How much does a 401(k) cost an employer?

Understanding the true 401(k) costs for U.S. businesses

Offering a 401(k) plan can be one of the most effective tools for attracting and retaining employees. Yet, many HR leaders and business owners may hesitate and ask themselves: How much does a 401(k) cost an employer? From setup expenses to 401(k) administration fees and matching contributions, total costs vary widely depending on plan design, provider and workforce size. Here’s a complete breakdown of what to expect and how to manage it effectively.

401(k) set up costs

Starting a 401(k) plan begins with initial setup fees charged by the plan provider. These fees often cover the cost of plan documentation, onboarding meetings, investment lineup selection and integration with the payroll system. The typical initial provider setup cost ranges from $500 to $3,000 or more, depending on whether the provider uses a third-party administrator (TPA) model or offers bundled services. TPAs may offer more flexibility in fund selection and plan design, while bundled providers streamline administration at a flat rate.

Onboarding a new plan

Onboarding includes creating the plan document, educating employees and connecting systems. While some providers waive setup fees as an incentive, others charge depending on plan complexity and the level of customization required.

401(k) administration fees and expenses

After the plan is live, the employer incurs ongoing costs for managing and maintaining it. Ongoing 401(k) management fees typically cover:

• Record keeping – Tracking contributions, maintaining participant balances, managing loans/withdrawals and issuing statements costs $45 and up per participant, per year. Fees may vary based on package and product solutions a service provider may offer, as well as the size of the plan (number of participants).
• Custodial services – Executing trades, contributions and distributions typically costs .01-.05% of plan assets annually.
• Investment advisory services – Compensating the plan investment advisor for fund selection and performance monitoring typically costs .10-.50% of plan assets annually.
• Investment management fees – The expense ratios of mutual funds chosen for the plan range from 0.5% to 2% or higher of the total assets under management. Passively managed index funds typically have lower costs, whereas actively managed funds can be more expensive.
• Annual compliance testing – Plans that are not safe harbor must test annually to make sure contributions don’t favor highly compensated employees. Testing is typically bundled with TPA services and costs $500-$1,500 per year.

How much does a 401(k) cost an employer?

Do employers pay 401(k) fees?

Plan sponsors often wonder whether employers pay 401(k) fees or if they’re passed on to employees. The answer: It can be both, but it varies.

• Employer-paid – Some companies cover all plan expenses.
• Participant-paid – Investment-related expenses are typically paid by employees.
• Shared responsibility – Many employers cover administrative costs while participants cover investment-related fees.

At ADP, our enhanced service tier generally has an annual base fee of $250-$400, plus approximately $5-$14 per participant (actual pricing varies by plan size, selected services and complexity). If plan sponsors elect to charge these costs to participant accounts, they should carefully review all fees to confirm they qualify as legitimate plan expenses.

401(k) matching costs

Matching employee contributions is one of the largest expenses for employers offering a 401(k). Although not a requirement, it’s become a standard feature in many plans because employees and job applicants alike value it. Small employers with 100 employees or fewer may also be eligible for tax credits on matching employer contributions.¹

The most common formula is a 100% match on the first 3% of employee salary and a 50% match on the next 2%, which equals a 4% total employer match.

For example, an employee earning $60,000 who contributes 5% ($3,000) would receive a $2,400 (4% maximum) employer match using this formula. Multiply the $2,400 contribution across a workforce of 20 employees earning a similar salary and the annual employer match totals about $48,000.

How can employers lower their 401(k) costs?

While offering a retirement plan comes with costs, there are several ways to reduce expenses and still provide substantial benefits for employees:

1. Choose a low-cost 401(k) provider
Modern 401(k) providers often bundle administrative services and offer flat-fee pricing, which can significantly reduce overhead. Look for transparent 401(k) management fees, digital automation and fiduciary support.

2. Share fees with employees
Employers can legally share investment and plan administrative costs with plan participants as long as the fee structure is clearly disclosed.

3. Claim tax credits
Eligible small businesses (with 100 or fewer employees) may qualify for the SECURE Act startup tax credit, which covers 50% of setup and administration costs for the first three years, up to $5,000 per year. There's also an automatic enrollment credit of $500 per year for up to three years.¹

4. Set a match cap
Offering a capped or tiered match helps employers control costs. For instance, matching 50% of the first 6% of employee contributions caps the match at 3% of salary.

5. Use forfeitures to pay expenses
The IRS specifies that employers may use forfeitures for some plan expenses provided that these methods are outlined in the plan document.

Learn more about forfeitures and how they may be used

Optional 401(k) costs: Employer match and profit-sharing

While not all employer contributions are mandatory, employers may choose to enhance their plans with discretionary match or profit-sharing contributions.

Employer match

Safe harbor matches are required to avoid annual IRS testing, but they offer full deductibility and predictable costs. A common safe harbor formula is 100% match up to 4% or 5% of employee pay with immediate vesting. Discretionary matches offer flexibility but require annual testing and may have longer vesting schedules.

Employer profit-sharing contributions

Though optional, profit sharing can be a powerful tool to reward employees or allow owners and highly compensated employees (HCEs) to hit the IRS contribution limit, currently $66,000 (or $73,500 with catch-up contributions for those over 50).

The costs of staying in compliance

What is a 401(k) audit?

Plans with over 100 eligible participants must undergo a 401(k) audit, which costs upwards of $10,000 annually, depending on the firm and audit scope.

Avoiding compliance costs

Adopting a safe harbor 401(k) plan design can eliminate testing requirements, simplify administration and lower long-term compliance costs. You can reduce audit costs by choosing providers that offer automated record keeping, built-in fiduciary support and digital audit trails.

Benefits of offering employees a 401(k)

Despite the costs, a 401(k) plan delivers long-term value for businesses:

• Attract and retain talent – A retirement plan helps businesses compete for top talent.
• Tax advantages – Employer contributions are tax-deductible, reducing taxable income.
• Employee financial security – Employees with access to retirement plans are more likely to feel financially stable, which helps improve productivity and morale.
• Improved company culture – Offering benefits shows employees that employers care about their future, fostering loyalty and engagement.

In 2024, 66% of private industry workers had access to defined contribution retirement plans, while 24% had access to defined benefit retirement plans, according to the U.S. Bureau of Labor Statistics. Not offering a retirement benefit could make businesses less competitive.²

Choosing a 401(k)Employers should ask the following questions when looking for a 401(k) plan for their business:

• What are the total 401(k) costs, including hidden fees?
• How much should 401(k) fees be for a company of my size?
• Does the provider offer fiduciary services and compliance support?
• Can employees access a user-friendly digital portal?
• Is there flexibility to scale as we grow?

Here’s an overview comparison of 401(k) plans and their high-level attributes:

Plan Type	For	Key Features	Employer Contributions	Compliance Requirements	Administrative Complexity
Traditional 401(k)	Most businesses, especially mid to large	Employee pretax deferrals, employer match optional, high contribution limits	Optional match or profit sharing, must follow nondiscrimination testing	Must pass annual nondiscrimination tests (ADP, ACP, top-heavy)	Moderate to high
Safe harbor 401(k)	For businesses wanting to avoid testing	Similar to traditional 401(k) but avoids testing through mandatory employer contributions	Mandatory match 100% up to 3%, then 50% from 3-5% or non-elective 3% to all	Exempt from most annual nondiscrimination tests	Moderate
SIMPLE IRA	Small businesses (≤100 employees)	Combines IRA simplicity with 401(k) features, limited flexibility	Mandatory match dollar-for-dollar up to 3% or 2% to all employees	Exempt from nondiscrimination testing	Low
Solo 401(k)	Owner-only businesses (no employees)	High contribution limits for self-employed owners	Owner contributes both as employee and employer	No annual testing, Form 5500 required if assets > $250K	Low
Starter 401(k)	Small businesses (≤100 employees)	Automatic enrollment, lower contribution limits and simplified compliance	Not required	Exempt from nondiscrimination testing	Low

The ideal 401(k) for every business

ADP provides different 401(k) programs that readily meet the unique needs of different businesses. We can help you offer your employees a valuable way to save and invest in their future financial security.

No business is too small to benefit from a retirement plan – costs, plans and administrative options vary. With so many choices available today, there is a right retirement plan for you.

ADP delivers benefits across businesses with easy administration and interactive resources to keep employees engaged. We can help you create a retirement plan that’s smart and easy for your business with no investment bias, whether you have one employee or thousands.

Conclusion

A 401(k) plan is a powerful investment in employees and businesses, but understanding the costs is essential. When budgeting for a plan, employers must consider setup expenses, 401(k) administration fees and optional contributions, like matching and profit-sharing. Employers should look for technology, fiduciary outsourcing and efficient plan design that can help them efficiently manage costs without sacrificing quality. In return, they’ll have a strong benefits package, tax advantages and a more engaged, loyal workforce.

¹ IRS, “Retirement plans startup costs tax credit”
² U.S. Bureau of Labor Statistics, “Percentage of private industry workers with access to employer-provided benefits”

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ADP Inc. owns and operates the ADP.com website. Unless otherwise disclosed or agreed to in writing with a client, ADP, Inc. and its affiliates (ADP) do not endorse or recommend specific investment companies or products. Please consult with your own advisors for such advice. Investment options are available through the applicable entity(ies) for each retirement product. Investment options in the “ADP Direct Products” are available through either ADP Broker-Dealer, Inc. (ADP BD), Member FINRA, an affiliate of ADP, Inc., One ADP Blvd, Roseland, NJ 07068 or (in the case of certain investments) ADP, Inc. Only registered representatives of ADP BD may offer and sell ADP retirement products and services or speak to retirement plan features and/or investment options available in any ADP retirement products.