Do you believe that 401(k) plans are only for large businesses? Think again.
Today's top employees want more than just a good paycheck. Offering a retirement plan is a no-brainer for winning the talent war! After all, the days of retiring with a pension and Social Security are long gone. A 401(k) can be the difference between landing stellar key employees, or losing them to your competition who offers a 401(k) plan.
As a small business owner, you understand that your employees are concerned about their retirement benefits. But, like many business owners, you may also be worried that a 401(k) is too expensive, too complicated to open, or time-consuming to maintain.
To help you decide whether opening a benefit plan is right for you and your business, we’ve compiled some answers to the most common questions:
Why should I open a Small Business 401(k)?
We’ll start with the most salient reason to offer a 401(k): Because you care about your employees, and you want them to retire comfortably and on time.
Beyond that, offering a 401(k) will position your company as more competitive to top talent, help you retain key employees, and allow for tax credits and tax deductions.
Here are four solid reasons to open a Small Business 401(k).
Talent Acquisition & Retention
As an employer, your people are your biggest investment.
A MetLife study found that retirement benefits were integral to earning employee loyalty; four in 10 employees said retiree benefits are a strong reason to stay with their company. Relieve your employees of the financial and mental burden of saving for retirement by offering a 401(k).
Even further, when you offer a 401(k) plan, you eliminate the risk of employees leaving for a company that does offer a retirement plan. After all, 88 percent of employees say that a 401(k) is a must-have benefit when looking for a job. Thus, you can limit turnover (and time spent training new employees) and increase retention.
The costs of starting a new 401(k) plan can add up quickly. However, with the passage of the SECURE Act of 2020, the federal government offers plenty of tax incentives to start a 401(k).
Employers can benefit from:
- Up to 10x the previous amount of tax credits for businesses offering a new 401(k) plan. Depending on the size of your company (and how many employees you have that make over $130,000) the credits could cover a significant portion of the costs for starting a new plan.
- An additional $500 in tax credits per year over three years for automatically enrolling participants—for a total of $1,500 to offset plan costs.
If you choose to match your employees’ 401(k) contributions, your contributions are tax-deductible. In addition, your contributions won’t be subject to Social Security or Medicare taxes.
Alternatively, you may choose a profit sharing plan to contribute to your employees’ retirement accounts. Contributions are made at the discretion of the employer, and if you have a low year, you have the option not to contribute.
Auto-enroll for Automated Contributions
Worried about low participation?
When given a chance to save, most small business employees will save for retirement through a 401(k).
We cannot underestimate the advantage of savings that are automatically deducted during each payroll period.
First of all, it’s key for employees to save early so they have enough money to enjoy a security and good quality of life during partial or full retirement. By the time some employees want to retire and can't, it’s too late.
This leads to the next advantage: When you take an active role in helping ensure that employees retire on time, you can successfully avoid the unintended consequences of employing retirement-eligible workers. For instance, you can remove the frustration of younger employees losing out on promotions because the more senior workers are putting off retirement. You can also control labor costs by controlling the ratio of junior, mid-level, and senior-level employees.
How much does it cost to open a 401(k)?
In short: It depends.
Your 401(k) plan fees can be calculated using a few different factors:
- Asset-based: Custodial fees are expenses based on the amount of assets in the plan, represented as percentages. This can range from two to four percent of the total plan assets.
- Per-percent, or per-participant: These expenses are based upon the number of eligible or actual participants in the plan. This can range from $500 to $750+ per month, per participant.
- Transaction-based: These expenses are based on the execution of a particular plan service or transaction. This can range from $70 to $200+.
- Flat rate: This is a fixed charge for any plan, regardless of the plan size.
Most plans charge fees based on a combination of these categories, and these expenses are variable depending on the number of 401(k) plan participants.
Some 401(k) sponsors (the employer) pay for everything, including investment fees and costs.
Others pay for nearly nothing, with fees paid out of the plan’s assets (by the employees).
In most cases, plan costs are shared by the employer and employees.
How can I open a Small Business 401(k)?
It’s important to get the details of your plan design correct–it determines which employees are eligible, the annual compliance testing requirements, and how much, if any, employee contributions your company makes to your employees' 401(k) accounts.
How should I design my 401(k)?
Most plans differ in how and when you’ll make contributions on behalf of your employees. Here are a few different examples:
Standard Profit Sharing 401(k)
Safe Harbor Profit Sharing 401(k)
401(k) Plan Features
- Traditional or Roth. Employees will contribute pre-tax income to a Traditional 401(k) and post-tax income to a Roth 401(k). When an employee retires, withdrawals from traditional accounts are taxed at ordinary income rates, whereas Roth withdrawals can generally be made on a tax-free basis.
- Employer matching. Matching contributions can be hugely beneficial for both employees and employers. For one, you’ll help your employees maximize their retirement security and retire on time. Moreover, you may be able to deduct your matching contributions as an ordinary business expense, up to the annual corporate tax deduction limit on all employer contributions (25 percent of covered payroll).
- Profit sharing. Think of profit sharing as a pre-tax bonus that goes straight into your employees’ 401(k). These deposits are income tax-deductible and also aren’t subject to Social Security or Medicare taxes—making profit sharing a win-win for both parties.
Who can help me with plan administration?
After opening your 401(k), it’s time to choose the right partners to help you run your plan and keep your plan in good working order.
- A 401(k) recordkeeper to help managing your day-to-day administration
- A Fiduciary Advisor, an ERISA 3(21) Investment Advisor or 3(38) Investment Manager
- An ERISA 3(16) third party administrator
- A trustee, to ensure that your 401(k) plan’s assets are used solely to benefit plan participants and their beneficiaries
- A custodian, to actually hold your plan’s assets
- A payroll provider, to ensure employees’ personal information and retirement contributions are accurately reflected in all systems
Finally, your 401(k) plan administrator will help you adopt a written plan document.
We Can Help
Here’s the thing—equally important to offering a 401(k) is making sure that it’s well-run.
To optimize your401(k) optimized for maximum employee retention, you must incentivize participation, provide employee education, a clear and scheduled onboarding process, and access to personalized financial advisory services. And all that comes down to your ERISA Fiduciary Advisor.
If you’d like to schedule a Complimentary 401(k) Advisory Consultation, please fill out the form below. We look forward to hearing from you.