How to choose a 401(k) provider for your small business

Most owners buy a 401(k) the way they buy payroll software: whoever showed up with a decent demo and a price that didn't scare them. Then the plan runs for a decade on autopilot while fees compound against every participant. Here's the framework I'd want a friend to use.

First, understand what you're actually buying

Every 401(k) plan needs three functions, whoever performs them:

1. Recordkeeping — the ledger and the website. Tracking who owns what, processing contributions, serving statements.
2. Administration and compliance — the plan document, nondiscrimination testing (ADP/ACP), top-heavy testing, Form 5500, required notices. This is the job a TPA (third-party administrator) does in unbundled arrangements.
3. Investments and advice — the fund menu, and possibly a human advisor for you or your employees.

A bundled provider (the payroll-integrated platforms and large recordkeepers) packages all three. An unbundled arrangement pairs a recordkeeper with an independent TPA and often an independent advisor.

The trade is straightforward: bundled is operationally simpler — one vendor, one integration, one invoice. Unbundled buys you an administrator whose loyalty is to the plan rather than to the platform, real plan-design flexibility (new comparability profit sharing, unusual eligibility, cash balance add-ons), and someone who'll actually pick up the phone when the IRS sends a letter. For a plain vanilla safe-harbor plan with a young workforce, bundled is usually fine. The moment your goals get interesting — owners want to maximize contributions, demographics are lopsided, you're acquiring another company — unbundled starts earning its keep.

The three places fees hide

Ask any provider "what does this cost?" and you'll get one number. There are three.

Hard-dollar fees. The visible ones: a base annual fee, per-participant charges, maybe setup. These are the most honest fees and, perversely, the ones owners negotiate hardest against.

Asset-based fees. A percentage of plan assets — sometimes labeled a "custody fee," "program fee," or "advisory fee." The pitch writes itself: "only 0.5%, and nothing until you have assets." Run the projection instead: a plan growing to $3 million pays $15,000 per year at 0.5%, forever, for the same recordkeeping it got at $300,000. Asset-based pricing is a teaser rate on your own future money.

Fund expense ratios. The costs inside the investment menu, netted invisibly out of returns. This is also where revenue sharing lives — funds that quietly rebate part of their expense ratio back to the recordkeeper. If a provider's headline price looks impossibly low, the difference is usually in here.

Neither model is inherently wrong — asset-based pricing genuinely helps a startup plan with no assets. The failure mode is signing an asset-based contract and never rebidding it. Put a recurring calendar entry three years out that says "rebid the 401(k)," and you'll beat most of the market on this alone. As the plan sponsor you have a legal duty to ensure fees are reasonable for the services received — "we were busy" is not a defense the Department of Labor accepts.

Decoding the fiduciary labels

Sales decks love the word fiduciary. It refers to at least three different jobs, named after ERISA sections:

• 3(21) investment advisor — recommends the fund menu; you still approve it. Shared responsibility, lowest tier.
• 3(38) investment manager — selects and monitors the menu with discretion. You've delegated investment decisions and keep only the duty to monitor the manager. Stronger protection, and what I'd generally want.
• 3(16) plan administrator — takes over specified administrative duties: notices, filings, sometimes eligibility tracking. Valuable exactly to the extent the contract lists real duties — read the list, because "3(16) lite" offerings abound.

Two things no vendor removes: your duty to prudently select and monitor the providers themselves, and — this one is absolute — your obligation to deposit employee deferrals on time. Late deferral deposits are the most common small-plan compliance failure I see, they're self-reported on the 5500, and no fiduciary package makes them someone else's problem.

Questions that separate good providers from good salespeople

Take these to any finalist and watch how they answer:

1. "Show me every fee in the 408(b)(2) disclosure — hard dollar, asset-based, and revenue sharing — as one annual dollar number at our current size and at 3× our size."
2. "Are you taking discretion as a 3(38) and a 3(16)? Show me the exact list of 3(16) duties you assume in the contract."
3. "Do your funds pay you revenue sharing? If so, is it rebated to participants?"
4. "Who runs nondiscrimination testing, when do we see results, and who fixes a failure — and what does that cost?"
5. "What's the deconversion fee and process if we leave?" (Asking about the exit before you enter tells you a lot.)
6. "Which plan-design options do you actually support — safe harbor variants, new comparability, after-tax contributions, in-plan Roth conversion?"

A provider who answers these crisply, in writing, is probably safe to hire. A provider who redirects to the participant app demo is telling you where their margins come from.

The bottom line

Pick the service model first (bundled vs unbundled), based on how complicated your goals are. Then force every finalist's cost into one all-in dollar number — today and at the size you expect to be. Then decide which fiduciary duties you're delegating and get the delegation in writing. Do those three things and rebid every few years, and you'll be running a better plan than the large majority of small businesses — including plenty with more employees and more lawyers.