Human Interest has released research on unexpected retirement plan costs faced by US small and mid-sized businesses, based on a survey of 500 benefits decision-makers at firms with fewer than 1,000 employees.
The study found that fees for unplanned retirement plans are affecting both employers and workers. Some 63% of respondents said they had paid fees they did not anticipate when choosing their current provider, and 73% said those charges had increased the overall cost of their benefits programme.
Among employers surveyed, 13% said they had terminated a retirement plan because they could not afford the additional costs. Another 26% said they had lowered their matching contribution to save money, while 31% said they had cut other benefits to offset the expense.
The survey also suggested that workers are bearing part of the burden. According to the data, 81% of respondents said providers charged employees fees for hardship withdrawals and loan originations. In comparison, 63% reported that participants withdrew from a plan because transaction fees were unaffordable, unexpected, or confusing.
Nearly half of respondents (49%) said complaints and support tickets had increased because employees were frustrated, confused, or surprised by these charges. Human Interest said this reflected broader pressure on retirement savings and on the staff responsible for running benefit schemes.
Cost pressure
Extra service charges and plan event fees could account for as much as 60% of total retirement plan costs for smaller employers, according to the report. These costs included third-party services such as auditors and ERISA counsel, as well as routine administrative processes including participant searches, compliance updates and tax filings.
Respondents said they spent an average of 4.2 hours a week managing third parties, added services and participant issues linked to transaction fees. According to the report, this represented 93% of the total time spent administering the benefit.
Based on the average salary reported by survey participants, Human Interest estimated that this amounted to about USD $12,870 per year spent on fees rather than other business activities. It is also estimated that transaction fees may total nearly USD $4 billion for participants and administrators across the market in 2025.
PEP findings
The research also highlighted pooled employer plans, or PEPs, which are often presented to smaller businesses as a simpler and cheaper option than standalone 401(k) plans. In the survey, however, employers using PEPs reported higher costs and more administrative work than sponsors of conventional 401(k) plans.
According to the data, 89% of PEP sponsors reported paying unexpected fees, compared with 53% of 401(k) sponsors. PEP sponsors also reported spending about 65% more in total annual plan costs than 401(k) sponsors.
The report found that 24% of PEP sponsors had hired ERISA counsel, even though the structure is designed, in part, to shift employers' fiduciary burden. PEP sponsors also spent 81% more time each week managing the plan than 401(k) sponsors.
Rakesh Mahajan, Chief Revenue Officer at Human Interest, commented on the effect of transaction-based pricing on smaller employers.
"Small and medium-size businesses are being nickel-and-dimed for every retirement plan transaction, distribution, and plan event," said Mahajan. "Transaction fees add up - in administration time, in cost, and in confusion for employees. These employers are the key to better retirement security for American workers, and should not be treated like a revenue stream. Transparent, predictable pricing is the standard the industry should be held to."
The survey was carried out by Talker Research using a random double-opt-in methodology. It questioned US-based business owners, partners, C-suite executives, and senior managers responsible for managing, administering, evaluating, or selecting retirement benefits at their companies, and excluded Human Interest customers.
Mahajan also addressed the findings on pooled employee plans.
"The PEP market was founded on the promise of simplicity and cost efficiency. Our data suggests that SMBs in PEPs are reporting higher total costs and more administrative burden than many may expect, including ERISA counsel costs that PEPs are designed to" reduce," he said.