Many 401(k)s are set up to have participants pay plan costs from plan assets. Plan sponsors may instead elect to pay plan costs out of company funds. This can benefit employers and employees:
Additional tax deduction
Lower participant fees
Reduced litigation risk
One way to tell if a 401(k) plan is successful is to set measurable objectives for participant outcomes. The following hypothetical example shows how plan expenses can be part of that mix.
Tax savings for employer, increased assets for employees
Assumes $1 million in plan assets, 30 participants, $11,000 in annual plan costs and an 8% annual investment growth rate over 20 years
This hypothetical example was developed by third-party retirement plan consultant Patrick Shelton, GBA and managing member of Benefits Plans Plus, LLC and is not intended to represent or predict actual results. The example assumes annual recordkeeping costs of $4,000, annual advisor costs of $5,000 and annual TPA costs of $2,000. To estimate the increase of participant balances, one-fourth of $11,000 ($2,750) is invested quarterly with an annual growth rate of 8% compunded quarterly over 20 years.
In this example, the employer receives an $11,000 annual tax deduction and participants receive a cumulative addition of $543,530 to their account balances over 20 years. This additional accumulation may really make a difference in the quality of retirement for participants. Sponsors, of course, can elect to pay or not pay plan expenses each year, depending on business conditions.
The potential benefits of paying 401(k) expenses with company assets:
Plan sponsor benefits:
• Tax savings — Out-of-pocket plan fees are a tax-deductible expense.
• Reduced litigation risk — Exposure to excessive fee claims may be lower.
• More plan assets — May help the plan qualify for lower pricing.
Participant benefits:
• Better fee transparency — Participants have fewer embedded costs.
• Lower share of costs — Employers pay a greater portion of plan expenses.
• Potential higher account balances — Could help improve retirement outcomes.
Small businesses may find substantial benefits from expanded startup tax credits
The SECURE 2.0 Act of 2022 created a new startup plan tax credit based on contributions the employer makes on behalf of participants, and expanded the existing startup tax credit on employer out-of-pocket plan costs. These tax credits may provide a significant cost savings for small businesses that are starting a plan.
Learn more about the SECURE 2.0 tax credits.
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