With so many differing opinions as to the reliability of the social security system in the future, 401(k)s have become one of -if not the most- popular retirement savings options for Americans. For a long time, the administrative burden of managing retirement benefit plans for small businesses made it difficult for them to offer these services to employees without dedicated HR or finance teams. Keeping and attracting talented employees in your small business is a crucial point of ensuring your business continues to succeed and grow with its employees. 401(k) plans are such a popular option for workplace retirement planning because pooled employer plans are a cheaper and easier way to provide retirement benefits for employees.
To this day, small and medium-sized businesses are 11 times less likely to have access to 401(k) plans for their employees. 92% of large businesses (with more than 500 employees) offer 401(k) plans to their employees, yet only 12% of small businesses receive the same retirement benefits. Despite previous setbacks to retirement benefit plans for small businesses, new changes have never made it easier for businesses of even less than 10 employees to offer competitive benefits to their employees.
Traditional 401(k) providers require extensive administrative assistance with plan management and payment of higher fees, which for a long time meant that 401(k) plans were out of reach for smaller businesses with fewer employees. Exorbitant fees and less attention given to smaller businesses have led to the prevailing misconception that 401(k) plans aren’t meant for small businesses altogether. Through the development of financial technologies, modern 401(k) providers have removed the previous barriers to small businesses’ involvement with employee retirement benefits plans, transforming past misconceptions.
Traditional vs. Modern 401(k) Providers
Some examples of traditional 401(k) providers would include Fidelity or John Hancock. Traditional providers are characterized by a number of features including manual processes to manage plan participants leading to increased paperwork, larger costs for small and medium-sized businesses (to make up for fewer employees), and the experience required to make qualified decisions on behalf of plan beneficiaries, often including 10+ years of experience. These plans tend to carry more cost because they are managed by humans, who must be compensated for their work.
On the other hand, modern 401(k) providers are characterized by a number of features including streamlined administration through automation, Robo-advising for employees, and a number of other services for onboarding and employee education. All of this is made possible by competitively pricing services to accommodate for less-involved management of the plans. Since more of the processes are automated, less cost is involved without the need to pay robots while still achieving incredible accuracy. Modern plans have made 401(k)s accessible to businesses of all sizes and compositions. Choosing the right plan for your business still takes some consideration, and should involve a number of steps to ensure that your plan is right for your small business.
Understanding 401(k) Options
Even after you’ve made the decision to provide 401(k) plans to your employees, there are many options to choose from, with main differentiating features relating to how and when employer contributions are made to the accounts.
Standard profit sharing 401(k) plans are one of the most flexible 401(k) options, allowing employers to make outright contributions to employee accounts, base contribution contingent on what employees contribute and matching them, or making no employer contributions at all. On the other hand, safe harbor profit sharing 401(k) plans require employers to make contributions to their employees’ accounts, and as a result, are exempt from some IRS nondiscrimination tests. Simple 401(k) plans are similar to safe harbor profit-sharing plans, differing only in the prescriptive nature of strict plan start and closure dates.
Another important distinction to make is the difference between traditional and Roth 401(k) plan options. The main distinguishing feature of these accounts is when the money in the account is taxed. Traditional 401(k) plans receive taxation when the money is taken from the account in retirement, while Roth accounts receive taxation before the money enters the account and the account is able to grow tax-free. Depending on the age of your staff, as well as when you expect them to retire, one account option may be a better option than the other for your small business.
Choosing the Right Provider
After you’ve selected the type of plan you’d like to offer your employees, the next step is to find a plan provider that supplies all or some of the services you are seeking. Some employers will choose to work with a variety of providers offering different solutions, taking an a la carte approach, while others will choose to work with a single provider that provides comprehensive solutions.
Potential providers should be assessed on a number of criteria including whether they offer the type of plan you’re looking to implement, how much you are wanting to spend, and the administrative duties the provider will be offering including the potential of recordkeeping. For small businesses, this may be a point where it could be advantageous to consider cheaper providers that offer ‘modern’ 401(k) plans, or partial services that call for more employer involvement in the process of plan management. This may involve designating a specific employee as a ‘record keeper’ in charge of logging employee contributions, tracking investments, processing loans and withdrawals, and providing basic customer support.
As is to be expected, the more services offered by the plan provider, the more expensive it becomes, especially for small businesses without a large number of employees. However, working with major recordkeepers typically includes working with companies that have improved technological capabilities with managing employee accounts, which makes the management processes more simple and potentially less expensive.
Some businesses may hand 401(k) plan management over to financial advisors who have a fiduciary responsibility to manage your employee plans to the best of their ability. While this is one option of ‘outsourcing’ responsibility to plan management to another entity, others may rely on 3rd party 401(k) plan administrators. These administrators might be tasked with a variety of responsibilities including preparation of documents and notices for plan beneficiaries, transaction approvals, compliance regulation, and implementation, as well as discrimination test and audit support.
Depending on who you choose to work with, fees will always be involved in the processes of providing plan options to your employers, which makes reading through the fine print incredibly important upfront. Another important point to consider is that fees will change and grow as your company grows and adds additional employees. Plan options that are the cheapest upfront are often the plans that will become exponentially more expensive with time, especially for high-growth sector industry employers. Remember to evaluate plans and providers on a short-term and long-term basis.
Contributions to 401(k) account steam from agreed-upon rates of contribution from employees’ paychecks on payday. Therefore it’s also important to have a close relationship with payroll providers to ensure contributions and personal information is accurately reflected in all systems and processes. You also want to ensure that your 401(k) provider will be able to fully integrate with your HR and payroll provider to avoid time-consuming errors and headaches.
Putting a Plan In Place
The IRS requests that employers create a written document that goes into more depth on the details, rights, and features of the retirement plan options that your business offers. The document should include details such as when employees are eligible to participate, details on vesting schedules, matching/profit-sharing details, details on distribution handling, in addition to contact information for the employer and relevant third-parties. This information is extremely critical to have on hand, not only for employee use but for compliance purposes in the event that the materials must be presented during an audit.
Another crucial aspect of implementing 401(k) plan changes is employee onboarding and education. Typically, new benefit plan changes need to be communicated to employees at least 30 days prior to plan implementation. You’ll also need to communicate plan changes on a timely basis and provide additional information and notices for retirement plan features such as automatic enrollment, Safe Harbor, or qualified default investment alternatives.
Since retirement benefit options can be relatively confusing and time-intensive to understand, it may be beneficial to provide an educational session in tandem with your next open-enrollment or all-hands meeting. You’ll benefit from increased plan utilization, staff financial literacy, and the establishment of clearer benefit understanding as a point of employee retention in the future.
Even after your new retirement benefits plan is put in place, it requires continuous upkeep to ensure rules and regulations by the IRS and ERISA are followed. The majority of 401(k) plans are required to pass a nondiscrimination test each year, which assesses the value of employee accounts, employee contribution rates, employer contributions, and other important details. Your business will also want to carefully watch and consider any changes to the company that could impact which plan features your business will best benefit from overtime. In accordance with IRS regulations, your business is also required to file Form 5500 each year, which includes details about your business, retirement plans, number of participants, and more.
Debunking 401(k) Myths
With a number of misconceptions for small businesses surrounding the use of 401(k) plans including lack of employee participation, the large expense involved, inability to match employee contributions, and the difficulty of managing plan logistics, alternatives including individual retirement accounts (IRAs) may be a point of consideration. While IRA accounts are tax-preferred retirement savings account options similar to 401(k) plans, the two ultimately differ in their yearly contribution limits. 401(k) accounts offer higher contribution limits than IRA accounts, which over time, whilst utilizing the properties of compounding interest, can lead to accelerated growth in employee accounts.
A popular point of the doubt for small business employers considering 401(k) retirement plan options for employees is that they are unable to match employee contributions. Matches can be a great way to encourage employee contributions to accounts, however, frameworks such as vesting schedules can be put in place that mandate employees must be employed at your company for a certain period of time before employee contributions come into effect. Additionally, vesting schedules can mandate that if an employee leaves your company before an agreed point in time, employee contributions to the account must be returned in proportion to the number of years actually worked. Vesting schedules are an easy way to ensure your company isn’t spending large sums of money on individuals who may not be with your company long-term.
Another popular misconception that small business owners have when entertaining whether or not to implement a 401(k) retirement plan option, is that their employees won’t take advantage of the benefit. As stated before, 401(k) plans are one of the most popular and relied upon options for retirement planning, so much so that 40% of current small business employees would leave their job for a company that offers a 401(k) plan. Additionally, 90% of employees between the age of 18 and 34 years of age would prefer acquiring additional benefits at work to a pay raise.
Retirement planning is an essential part of every serious professional’s financial plan. As an employer, you want to ensure that the retirement benefits that both you and your employees are receiving are quality enough to remain competitive and attractive in comparison with other employers. You’ll also want to ensure that the process is completed professionally and with accuracy to avoid costly errors dealing with your employees’ retirement planning. There are many components to consider when deciding on which 401(k) plan structure is best for your and your business, but once the decisions have been made, you’ll be happy that you took the time to make the best decision possible for the retirement stability that you and your employees are seeking in the years to come.