Should Your Small Business Offer a 401(k) Plan?

Should Your Small Business Offer a 401(k) Plan

Health insurance, bonuses, commuter benefits, retirement plans, gym credits, education stipends—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 retirement 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 Americans¹ do not have access to a workplace retirement savings plan, meaning they may 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 401(k) plan. 

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? Here are some things to consider. 

Common Myths About 401(k)s for Small Business

There are a number of reasons why small business owners hesitate to start a 401(k) plan for their employees. Some of the most common hang-ups business owners have around this benefit include:

  • It’s too expensive
  • It’s too time-consuming
  • There may be negative legal ramifications
  • My employees won’t participate
  • We can’t offer a match 

Traditionally, the price for a 401(k) plan could be quite high and complex. However, new providers have since entered the market to offer comprehensive plan solutions at costs that are well below the industry average. Plus, small businesses may be eligible for a tax credit to help offset the cost (more on this later).

Employee participation is also likely higher than you may expect. In fact, according to the latest survey from the Plan Sponsor Council of America², 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 inertia³. And depending on how much your employees make, they may be eligible for a retirement savings contribution credit, known as the Saver’s Credit4, of up to $1,000.

Additionally, even if your company can’t afford to kick in extra contributions—such as matching or profit-sharing 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. 

Benefits of 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 survey5, 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, including a tax credit of up to $500 per year for three years to employers who create a 401(k) program with automatic enrollment6

Want to know more about these tax advantages? Talk to your tax advisor or 401(k) plan provider to make sure you’re taking advantage of all your eligible tax benefits.  

401(k) Costs to Consider

Historically, 401(k) fee structures have been notoriously complex, often with embedded fees to compensate the many players involved. However, with 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 401(k) 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. 

Be sure to compare your options to make sure you choose the best one for your business and employees.

How State 401(k) Programs and 401(k)s Differ

Several states, including California, Illinois, Oregon, and more, have passed legislation mandating that employers offer a retirement 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) programs. For those 50 and over, the limits are $7,000 for an IRA and $25,000 for a 401(k).

Lower Income Limits

Because Roth IRAs are governed by federal guidelines on income limits, business owners and highly compensated individuals may be restricted by 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.

Less Flexibility

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

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. 

While you may be eligible to receive tax credits by creating a 401(k) program, as discussed above, you won’t have the same benefit with a Roth IRA.

How to Create Your 401(k) Plan

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: 

  1. Select your 401(k) plan provider. How do you figure out who to choose? Research all your options, ask for recommendations from other small business owners and see if any of your existing partners (like HR or payroll providers) have any integrations. Be sure to ask detailed questions about the onboarding process, fees, investments, customer support, employee experience, and more of each provider you look at. 
  2. Set up your plan. If you select 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—that’s it.
  3. Encourage your employees to start saving. 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.  

The Bottom Line

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. All small business owners should understand the benefits of starting up a 401(k) for their employees and consider how this fringe benefit can help them attract and retain top talent. 

 Article Sources:

  1. bls.gov. “Employee Benefits Survey
  2. americanbenefitscouncil.org. “401(k) Fast Facts
  3. www.pionline.com. “PSCA: 401(k) participation up, as well as contributions
  4. irs.gov. “Retirement Savings Contributions Credit (Saver’s Credit)
  5. betterment.com. “Maximize Your 401(k): A Survey for Employers
  6. irs.gov. “Retirement Plans Startup Costs Tax Credit

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

Patricia Advaney

Patricia Advaney is Senior Director of Marketing at Betterment for Business and has more than 25 years of experience in the retirement and investment industry.

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