Cost of employee benefits: comparing retirement plans

Written by Kevin Hagen

By offering your employees a retirement plan, you provide them with an important benefit that helps you retain valued workers. And as the owner, you can also contribute to your own retirement savings. The cost of employee benefits consists of fees to set up and administer the plan, any costs you incur to operate the plan in-house, and contributions you make, either directly or by matching employee contributions. Your cost is partially offset by a tax credit for setting up the plan and the tax deductions you can claim for your expenses and contributions.

Comparing the cost of employee benefits for different plans

The SEP IRA is a plan designed for small businesses and the self-employed. This is the simplest and lowest-cost plan. The business's contribution can vary from year to year, which makes this plan flexible. You can contribute from 0% to 25% of compensation up to a limit ($49,000 for 2009), but employees can’t contribute.

A Simple IRA is for businesses with 100 or fewer employees. This plan is a little more complex than a SEP IRA, so the fees may be higher. The employer is required to match employee contributions dollar-for-dollar up to 3% of compensation, up to an annual maximum ($11,500 for 2009). Or the employer can contribute up to 2% compensation regardless of whether or not the employee contributes (up to a maximum of $4,900 for 2009).

A 401(k) plan is more complex – and most common – but can also provide the most flexibility. Administrative fees can range from $1,000 to $5,000 per year, depending on the plan, the investment options offered and the number of employees. Some administrators may charge an up-front fee to set up the plan and then a flat monthly fee, or a fee per employee to administer the plan.

Fees to manage fund investments are generally 1% to 2% of total fund assets. Under a 401(k) plan the employer can match employee contributions (up to $16,500 for 2009), or make "non-elective" contributions, whether or not employees contribute. You are not required to make any contributions.

A practical way to determine the cost of a 401(k) plan and compare costs among different providers is to use the 401(k) Plan Fee Disclosure Form from the U.S. Department of Labor. This form spells out the different types of fees and expenses involved and will help you make an informed cost-benefit decision. Providers often express their fees in different ways, and this form will help you analyze costs on a comparable basis.

Intangibles

Cost is not your only concern in choosing a retirement plan – you want a quality plan that meets the needs of your business and employees. Figuring the cost of employee benefits can also be done in reverse – analyzing how your business will be affected if you don't provide such benefits.

Let BuyerZone help you with your employee benefits. Submit a free BuyerZone request for quotes, and we’ll match you to multiple vendors who will help you determine the true cost of employee benefits.