Six Reasons Small Businesses Should Offer a 401(k) Plan
The statistics on the number of American workers not covered by a workplace retirement plan like a 401(k) are sobering. According to a 2011 survey just over half of all American workers had access to a workplace retirement plan.
Sadly all too often the reasons smaller companies don’t offer a 401(k) plan are that they can be expensive and there are a vast number of government rules and regulations that must be followed. Small business owners have all that they can handle in running and growing their companies.
Here are six reasons that a small business should consider offering a 401(k) plan for their employees.
#1. The small business owner’s retirement needs
Small business owners work hard to manage and grow their companies. Unlike larger organizations, there generally are not armies of employees to handle administrative tasks like human resources or accounting. The owner is often the face of the business and intimately involved in sales and various business processes. It is not uncommon for small business owners to put in many long hours and take very little time off.
Too often the hope is that the value of the business will serve as their retirement plan. Maybe this will happen; they will find a willing buyer who will pay a premium price for the company. Or maybe it won’t happen — at least not quite that way.
A 401(k) plan allows the business owner to contribute up to $18,000 or $24,000 (if 50 or over) of their compensation for 2015. In addition they can make a profit sharing contribution as well. This can bring the total combined employee deferral and employer contribution for the owner to an annual maximum of $53,000 or $59,000 if they are 50 or over. This can go a long way towards helping the business owner fund a comfortable retirement for themselves.
#2. Business contributions and tax dedications
Any employer matching contributions will be tax-deductible as will any costs incurred by the employer in connection with offering the plan.
In order to alleviate any restrictions on the amount the business owner and top executives can contribute for themselves the company may decide on a safe harbor plan that entails a minimum matching level or a minimum level of contributions to the accounts of all employees whether they contribute to the plan or not. The safe harbor contributions are immediately vested for the employees. In exchange the owner will not be limited as to the amount of their contributions based on the results of the required non-discrimination testing.
Certainly not all small businesses will be able to afford the safe harbor contributions, and for those companies getting high participation and savings rates will be key to passing non-discrimination testing.
#3. Doing the right thing for employees
There are many articles written and studies done that point to a retirement savings crisis in this country. Part of the problem is the lack of availability of a workplace retirement plan for over half of U.S. workers.
Offering your employees a low cost 401(k) plan is a great way to help them save for their retirement and frankly it’s the right thing to do for employees. They work hard and contribute to the success of the business, they should have the opportunity to save for their own retirement and build a measure of financial security for themselves and their families.
#4. Attract and retain top talent to stay competitive
With the economy having largely recovered from the financial crisis unemployment is low and many companies are having a hard time finding the workers they need in some cases. Top talent expects to be well-compensated and a quality 401(k) plan is a part of a top-notch compensation package. While likely not the main driver of determining whether a top prospective employee accepts your job offer, a really lousy 401(k) plan (or no plan) might be the “tie-breaker.”
Likewise if a valued employee is being courted by a competitor and that competitor has a robust benefits package that includes a much better 401(k) plan that might be the difference between retaining that key employee and losing them.
#5. Financial wellness can help the bottom line
Employees who are worried about retirement or other financial issues may be less productive at work. Stressed out employees might also drive up the company’s healthcare costs.
According to a survey by benefits consultant AON Hewitt about 90% of the country’s 250 largest employers also recognize the impact of financial stress on their workforce and will be looking to expand or start financial wellness programs.
Small businesses may not have the resources of these large companies but offering a solid, low cost 401(k) plan is a positive step for their employees on the road towards financial wellness.
#6. Technology has expanded plan options
Just a few years ago smaller plans and start-ups had very few alternatives and most of those alternatives were high cost plans with questionable investment choices. Insurance company group annuities were also a common option in this market, again generally an expensive, unattractive option.
There are a number of low-cost 401(k) options for small businesses today that thanks in large part to technological advances can offer a complete package including administration, education and low-cost investing options at a reasonable price. Some of these providers serve as plan fiduciaries taking that responsibility off of the shoulders of the business owner.
Frankly cost and the rules connected with running a plan can make it a hassle where these issues and the costs outweigh the good of offering the plan in the minds of many small business owners. The new generation of user-friendly low cost options for small businesses remove this hurdle.
The Bottom Line
Traditionally the 401(k) options for small businesses have been limited to high cost options with less than desirable investment options. Today with the advances in technology there are a number of low cost, low-hassle options for small companies to consider. Offering a 401(k) plan is a win-win for small businesses in that the owners win and so do their employees.
