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Retirement Planning > Retirement Investing

Administrative Costs Hit Small Retirement Plans Hard

By Allison Bell

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The sponsor of a very small 401(k) plan could spend more than 6 times as much per employee on administration than the sponsor of a giant 401(k) plan would spend.[@@]

Joel Popkin, a researcher in Washington, has quantified the administrative burdens facing “baby groups” in a report on benefits costs released today by the U.S. Small Business Administration.

When Popkin reviewed administrative expense data from 1998 retirement plan tax forms, he found stark differences between the average annual per-employee administrative expense levels for large, midsize employers.

For an employer with more than 5,000 employees, the average annual per-employee administrative cost is $31 for defined contribution plans and $159 for defined benefit plans.

At midsize employers with 51 to 100 employees, the averages are $59 for defined contribution plans and $217 for defined benefit plans.

For “baby groups,” or groups with 6 to 10 employees, the averages are $192 for defined contribution plans and $541 for defined benefit plans.

Figures for employers with fewer than 6 employees may not be directly comparable, because micro-groups with defined benefit plans, for example, may be using special plan designs to provide benefits and tax advantages for wealthy professionals.

But at the employers with 5 or fewer employees, plan costs averaged a stratospheric $439 for defined contribution plans and $959 for defined benefit plans.

“There appears to be a rough minimum of administrative costs for these plans,” Popkin concludes. “The average total payment of administrative costs is nearly the same for companies with 5 and fewer employees as it is for companies with 6 to 10 employees and is only slightly higher for companies with up to 50 employees.”

The Popkin report is on the Web at //www.sba.gov/advo/research/rs262tot.pdf

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