Boost Retirement Savings and Reduce Taxes by Paying Your 401(k) Fees from a Business Account

As a small business owner, you have a significant personal stake in how your 401(k) plan administration fees are managed. The method you use for paying plan expenses can have a major effect on participant returns. Paying them from a business account – not plan assets – can directly benefit you, your employees, and your business. Here’s what you need to know to decide whether the approach is right for you.

Understanding 401(k) Administration Fees

All 401(k) providers charge fees for delivering plan administration services such as participant recordkeeping, ERISA compliance, asset custody, and investment advice. These fees can be paid from one of more of the following sources:

Direct Fees

401(k) providers deduct these fees directly from participant accounts. Their amount must be disclosed in invoices in 408b-2 and 404a-5 fee disclosures, participant statements, and invoices.

• • Direct fees can be charged on a flat and/or asset-basis. Flat fees increase with participant headcount, while asset-based fees increase with assets.
  • Once their amount is determined, direct fees are usually allocated among plan participants pro rata based on account balance. In other words, a participant with a high account balance will pay a higher amount than participants with a lower balance.

Indirect Fees

401(k) providers are paid these fees by some investment funds. They increase the cost of a fund, lowering participant returns. Often called “hidden fees,” indirect fees lack the transparency of direct fees. Their amount can be buried in the fund expense ratios of 408b-2 and 404a-5 disclosures and not appear at all in participant statements or invoices.

• Indirect fees are usually charged on an asset basis, meaning their dollar amount will grow automatically as assets increase.
• The most common forms are revenue sharing and wrap fees. Revenue sharing is paid by some mutual fund share classes, while wrap fees are paid by variable annuities.

Employer-Paid Fees

You pay these fees from a business account, not plan assets. Unlike direct and indirect fees, they have no impact on participant returns.

In Summary:

Lower 401(k) Fees Means Faster Savings Growth

Direct and indirect 401(k) administration fees reduce the amount available for future account growth and compounding. Over decades, their cumulative effect can cost a plan participant tens, or even hundreds, of thousands of dollars in retirement. Put differently, a plan participant can dramatically increase their future savings in retirement by lowering their 401(k) fees today.

The example below shows how dramatically the cumulative effect of 401(k) fees can affect the future savings of a 30 year-old with a $25,000 account balance assuming they retire at age 65, make no additional contributions, and earn a 7% annual rate of return.

Based on these assumptions, just a 1% annual administration fee would cost this individual $85,521.60 by age 65 ($289,640.62 - $204,119.02), while a 2% annual administration fee would cost them $145,792.79 ($289,640.62 - $143,847.83).

Benefits of Paying 401(k) Fees from a Business Account

About 80% of Employee Fiduciary’s small business clients pay 100% of our plan administration fees from a business account – not plan assets. This popularity is hardly surprising once you understand how the approach can be a win-win for you and your employees. Here are five important benefits:

Increase Your Personal Savings

When 401(k) administration fees are paid from the plan assets directly or indirectly, owners typically bear the highest costs because their retirement accounts usually represent the largest portion of the plan. Paying fees from a business account prevents your own retirement savings from being diminished by these administrative costs, leaving you more money to compound over time.

Reduce Your Tax Burden

401(k) fees paid from your business account become fully deductible expenses, directly lowering your taxable income. For instance, if your business pays $3,000 annually in 401(k) administration fees from a business account, at a 25% tax rate, you immediately save $750 in taxes each year.

Better yet, SECURE 2.0 significantly enhanced the tax credits available to eligible small businesses that start a new plan, add an auto-enroll feature, or make employer contributions to employees. Use our free calculator to estimate your credits.

Improve Employee Retirement Outcomes

By paying 401(k) administration fees from your business account, your employees retain all their contributions and earnings, leading to faster savings accumulation. This can greatly enhance your employees' financial security and job satisfaction.

Protect Yourself from Hidden Fees

According to our latest 401(k) fee study, approximately 75% of small business plans nationwide pay revenue sharing and or wrap fees. When these “hidden fees” are asset-based, their amount can quickly outstretch a 401(k) provider’s level of service as plan assets grow. Paying fees from your business account motivates you to seek transparency and ensure you're not paying unnecessary or excessive costs.

Reduce Your Fiduciary Liability

As the plan sponsor, you have a fiduciary obligation to ensure fees are reasonable and beneficial to participants. Paying directly from business funds reduces fiduciary risk associated with excessive fees deducted from participant accounts.

Take the Next Step to Help Yourself and Your Employees!

Choosing to pay 401(k) administration fees directly from your business funds maximizes your retirement savings, reduces your tax bill, and creates a more attractive, transparent retirement plan for your employees. It's a strategic investment in your financial future and employee well-being—a true win-win.

Ready to maximize your benefits? Contact us today to review your current fee structure and show you how much faster you and your employees can save with Employee Fiduciary.