Smaller Plans, Larger Costs

While fee compression has broadly pushed down the costs of retirement benefits, basic math still puts smaller plans at a disadvantage. Larger plans benefit from economies of scale, even if they have higher total costs, while fixed costs mean smaller plans pay more per participant.

Total bundled costs, including investment and recordkeeping and administration fees, average 4.16% for plans with 10 participants and $100,000 in assets, compared with 1.62% for plans with 500 participants and $5 million in assets, according to the 2024 edition of the “401(k) Averages Book.”

“If you have a small plan with 10 or 20 employees, you still have to do the testing and all that,” says Mark Alley, national market president for Alerus. “It doesn’t take much more to test a large plan than a small plan.”

In addition, providers may be more willing to lower variable costs for larger plans, or for plans with fewer participants and higher balances, since they see a greater potential to cross-sell and realize other revenue opportunities.

There are, of course, other options for small businesses, such as a SIMPLE 401(k) and a SEP individual retirement account. At some providers, there is no cost to set up those plans for the employer. But for smaller businesses that may not have an adviser, parsing the fee nuances can be a challenge.

“We see a general confusion and folks are overwhelmed because there are a number of different options available,” says Roger Morrissette, vice president of small business retirement products at Fidelity.

To help, Fidelity has created a “Plan Selector” tool that employers can use to understand how their plan options differ from each other.

SECURE Impact

For plan sponsors looking at a 401(k), experts say that 2019’s Setting Every Community Up for Retirement Enhancement Act and the SECURE 2.0 Act of 2022 have helped reduce the cost burden via both tax credits for new plans and support for pooled employer plans, which allow even smaller employers to take advantage of economies of scale, while also outsourcing some of the fiduciary risk and time required to run a plan.

For the first three years of a new plan, employers with fewer than 100 employees can get a tax credit of up to $5,000 per year, with an additional $500 for setting up automatic enrollment and a $1,000-per-employee credit for matching contributions made to non-highly-compensated employees.

“Some of the more successful PEPs are leveraging that tax credit to allow small employers to maybe start up a plan with no cost at all,” says Ted Schmelzle, assistant vice president of retirement plan services at The Standard.

From the plan participant perspective, higher fees for small plans take a larger bite out of savings, but experts say these fees remain small relative to the post-tax savings and potential future benefits of investing in the plan.

“You’re talking about investment growth of multiple, full percentage points and fees that are basis points,” says Sean Jordan, head of small- and mid-market segments at Principal Financial Group. “They’re different scales.”

Benefits Over Time

For participants, any employer match can further offset costs, and there are other benefits to encourage participants to save in a workplace plan, despite fees.

“There are things that participants can get from a plan, such as the possibility to take a loan or make a hardship withdrawal: That might not be available in an if that’s the alternative,” says Joe Valletta, the principal owner of HR Investment Consultants and co-author of the “401k Averages Book.”

Another factor in favor of plan participation despite higher fees is that, as both the plan and participant assets grow over time, the cost of the plan should start to decline, especially in a PEP that is quickly expanding. So even if tax benefits do not pan out in the first year, those savings compound over time.

“Generally, as a plan gets bigger, the cost per participant will get lower,” says Schmelzle. “The benefits to all of us, as individuals, of saving and starting early far outweigh the risk of not doing so, even if you compared it to a similarly situated non-tax-qualified vehicle like a brokerage account, where trying to invest those dollars are generally more expensive.”