About 80% of our small business clients pay 100% of their 401(k) administration fees from a corporate bank account instead of plan assets. I am confident that percentage is higher than average because so many 401(k) providers charge hidden administration fees - including mutual fund revenue sharing and variable annuity wraps - that increase the cost of plan investments. These additional fees lower the investment returns of plan participants - often without their knowledge.
As a business owner, I strongly recommend you consider paying your 401(k) administration fees from a corporate bank account instead of plan assets. The approach can be a win-win for you and your plan participants. Here are 4 ways you can benefit personally:
1. It Reduces Fiduciary Liability
The top source of 401(k) fiduciary liability today is paying excessive fees from plan assets. When 401(k) administration fees are paid from a corporate bank account – not plan assets – any potential liability for overpaying is eliminated.
2. It Lowers Business Taxes
The SECURE Act permits an eligible small business to claim a tax credit for adopting a new 401(k) plan and/or a new automatic enrollment feature.
- Qualified startup costs - Before the SECURE Act, a small business could claim a tax credit equal to 50% of their “qualified startup costs,” up to a $500 limit. Now, the limit is the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of non-Highly Compensated Employees (non-HCEs) eligible for plan participation or (b) $5,000. This credit is available for up to three years.
- Automatic enrollment - Small businesses can earn an additional $500 tax credit by adding an automatic enrollment feature to a new or existing 401(k) plan. The credit is available for each of the first three years the feature is effective.
When combined, these credits can total up to $5,500 per year ($16,500 for 3 years).
Other administration fees paid from a corporate account will be tax-deductible.
3. It Increases 401(k) Investment Returns
In many (if not most) small 401(k) plans, the business owner has the largest account balance. When this is the case, their account will pay a big chunk of any 401(k) administration fees paid from plan assets. Business owners can avoid this issue – and keep more of their retirement savings – by paying 401(k) administration fees from a corporate bank account. Due to the power compound interest, these annual savings can dramatically increase a retirement nest egg after decades of savings.
Example - assume a 5-participant 401(k) plan with $1M in total assets pays its 401(k) provider a 1% annual administration fee. If the business owner’s account balance is $600,000, they would pay 60% of the fee.
If business owner’s $6,000 fee remains in their account instead, it would grow to $48,987 in 30 years (assuming a 7% annual interest rate, compounded daily).
4. It Makes Your 401(k) More Attractive to Employees
Studies show many 401(k) participants are unclear regarding the fees paid by their account. That’s unfortunate given the erosive effect of 401(k) fees, but hardly surprising when you consider most 401(k) providers charge hidden fees that don’t appear in participant statements or fee disclosures.
However, it’s not hard for employees to understand that they’ll able to save more for retirement when their account is not reduced by 401(k) administration fees annually. This is a benefit employers can promote – making their plan more attractive to employees.
Bottom line - A win-win for 401(k) participants and business owners!
In the past, business owners didn’t pay close attention to their 401(k) administration fees because they were buried in plan fund expenses and did not reduce their company’s bottom line. That’s changed. Due to DOL fee disclosure rules and several high-profile excessive fee lawsuits, most owners understand they risk personal liability by not understanding these fees and keeping them in check – an important fiduciary responsibility
The good news is that 401(k) providers are making it easier for owners to meet this fiduciary responsibility by charging only fully-transparent administration fees. Another virtue of these fees? They can be paid from a corporate bank account – not plan assets. When this is done, it can be a win-win for both 401(k) plan participants and the business owner.