401(k) Plans for Small Businesses

When deciding on employee benefits, more employers are recognizing the importance of financial wellness and how it attracts and retains top talent.

Small business buildings

Health insurance. Bonuses. Cold brew on tap. Retirement plans. Free lunch Fridays. Ping pong tables. Nap pods. When it comes to employee benefits, there’s a lot to consider. Some perks clearly outrank others, but when deciding what to offer, it can be hard to determine which are right for your small business.

But these days, more employers are recognizing the importance of helping their employees save for their future. Not only does having a savings plan make a company more attractive to candidates in today’s tight market, but there is a larger societal issue at play. Approximately 40% of Americans do not have access to a workplace savings plan, meaning they will likely not have enough to retire comfortably.

In light of this, many states have passed legislation mandating that employers offer a retirement savings plan such as a 401k plan. (See more later in this article about the state plans.)

And don’t forget about your own future! As a small business owner, you may believe that the profits you earn will help you live comfortably in retirement. However, you know that life can change in an instant. Setting aside money in a convenient, tax-advantaged 401(k) plan, can help ensure you’ll live the life you envision.

So you may be asking yourself: “Should my small business offer a 401(k) plan?” Many times small business owners believe a 401(k) is too expensive and time-consuming, but that couldn’t be further from the truth.

5 Common Myths about 401(k)s for Small Businesses

Let’s take a moment to dispel some of the most common misconceptions about small business 401(k) plans:

“It’s Too Expensive!”

Traditionally, the price for a 401(k) plan could be quite high and complex. However, times have changed. Innovative providers like Betterment now offer comprehensive plan solutions at costs that are well below the industry average. Plus, small businesses may be eligible for up to $16,500 in valuable tax credits (see more below).

“It’s Too Time-Consuming!”

Managing every detail of your 401(k) plan by yourself could be extremely onerous, but choosing an experienced partner who can handle everything from plan design to compliance testing means that you can focus on running your business—not worrying about your 401(k) plan.

“I’m Afraid of the Legal Ramifications!”

The legal responsibilities are real, but many providers assume various levels of investment and/or administrative fiduciary responsibility that dramatically limit your risk exposure.

“I’m Not Sure My Employees Will Participate!”

Participation is more popular than you may think! In fact, according to the latest survey from the Plan Sponsor Council of America, more than 84.9% of employees are contributing to their 401(k)s. Plus, plan enhancements like automatic enrollment have helped drive participation by combating employee inertia.1 And lower-salaried employees may be entitled to as much as $2,000 thanks to the little-known Saver’s Credit.

“We Can’t Afford to Offer a Match!”

Matching and profit-sharing contributions are totally optional. Even if your company can’t afford to kick in extra contributions, you can still offer your employees the convenience and tax savings of a 401(k) plan. And if you do decide to offer an employer match in the future, you can deduct those contributions on your taxes!

Three Benefits Employers Get From Offering a 401(k)

You probably know a 401(k) plan is great for employees, but did you know it’s great for employers, too? Here are the top three ways small businesses benefit by offering a 401(k) plan:

  • Attract and retain talented employees: According to a Betterment for Business survey, 67% of plan participants said that a good 401(k) plan was very important or important in their evaluation of a job offer. Plus, you can consider perks like an employer match to make the plan even more compelling for current and prospective employees.
  • Improve employee satisfaction (and productivity): Many studies have shown that personal financial stress negatively impacts employees’ performance, productivity, and ability to focus—all of which can lead to higher employee turnover. But a 401(k) combined with financial guidance can go a long way toward helping your employees reduce their financial stress.
  • Enjoy valuable tax advantages: To help motivate employers with fewer than 100 employees to offer a retirement plan, the IRS grants some valuable tax benefits. Some of these were added or increased as part of the recent passage of the SECURE Act in December 2019.
    • A tax credit of up to $15,000 over three years to help defray 401(k) start-up costs
    • A tax credit of up to $1,500 over three years for adding automatic enrollment
    • Tax deductions for employer matching or profit-sharing contributions

Want to know more about these tax advantages? Talk to your tax advisor or 401(k) plan provider.

The 401(k) Costs to Consider

Historically, 401(k)s fee structures have been notoriously complex, often with embedded fees to compensate the many players involved.  With renewed focus on fees and the entrance of newer 401(k) providers, fees today can be lower and more transparent.

Fees are usually shared between employees and employers, so it’s important to look at how fees are assessed and their impact. Fees typically include an annual administrative fee, a per employee fee, and investment management and/or fund fees, usually expressed as a percentage of assets and deducted from employee accounts.

Although it can be tempting to choose the provider with the lowest fee, it’s important to understand and evaluate the value provided to you and your employees. Making a wrong decision could mean you will be looking for a new 401(k) provider again in the very near future, which is a distraction to your business.

What About the State Programs?

Several states, including California, Illinois, Oregon, and others, have passed legislation mandating that employers offer a savings program to their employees. States differ in terms of the size of companies impacted by the mandate, but this trend reflects a growing concern among state governments that more needs to be done to address the issue.

The state programs represent potential alternatives to a 401(k); however, they differ from 401(k)s in several important ways:

Lower Contribution Limits

Because the state programs are Roth IRAs, the maximum allowable contribution limits are much lower than for 401(k)s. For instance, annual contribution limits for those under 50 are just $6,000 for the state programs versus $19,500 for 401(k)s). For those 50 and over, the limits are $7,000 and $25,000 respectively.

Lower Income Limits

Because Roth IRAs are governed by federal guidelines on income limits, business owners and highly compensated may be restricted from how much they can save (or be prohibited from saving anything at all). To be eligible, married filers can have a joint income of no more than $206,000 and single filers can have an income of no more than $139,000.

No Flexibility in Terms of Features and Investment Options

A 401(k) can be designed to address the unique needs of a given employee demographic or industry, thereby enabling employers to differentiate their benefits package to attract and retain talent. This flexibility includes plan features like loans and employer contributions, neither of which is part of the state IRA programs.

No Employer Tax Credits

the recently-passed SECURE Act increased the attractiveness of 401(k)s, thanks to increased tax credits available to small employers. The maximum tax credit is $16,500 over 3 years. No such tax credit is available for companies that adopt the state-mandated plans.

State-mandated Roth IRA programs are a step in the right direction, but you should consider all of your options when it comes to offering your employees a benefit that will make a real difference for their future. Given their added flexibility and the ability for employees (and business owners) to save more, 401(k)s have the potential to bring greater value to both your employees and your organization.

3 Steps to Getting your 401(k) Up and Running

If you’re considering offering a 401(k) plan to your employees, you may be wondering how to get started. Well, the process is relatively simple:

  • First, select your 401(k) plan provider. How do you figure out who to choose? Be sure to ask detailed questions about their onboarding process, fees, investments, customer support, employee experience and more.
  • Second, set up your plan. If you elect an experienced 401(k) provider, the onboarding process should be easy. You’ll likely have to fill out some paperwork, connect your payroll, and complete a few other straightforward tasks.
  • Third, encourage your employees to start saving as soon and as much as they can. By communicating with your employees, you can help them understand the benefits of having a retirement account. Plus, if you elect automatic enrollment, it’s even easier to help your employees save for their financial future.

Deciding to offer a 401(k) plan is an important decision and one that has the potential to impact the lives of your employees in a significant way. We encourage all small business owners to understand the benefits of starting up a 401(k) for their employees and to be a part of helping more Americans save for their future.

1.PSCA: 401(k) participation up, as well as contributions

The information provided is education only and is not investment or tax advice.