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The Costs to Small Businesses of Starting Up a Retirement Plan

We get asked a lot of questions here about retirement plans – from regulators and legislators, as well as readers and other industry professionals. This week, we asked NAPA Net readers to weigh in on plan startup costs – and that all-important first year of operation.

Of course, the answers varied – and there are a variety of factors to be considered (more on that in a minute) – but, asked how much (on average) out-of-pocket would it cost a 10-person firm to set up a DC plan, such as a 401(k), the answers broke down as:

44.3% - $2,000-$3,000
27.5% - $1,500-$2,000
17.5% - $500-$1,000
7.7% - more than $5,000
3.0% - less than $500

One reader explained that, “When working with my firm, plans have no out of pocket set up costs. Outside of our arrangements, I would expect to see at least a plan document fee of $1,000.” Another estimated that, “Because of the cost of TPA services and safe harbor contribution, I generally say that it would be about 4-5% of payroll for a 401(k) plan.”

“We have a minimum $1,000 a quarter fee,” explained another reader. “Then there is typically $1,200 to $1,500 plus $25 per participant from the TPA. The recordkeepers are charging $0 to $500 to also set up a plan with some charging $20 per participant.” Still another quoted “$5,000 for the fiduciary advisor, plus TPA fees, etc. All in approximately $7,000.”

By Size of Firm

Next we asked how much (on average) out-of-pocket would it cost a 25-person firm to set up a DC plan, such as a 401(k), the answers broke down as:

39.2% - $2,000-$3,000
22.5% - $1,500-$2,000
17.5% - $3,000-$4,000
13.2% - $1,000-$1,500
5.0% - less than $500
2.5% - more than $5,000

As for a 50-person firm:

39.0% - $2,000-$3,000
20.5% - $3,000-$4,000
15.5% - $1,500-$2,000
12.5% - $4,000-$5,000
7.5% - less than $500
5.0% - more than $5,000

And last, but not least, for a 100-person firm:

26.5% - $4,000-$5,000
19.5% - $1,500-$2,000
16.7% - more than $5,000
12.8% - $2,000-$3,000
10.3% - $3,000-$4,000
5.4% - less than $500
2.6% - $1,000-$1,500

First-Year Costs

We then asked readers about the first year operating costs for those plans, and realizing that these are sometimes quoted in basis points, for that 10-person firm – well, the plurality was more evident:

43.2% - $2,000-$3,000
16.2% - 1,500-$2,000
13.5% - $1,000-$1,500
10.8% - $3,000-$4,000
5.4% - More than $5,000
2.7% - $500-$1,000

As for the first year operating costs for that 25-person firm – well the plurality was more evident:

35.1% - $2,000-$3,000
35.1% - $3,000-$4,000
16.2% - 1,500-$2,000
5.4% - $1,000-$1,500
5.4% - More than $5,000
2.7% - $500-$1,000

According to readers, the 50-person firm might be looking at the following year-one operating costs:

43.5% - $3,000-$4,000
24.3% - $4,000-$5,000
13.5% - $2,000-$3,000
8.1% - 1,500-$2,000
7.4% - More than $5,000
3.1% - $1,000-$1,500

When it came to the 100-person plan, there was an even greater concentration in responses:

53.5% - More than $5,000
27.1% - $4,000-$5,000
11.1% - $3,000-$4,000
5.6% - $2,000-$3,000
2.8% - 1,500-$2,000
7.4% - More than $5,000
3.1% - $1,000-$1,500

Other Questions

Now, as noted above, there are factors that are generally taken into account beyond the mere size of the employee base. Having provided a rough guess at out-of-pocket cost(s) to this hypothetical employer, I asked readers what specific questions they would want to have answered to provide a more accurate response. Here’s a sampling:


  • Details about advisory services needed

  • Vehicle types

  • Any additional design features: safe harbor, Roth, cross-tested, etc.
    How many locations.

  • Are these “eligible employees” that have met the plan's eligibility requirements? I assume that there is not “tiered/cross-testing” profit sharing formula? Just a 401(k) deferrals and employer-match? No controlled groups/affiliated service groups?

  • Whether or not it includes “man hours.” My numbers do not reflect the amount of time the employer’s personnel would spend establishing the plan. These numbers do not reflect a company contribution either.

  • Make sure the administration fees are fixed based on number of employees. Advisor services will either be basis points or flat fee, so the client should get basis points to ensure the Advisor is fully aligned with the long-term success of the plan.

  • How much service for participants is required/desired? Also, how much trustee work is required/desired?

  • Income of Employees, Auto enroll, match, employer support of the plan or a “hassle” for the employer.

  • Are we including match dollars or only administration costs?

  • 1. Is there a controlled group/affiliated service group? 2. Has the employer previously sponsored a qualified plan? 3. Are all employees going to be included? 4. Will all compensation be included? 5. Will there be an employer match? Profit sharing plan? 6. Will the plan use safe harbor design? 7. Will there will contributions allocated using new comparability?

  • How many assets will be rolled into the plan within the first year?

  • Assume they are on some kind of platform vs Trustee directed or FBO account.

  • Type of plan: Safe harbor, new comparability?

  • Profit sharing/match formula brokerage account number of expected eligible v. active participants

  • Is it a safe harbor 401(k) plan; will there be a match; are there profit sharing accounts?

  • Average balance, plan cash flow, total number of EEs and participants (including terminated and retired) vs employees, how would the advisor on the plan be compensated.


Other Comments

As for general comments on the topic, we also got an assortment of interesting responses. Here’s a sampling:


  • The conversation needs to be about “how” (company vs. deducted from the plan) the fees are paid while being aware of what the actual fees.

  • Some clients want to start a 401(k) but don't understand the testing rules. I usually discuss both SIMPLE and 401(k).

  • My top priority is to educate the business owner on the benefits they will personally receive from starting a new 401(k) Plan, which frequently supersede their desire to help the employees save for retirement. Writing a new check from the business every year is a big commitment so it's important to make sure that the commitment won't waver over time.

  • The comments made by government reps that there are ANY obstacles to a person establishing a retirement plan is flat out absurd and a canard for local governments to intrude into another industry by setting up competing plans for political gain.

  • I believe employers, especially small employers, find that the cost of the time that they or their employees spend on start-up is as problematic as actual out-of-pocket expenses, regardless of how much advance preparation we try to give them.

  • Most ERs focus on healthcare for very logical reasons (e.g., importance to EEs, cost, complexity, etc.). However, not setting up their EEs to be ready for retirement can cause significant issues for the firm down the road for the firm and the associates that want to retire but cannot.

  • Regulations suck for small businesses. Too much work and expense. Congress should add a zero match option on the SIMPLE IRA and raise the deferral amount to be the same as 401k. This would help a lot!


Thanks to everyone – and we had a notably big turnout this week – for participating in our weekly NAPA Net reader poll!

Hey – got something you’d like to run by your peers? Want to get a sense of the industry? Post your question in the comments section below, or email it to me at [email protected].

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