder, another online 401(k) manager catering to small businesses, the average cost of a similar 401(k) plan from a mutual-fund provider would include a $1,350 startup fee, $270 per month in administration fees and a 1.69 percent assets-based fee. ShareBuilder charges a firm of 10 employees a $495 setup fee, a $95-per-month administrative fee and an assets-based fee of 0.75 percent.

You're in Control

Some employers worry about the cost of matching employees' contributions to a 401(k) plan. But the fact is that employers don't have to match anything. Employers decide what percentage of employee contributions to match, if any, when they set up the plan. An alternative is to contribute a fixed amount to every employee who participates in the plan.

The plan's vesting schedule is another way to control a 401(k) plan's cost. Employers decide how many years an employee must remain with the company in order to keep various percentages of the employer's contributions to the plan.

It should also be noted that startup and ongoing 401(k) fees paid by the employer are tax deductible. The government offers a $500 tax credit to employers who start 401(k) plans. If the employer matches all or part of an employee's contributions, the company is also eligible for a tax credit.


In short, the obstacles previously preventing SMBs from setting up retirement plans are noticeably less formidable than they once were. Employers now have little excuse and little incentive to withhold this benefit from their employees.

For more information on employee benefits, consult the HR Resource Center, where you'll find in-depth Focus research, community discussions and feedback from experts in the field.

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