A 401(k) retirement plan is a crucial benefit for private-sector workers, and having a strong plan is now an expected part of the total benefits package. Therefore, businesses looking to set up a retirement plan for their employees should carefully evaluate which 401(k) plan provider best suits their needs in terms of cost, service, and investment options, among other factors.
Below are some of the best 401(k) plans by provider along with key information about each:
Best 401(k) plans
- Merrill Edge 401(k)
- Vanguard 401(k)
- Fidelity Investments 401(k)
- ADP 401(k)
- Betterment for Business 401(k)
- Charles Schwab 401(k)
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Bankrate selected its top 401(k) providers based on the following criteria:
- Cost
- Types of available plans
- Customer support
- Investment funds
- Education and advice
Best 401(k) plans
Merrill Small Business 401(k)
Merrill offers a 401(k) plan with low one-time fees and low ongoing fees for the company. Fees for employees are higher, however, with both a flat administrative fee and a fee based on assets under management, so it grows as the portfolio grows. But that fee does buy something extra, including portfolios managed by a third party management firm and access to advisors, even in person at parent Bank of America. Plus, a benefit of a 401(k) here is that employees may already be customers of the bank, letting them keep their finances under one roof.
- Costs to company: $390 setup fee, then $90 per month
- Costs to employees: 0.52 percent of assets annually, $4 per month administrative fee
Vanguard 401(k)
One of the biggest advantages of going with a Vanguard 401(k) is that you’re working with a leader in low-cost investing, especially when it comes to its in-house funds. Not only will a 401(k) have access to all Vanguard’s low-cost funds, but it can access up to 12,000 other funds, if your plan has at least $2 million in assets. Vanguard also offers the option to let employees self-direct their portfolio, giving them full flexibility in what they invest in – perfect for experienced investors – and even allows them to invest in company stock.
- Cost to company: Fees vary
- Costs to employees: Fees vary
Fidelity Investments 401(k)
Fidelity is a great pick for a 401(k) because of its robust investment options and strong advisory and administrative support. Fidelity can offer literally thousands of mutual funds to participants, and advisors can help companies craft a plan that works for them. Higher employee costs help pay for that strong customer and advisor support, and employees also have access to their accounts at any time via a comprehensive dashboard that lets them adjust their investment choices and deductions at any time. With a 401(k) at a powerhouse financial institution like Fidelity, employees may have other accounts they can consolidate, making things a bit simpler.
- Cost to company: $500 set-up fee and $300 per quarter
- Costs to employees: $25 per quarter and 0.125 percent of assets quarterly (0.5 percent annualized)
ADP 401(k)
One of the biggest advantages ADP may offer employers is an easy-to-implement 401(k) plan that can quickly integrate with the company’s other offerings, such as payroll processing. ADP offers three 401(k) service tiers for companies of various sizes, including automatic enrollment and fiduciary advisors starting with the entry-level tier. The plan provides access to more than 13,000 funds, giving you plenty of investment options. ADP may be a good pick if your company already receives service here or is thinking about moving your business here.
- Cost to company: Fees vary and include 0.1 percent month for assets under management (subject to a minimum of $30 per month)
- Costs to employees: Fees vary
Betterment at Work 401(k)
Robo-advisor Betterment offers three tiers of service at various price points. Participants have access to a variety of curated portfolios, including a core portfolio as well as a social impact portfolio, though more adept investors can adjust portfolio weights as they like, and fees are reasonable. Betterment lets you add financial coaching to its mid-tier package, while it’s a standard feature on the high-end offering. You can also set up automatic enrollment for employees as well as profit-sharing, giving you flexibility in employer contributions.
- Cost to company: $500 one-time setup, then $1,200 (Essential), $1,800 (Pro) or $3,500 (Flagship) annually plus $5-$8 per employee per month
- Costs to employees: 0.25 percent of assets under management, or the employer can pay
Charles Schwab 401(k)
Charles Schwab has long been known as one of the most investor-friendly outfits, and for its 401(k) it offers a managed portfolio for plan participants, providing personalized investment advice and support for sponsors. Schwab can automatically enroll employees and can set up matching contributions if your company intends to offer them. Support is always a strong suit at Schwab, too, meaning your employees can reach someone knowledgeable quickly.
- Cost to company: Fees vary
- Costs to employees: Fees vary
How does a 401(k) work?
Along with Social Security, a 401(k) can form a cornerstone in your retirement savings strategy. Here’s how a 401(k) works and the key things to know about it.
A 401(k) is a tax-advantaged retirement plan offered by employers that allows employees to contribute and invest a portion of their salary. Contributions are automatically deducted from an employee’s paycheck and can then be invested in potentially high-return investments such as index funds. This setup makes it easy for employees to save without having to think about it.
Many companies match contributions made by their employees, up to a certain percentage of their salaries, often 4 or 5 percent.
The 401(k) match is a crucial benefit of the plan, greatly enhancing employees’ ability to save for retirement.
There are two main types of 401(k) plans: the traditional 401(k) and the Roth 401(k).
In a traditional 401(k), employees contribute with pre-tax dollars, allowing their contributions to grow tax-deferred until withdrawal, at which point they are taxed as regular income. Early withdrawals before age 59 ½ may incur a 10 percent penalty tax.
On the other hand, in a Roth 401(k), employees contribute with after-tax dollars, meaning they pay taxes upfront. The contributions grow tax-free and can be withdrawn tax-free after age 59 ½.
The annual contribution limit for a 401(k) is $23,000 in 2024, with individuals aged 50 and older eligible to make catch-up contributions of up to $7,500. Employer matching contributions do not count towards this limit.
When selecting a 401(k) provider, factors to consider include cost, investment options, advice and guidance, customer support, and additional features such as loan options against the account balance or automatic contribution increases.
While the 401(k) is a popular retirement plan, smaller businesses and sole proprietors may find other options more suitable. The SEP IRA, SIMPLE IRA, and Solo 401(k) are designed for smaller companies, offering tax advantages and flexibility in contributions.
These alternative retirement plans can be easier to manage and administer for smaller businesses. It’s essential for investors to conduct independent research before making any investment decisions, as past performance is not indicative of future results. following sentence in a different way:
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