Businesses have various reasons for not offering their employees a 401(k) plan. Affordability often tops the list; company executives may assume that starting and managing a 401(k) is cost-prohibitive to both the company and its employees.
But offering a 401(k) plan isn't as expensive as many employers assume. Plans can be designed as extensively or as basically as you desire — simply giving employees an easy way to save and invest a portion of each paycheck for the future can go a long way. And the investment fees paid by employees have actually fallen steadily over the past 14 years, according to a recent survey by the Investment Company Institute.
Designing a Low-Cost 401(k) Plan
The fees charged by plan advisors and administrators can vary, so it's important to work with an experienced plan advisor and compare your options. Fees may include a one-time startup cost as well as recordkeeping and investment management fees.
However, the way a plan is designed can help minimize costs. For example, the plan's administrative fees could be paid in full or in part from the plan assets, reducing the out-of-pocket expense for an employer. Moreover, a basic 401(k) plan — one that offers a simple investment menu and just key features — can keep total costs manageable.
Keep in mind that employers are not required to match their employees' contributions or make any employer contribution. They can contribute as much or as little as they please, within federal limits However, some employers make so-called safe harbor contributions to their employees' retirement accounts in order to avoid federal nondiscrimination testing rules.
If a company does want to offer a matching contribution, it can set up a vesting schedule so that employees only receive the full matching contribution once they've worked for the company for a set amount of time.
Incentives for Offering a Plan
Beyond keeping plan design simple, companies also have financial incentives for setting up a 401(k).
The IRS offers companies with 100 or fewer employees a tax credit worth up to $500 annually for up to three years to cover their retirement plan startup costs. Although there are limits, employer contributions to the 401(k) can be tax-deductible and any assets in the plan grow tax-free.
There are many good reasons to offer a 401(k); retirement plans are often among the most desired employees benefits. And the good news is that it doesn't have to be expensive.