401(k) Providers

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401(k) Providers Buyers Guide

401(K) PROVIDERS PRICING

Understanding the cost for a401(k) provider can be confusing, with a wide variety of plans available, and variability and complexity in fee structures. It’s important to be diligent and thorough when evaluating 401(k) provider options.  

IDENTIFY & PREPARE
PRICE, COMPARE, EVALUATE
ID WINNER, CONTRACT
IMPLEMENTATION AND BEYOND

What is a 401(k)?

A retirement program, typically offered in the form of a 401(k) plan, is a cornerstone of a comprehensive employee benefits plan offering and will help companies attract and retain exceptional employees.  Additionally, with tax advantages for both the participant and employer, 401(k) plans can be a sound business decision for many companies. 

401(K) PROVIDER SELECTION PROCESS

Tax laws and regulations provide strict guidelines for all 401(k) plans to follow. Thus, when comparing providers, you should consider the investments offered, features/services offered, flexibility in plan design, and overall financial stability and structure. Your company’s procurement processes, objectives, and time will heavily influence the time it takes to select a provider, but a general guideline is to allow 60-to-90 days.

PHASE 1: IDENTIFY & PREPARE

WHAT IS YOUR CURRENT SITUATION AND GOALS?

Is a 401(k) program a new venture for your organization? If so, allow yourself more time to work through the learning curve, and consider hiring an expert to help you. Are you replacing an existing solution?  Clearly inventory and document your existing program’s features and functionality.

Pinpoint areas that aren’t working or are missing, and identify preferred change with a new provider partner. However, don’t also forget to document what IS working, lest you lose that with your new provider. Having a defined list of criteria, and outlining your “must-haves” and “nice-to-haves” will be invaluable as you undertake the evaluation process.

WHO ARE THE INTERNAL STAKEHOLDERS?

In addition to evaluating employee needs, be sure to consider the priorities of your human resources, employee benefits and financial colleagues to ensure their needs are met. They may be involved directly in the selection process or just on the sidelines, but ensure you keep their objectives top-of-mind as you go through the evaluation process

PHASE 2: COMPARE & EVALUATE

WHAT 401(K) PROVIDERS SHOULD I CONSIDER?

There are many types of firms providing a variety of 401(k) services. When you’re just starting out, there are some ways to start your research:

  • Perusing lists of 401(k) providers
  • Asking for recommendations from your industry peers
  • Browsing financial blogs
  • Visiting an industry trade show
  • Talking with providers. Tip: If you find a provider you like, ask them who their key competitors are.

Be sure to review your list of current providers, especially those with whom you have a successful relationship. Your financial institutions likely offer 401(k) programs, and many payroll providers and insurance brokers do as well.

401(k) providers come in all shapes and sizes; from well-established, financial heavyweights, to tech-focused newer entrants, and everything in between. Some focus on smaller companies and others focus on medium- or large-sized businesses. Your company culture and requirements will likely guide you in a certain direction, though if you have the flexibility, we encourage you to evaluate several different types of providers to get a full understanding of the landscape.

Depending on your company’s objectives, you may want to find a provider who offers:

Roth 401(k) in addition to a pre-tax 401(k)
Quality, variety, and number of investment options
Dedicated customer support for the employer
Fiduciary and trustee services or outsourcing
Compliance and reporting support, such a nondiscrimination testing and Form 5500
Easy (and inexpensive/free) options to rollover an “old” 401(k)
Supporting automatic annual increases to participant contribution rates.

Additionally, consistent, clear, and robust employee education will be a key to the program’s success and should be included as part of an overall financial wellness strategy.

WHAT ARE FEATURES OF 401(K) PROGRAMS?

401(k) programs provide many standard features regardless of the provider, such as generous annual contribution limits, facilitating an employer match, and tax advantages. Other features can vary from provider to provider.

Options might include:

Mobile apps
Access to investment advisors
Intuitive participant web portal

Options might include:

Webinars
Seminars
One-on-one phone, email or in-person consultation

WHO SHOULD HAVE FIDUCIARY RESPONSIBILITY OF MY PLAN?

There are a plethora of legal and tax considerations that should be reviewed as part of your 401(k) evaluation project. Perhaps one of the most important is identifying who should have fiduciary responsibility over the plan. The Employee Retirement Income Security Act of 1974 (ERISA) requires the designation of at least one fiduciary.

Whomever takes fiduciary responsibility of the plan has personal and legal liabilities to make sound choices on behalf of the employees, including:

  • ensuring fees aren’t excessive
  • selecting prudent investment options
  • following governmental reporting and participant disclosure requirements

Many companies prefer to outsource some or all of these responsibilities to mitigate their risk. If you’re considering outsourcing these duties, understand that not all responsibilities may be offloaded to a third party. Review the service contracts, ask for fiduciary details in writing, and ask a lot of questions. Finally, if you do outsource some of your fiduciary responsibilities, you still must monitor the performance of the third-party fiduciary.

PHASE 3: ID WINNER, CONTRACT

WHAT CONTRACT DETAILS SHOULD I REVIEW?

As with any agreement with a new service provider, carefully review all of the details and ensure the services and delegation of responsibilities that you agreed upon are outlined clearly in the contract. 

Pay special attention to:

  • Fees, costs, and compensation. Review details including when you might incur additional fees, when fees can change, common additional expense you should be prepared for, participant costs, and more. Your potential provider should be happy to review all fees with you, in detail.
  • Services provided. Review any limitations on services provided.  Are the services outlined consistent with what was reviewed during the sales process?
  • Liability and indemnity. A big reason you’re working with a 401(k) provider is to offset some of your liability exposure. These terms are often written in the provider’s favor, and be sure these are reviewed and negotiated to protect your company.
  • Termination provision. 401(k) providers often have a 90-day termination provision in their contracts, and there are often fees associated.

Your legal team should thoroughly review the contracts and seek to negotiate any areas of concern.

PHASE 4: IMPLEMENTATION AND BEYOND

WHAT SHOULD I BE PREPARED FOR WHEN CHANGING PROVIDERS?

Going through implementation with your new 401(k) provider involves a number of steps.

IRS' successor rules aim to prevent employers from terminating one plan and beginning a new one.  When you switch providers, you’ll instead go through what is commonly called a conversion.

You likely focused on investment options as a big part of your review process. During implementation you’ll work with your new provider to select investment options for your employees. If you outsourced fiduciary responsibilities, they should provide significant guidance with this step.

You’ll continue to send plan contributions to your departing provider until you reach the “blackout period.”  This is a period of time, typically several weeks, where participants won’t have access to their 401(k) plans. They will not be able to act on their plan, such as adjusting investment options or making a withdrawal. Be sure to communicate this timeline to your employees.

Your departing provider will provide balances, loan, and investment information to the new provider. Once the information transfer is complete and approved, the blackout period ends, and the plan will go live with the new provider.

Throughout the transition, remain vigilant of your compliance requirements and confirm which vendor will have ownership. Ensure the responsible provider has access to the data needed, some of which may reside with the other provider. 

We recommend utilizing a variety of methods, from online calculators to mobile apps, paper mailing and in-person meetings. We all have different communication preferences, and this helps you reach the widest audience. Similarly, some promotion should target at the novice investor, while other resources should be highlighted for the savvier participants.

If you’re replacing an existing provider, be sure to clearly communicate any key information about re-enrolling and applicable blackout dates.

401(k) plan education is often included with annual employee benefit enrollment communications, as 401(k)s are often as valued as the medical, dental, life, and other core benefits that employees often receive from their employer.

And with many employers implementing financial wellness tools, 401(k) programs should be communicated as part of that overall program strategy.

HOW DO I PROMOTE THE 401(K) PROGRAM TO MY EMPLOYEES?

Initial promotion and ongoing, targeted education are the keys to successful employee adoption and satisfaction with your 401(k) program. Your new 401(k) provider likely has a plethora of communication materials which you can leverage. Lean on the experts for best practices and resources.

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WHAT DOES A 401(K) PROVIDER COST?

There are many fees that employers should understand when reviewing 401(k) provider options. On average, the all-in fee is 2.22%, but it can range from 0.2% to 5%. Typically, the smaller the employer the higher the percentage; fees are greatly impacted by the size of the employer, total assets, and number of participants in the plan.

Some fees are charged at a plan level while others are related to investments, and the majority of the plan’s costs are for investment management rather than plan administration.

Similar to most employee benefit plans, 401(k) costs are typically shared between the employer and participant.

WHAT OTHER 401(K) FEES MAY BE APPLICABLE?

In addition to administrative and investment fees, you should have a clear understanding of additional fees that may be imposed. You may want to ask about fees for services such as educational programs, investment advice, online transactions, access to white-glove customer support, and more. Some of these services may be included in the plan; other times they will be a supplementary cost.

Also consider integration needs with your HR and benefits systems to ensure uniformity and efficiency with the internal administration of the 401(k) plan. For example, you may need to set up an integration with your payroll software or HRIS software to ensure the 401(k) provider is notified when a new employee is eligible or the appropriate deductions are taken from a participant’s paycheck.

While not directly applicable to the employer, seek to understand other costs which may be charged to the participant if they use special services like a brokerage window or take out a loan or hardship withdrawal. Understanding these costs will help to serve your employers.

WHAT ARE COMMON 401(K) PROGRAM EMPLOYER COSTS?

While there are many types of expenses related to the administration of a 401(k) program, typical fees include:

  • Setup and termination costs are not always charged. When they are charged, they’re typically in the neighborhood of a few hundred to a few thousand dollars. As the name implies, these are one-time fees related to setup with your new 401(k) provider and termination of your current provider.
  • Investment fees are almost always charged as a percentage of assets and make up the majority of the plan’s costs. They cover investment management services and other investment–related services.
  • Administrative fees are often a flat fee and/or a  per-participant fee and average $100-to-$200 per participant per year. Sometimes these fees will be quarterly or annualized instead of monthly, and occasionally these costs are included in investment fees rather than separately charged. These fees cover the day-to-day functions of the plan such as educational materials, legal and trustee services, basic plan recordkeeping, and accounting services.

Employers often pay some of the administrative fees, but investment fees are almost always paid by the participant. Be sure to understand how much your participants will pay in fees, as an extra percentage in annual fees can significantly reduce a participant’s account balance over time.

FINAL THOUGHTS

Offering a 401(k) program is a key to ensuring your employee benefits package focuses on both the physical and financial health of your employees. It’s likely that most of your employees don’t have nearly enough saved for retirement, in fact, 48% of Americans age 55 and older don’t have any retirement savings at all.

A well-designed, thoughtfully promoted 401(k) program can be a key piece to help your employees get on a path to financial security.