How Top Employers Are Turning 401(k) Fees Into a Tax-Smart Advantage
See how moving fees off plan assets can benefit everyone involved.
For many business owners, offering a 401(k) plan is seen as a valuable benefit — a way to support employees, encourage retention, and build long‑term financial stability. But behind the scenes, the way fees are handled in these plans may be quietly working against that goal.
While administrative fees are a necessary part of plan maintenance, how they’re paid can make a significant difference — not just for your employees, but for you as the plan’s largest participant and fiduciary.
It’s an overlooked detail with long‑term consequences. Fortunately, it’s one that can be corrected.
Understanding the True Cost of Plan Fees
Administrative expenses typically fall into three categories:
- Direct fees, deducted from participant accounts and disclosed through standard fee reports.
- Indirect fees, often referred to as “hidden,” embedded in investment products and rarely listed clearly.
- Employer‑paid fees, which are covered directly by the business and not pulled from plan balances.
The third option — employer‑paid — is not as widely discussed. But among my clients, roughly 80% now choose to pay their plan fees directly from their business accounts.
Why? Because it protects their own savings, reduces their tax liability, and improves employee outcomes — all without changing providers or increasing risk.
The Math Behind the Method
The impact of administrative fees is easy to underestimate. Consider a participant with $25,000 in their account, left untouched and earning 7% annually for 35 years:
- No fees: $289,640
- 1% annual fee: $204,119
- 2% annual fee: $143,848
That’s a difference of nearly $146,000, lost purely to compounding fees — not poor performance or bad decisions. Now imagine that same impact on a business owner’s larger account. The effect is magnified.
Four Reasons to Shift Fees to the Business
- Preserve personal savings — When you hold the largest account in the plan, you’re absorbing the greatest cost. Paying from the business shields your own long‑term growth.
- Reduce your tax liability — Plan administration fees paid by the company are deductible business expenses. What would otherwise erode retirement balances instead becomes a tax‑saving line item.
- Improve employee outcomes — Removing fees from participant accounts helps employees build faster and stay more engaged. Their savings stay intact, and their performance improves.
- Lower fiduciary exposure — ERISA requires plan sponsors to ensure fees are reasonable. Paying through the business not only makes that process more transparent, but simplifies compliance.
Additional Incentives Through SECURE 2.0
Recent legislative updates under SECURE Act 2.0 provide added support for businesses willing to revisit their plan structure. Tax credits are now available for:
- Starting a new plan
- Adding automatic enrollment
- Contributing to employee accounts
These credits can total up to $5,000 per year, plus additional per‑employee incentives — making the shift to employer‑paid fees not only beneficial, but financially strategic.
A Practical Adjustment with Long‑Term Value
Revisiting how your plan pays for itself may seem like a small change. But for many of my clients, it has led to meaningful improvements in long‑term growth, tax efficiency, and fiduciary confidence.
There’s no pressure, just a chance to determine whether a smarter, cleaner solution might be right for your business.
