How to choose a small business 401(k) provider

Whether you're shopping for a car or just lunch, you'll probably do your due diligence beforehand. Choosing a small business 401(k) provider shouldn't be any different.

The race for talent, coupled with the fact over 90 percent of employees expect retirement benefits, has created a crowded market of 401(k) providers, consultants, and technology platforms. But nearly a quarter of small business owners admit they're "flying blind" when it comes to selecting a 401(k) solution.

When you make the right choice, you'll know it—employees are engaged, costs are low, and administration is easy. When you don't, it can be a costly mistake and compliance liability. Here's what to consider when choosing a 401(k) provider.

1. Decide how involved you want to be.

No matter how seamless the front-end experience seems for employees, offering retirement benefits involves a lot of behind-the-scenes work. Sure, there are plenty of upfront challenges, like finalizing your plan design and deciding whether you'll offer both traditional and Roth 401(k) contributions. But the biggest time commitment might involve day-to-day maintenance, compliance, and reporting. Below are just a few of the core duties handled by a 401(k) plan administrator.

• Preparation of Summary Plan Description for participants and beneficiaries

• Participant disclosure documents and account statements

• Approval of transactions (e.g., loans, distributions)

• Compliance with plan rules and federal laws

• Discrimination testing and audit support

• Employee enrollment and communications

• Required Internal Revenue Service and Department of Labor filings (e.g., Form 5500)

If that sounds like a full-time job, that's because it is. Small businesses often turn to third-party administrators (TPAs) to handle these responsibilities on their behalf. Even TPAs vary widely in their scope, responsibilities, and accountability. For example, ERISA 3(16) fiduciaries take on administration duties and liability so your plan remains compliant with the Employee Retirement Income Security Act (ERISA).

If that wasn't daunting enough, remember that there's more to managing a retirement plan than administration and compliance. Unless you want to handle your plan's investment strategy yourself, you need an investment advisor and manager.

Hint: Gusto Retirement handles administration and compliance for bundled fees. Gusto Investment Services, LLC takes care of investment management for an AUM fee of 0.25%.¹ Learn more >

2. Know your total expense ratio.

If you're looking for a metric that sums up how much your 401(k) plan might cost employees, look no further than your total expense ratio. This is simply the percentage that participants are charged based on their holdings. For example, a 1% expense ratio means that an employee with $100,000 in their 401(k) account would be charged $1,000 per year. As you evaluate providers, ask about their average expense ratios and other fees.

So what's considered a fair market expense ratio? It depends on your size. While it sounds counterintuitive, smaller companies usually pay higher expense ratios. According to the 401(k) Averages Book, plans with around $5 million in assets average a 1.08% total expense ratio — compared to just 0.76% for plans with $50 million in assets.While those percentages sound small, they result in significantly higher total fees and can meaningfully reduce long-term returns as balances grow. Because small businesses have enough to worry about, Gusto Investment Services, LLC’s managed portfolios use funds with blended expense ratios of about 0.058%–0.061% of assets under management.⁶

3. Ask about plan features and options.

There's no one-size-fits-all approach to saving for retirement. Employers have access to a variety of creative solutions for boosting participation and rewarding employees who save. You'll want to make sure that the providers you consider can accommodate your needs.

One of the first things you'll want to confirm is whether the provider supports both traditional and Roth 401(k) contributions. The difference between the two has to do with when the dollars are taxed. Employees with traditional 401(k) accounts make their retirement contributions before taxes and these amounts grow tax-deferred until they start withdrawing funds. The thought is that tax brackets will be lower after retirement. Conversely, those with Roth 401(k) accounts make their contributions after-tax. These amounts grow tax free and are generally tax free to employees at distribution so long as they are held for at least five years.⁵ Though Roth contributions take a bigger bite out of employee paychecks, the arrangement is popular with younger workers since they have a longer runway to retirement. Choice is king—bottom line, any reputable vendor should support both types of contributions.

Safe Harbor 401(k) plans are also worth considering. These special plans automatically satisfy most nondiscrimination testing but, in turn, require you to contribute to your employee's 401(k) accounts.

Given that both employer matching and profit-sharing are two great ways to boost participation, retain talent, and even save on taxes,⁴ the arrangement might be the right choice for your company. Just make sure that the 401(k) plan providers you're evaluating can actually accommodate Safe Harbor plans and matching arrangements.

Hint: Gusto Retirement offers a full suite of options for companies and their employees, including traditional, Roth, and Safe Harbor plan designs. Learn more >

4. Prioritize user experience

Managing retirement benefits should be easy for both your business and its employees. As you consider your options, pay careful attention to user experience.

Does the provider's technology make it easy for participants to roll over a previous retirement account? Does it give employees access to a single dashboard where they can check their balance, view transaction data, update contributions, and check in on your employer match? The harder this information is to find, the less perceived value employees get from your retirement offering.

Additionally, consider whether the provider has a mobile app or is mobile enabled, so that employees can securely access their account information on the go.

As intuitive as the software might be, it's a safe bet that employees will have retirement-related questions along the way. Your small business's HR team (if you even have one) is already wearing a lot of hats — don't force them to add "retirement expert" to the list. You may want to work with providers that bundle their software with service catering to all of your users, including HR professionals and 401(k) participants.

Hint: Gusto Retirement makes it easy for employees to check their balances, contribution rates, and more — all in one place.

5. Ask about payroll integrations

Payroll and retirement go hand in hand. When employees update their contributions, they trust those amounts will be deposited into their retirement accounts after payday. In the past, making that happen required HR to manually enter deferrals into payroll. That approach is time-consuming and prone to administrative errors.

When considering 401(k) providers, weigh whether they have a full 360 integration with your HR and payroll software. There are benefits beyond streamlined contributions, too. If you want to auto-enroll new hires into a 401(k) account, ask whether the providers' integrations support that. Investing in a solution that keeps HR, payroll, and retirement in sync not only saves time and money, but makes for a better employee experience overall.

Evaluating 401(k) providers can be intimidating, which is why small businesses often put off the decision. But delaying further can put companies at a competitive disadvantage, as jobseekers increasingly see employer-sponsored retirement benefits as a must-have.

As the saying goes, "you don't know what you don't know." When you're on the phone, knowing what to ask for is half the battle.

The 401(k) Checklist

FAQs

What should I look for in a 401(k) provider?

Key factors to look for in a 401(k) provider include: Level of administrative support (whether they handle compliance and filings), total expense ratio, plan features (traditional/Roth/Safe Harbor options), user experience for both HR and employees, payroll integration capabilities, and customer support quality.

Should I choose a provider that handles administration?

For most small businesses, yes. Managing a 401(k) involves compliance testing, IRS filings, participant communications, and more. It’s essentially a full-time job. You may want to look for providers that offer ERISA 3(16) fiduciary services to handle administration and liability on your behalf.

What plan features should a good provider offer?

You may want to look for providers that support both traditional and Roth 401(k) contributions, Safe Harbor plans, employer matching, and profit-sharing options. These features give you flexibility to design a plan that fits your business goals and employee needs.

Why is payroll integration important?

Payroll integration automates contribution transfers, reduces manual data entry errors, and saves HR time. It also enables features like automatic enrollment for new hires. A good integration should keep HR, payroll, and retirement data in sync.

Disclosure

¹Investment advisory services for Gusto’s 401(k) product (when 3(38) fiduciary services are appointed) and SEP IRA/IRA products are offered by Gusto Investment Services, LLC, an affiliated SEC-registered investment adviser. 3(16) fiduciary services are offered by its affiliate, Gusto Retirement Services, LLC, and only made available to clients who use the integration services available through Gusto’s payroll services.

² Recordkeeping services are offered by Gusto Retirement Services, LLC. 3(16) plan administration services are also offered by Gusto Retirement Services, LLC and only made available to clients who utilize an eligible payroll provider. For more information on Gusto Retirement’s pricing, see https://my.guideline.com/agreements/fees.

³ Investment advisory services for Gusto 401(k) product (when 3(38) fiduciary services are appointed) and SEP/IRA/IRA products are offered by Gusto Investment Services, LLC, an affiliated SEC-registered investment adviser. Illustration assumes an annual account fee of 0.25% charged by Gusto Investment Services, LLC, which is applied to assets under management and is deducted on a monthly basis. Alternative account fee pricing is available, ranging from 0.15% to 0.35%. See the Form ADV 2A Brochure for more information regarding fees.

⁴ You should consult a tax professional to determine what types of tax credits or deductions your company is eligible to claim.

⁵ Roth distributions will be tax-free if the following conditions are met: (a) Roth contributions are always distributed tax-free. The earnings on Roth contributions will be generally tax-free if the following conditions are met: (a) you're either over age 59 ½, disabled, or have died AND (b) it has been 5 years since your first Roth contribution under the current plan. Please consult a qualified financial advisor or tax professional to determine what is applicable to your financial situation.

⁶ Investment advisory services for Gusto 401(k) (when 3(38) fiduciary services are appointed) and SEP IRA/IRA products are offered by Gusto Investment Services, LLC, an affiliated SEC-registered investment adviser. The managed portfolios have blended expense ratios ranging from 0.058% to 0.061% of assets under management. Expense ratios for custom portfolios will vary. These expense ratios are subject to change by and paid to the fund(s). View full fund lineup