Driven by an insatiable curiosity, Daniel Beck has launched numerous businesses in a variety of industries. After multiple successful exits, his focus has shifted to helping hard-working Americans prepare for retirement and enabling small businesses to proactively help their employees work toward financial freedom.
Attracting new employees and retaining your workforce is of increasing importance. According to research by the Work Institute, employee turnover has increased a staggering 88% since 2010. Slightly more than 27% of employees left their job voluntarily in 2019. Hiring and training new employees isn’t only frustrating and time consuming, it’s extremely costly too. The costs of turnover can be significant with some studies estimating the cost to replace a mid-range salaried position to be equal to 6-9 months of salary. Clearly these are not trivial costs and, in most cases, salary and benefits were the primary reason for turnover. Fortunately, there are numerous ways to attract and retain employees beyond simply increasing pay.
Salary is always important but the one major differentiating factor between you landing your next key hire or your competitor landing them is your benefits offering. Nothing communicates a company cares more than a 401(k). After all, a company retirement plan is the one benefit that is enjoyed long after most employees have left an employer. Offering a 401(k) is the strongest signal that your company is built to last and one that employees will want to work for. Unfortunately, fewer than 15% of small businesses offer them.
Whether it’s out of genuine altruism or the simple fact that high turnover is far more costly than decent benefits, a 401(k) is a must and this is a simple guide for setting one up.
The first thing to know is, who’s involved: 1) The company is the plan sponsor and has ultimate authority over the plan; 2) A financial advisor is often the one that works with the employer to pull everything together and guides the company and employees through the investment aspects of the plan; 3) A third-party administrator (TPA) is hired to run many of the day to day aspects of paperwork, statements, annual returns and such; 4) A record keeper tracks contributions, executes trades for the investments and provides a platform for everyone to monitor and engage with the plan; 5) Lastly, the custodian is the bank or trust company that holds all the investments and assets of the plan.
Just trying to keep track of who is supposed to do what, their various agreements and all the fees is enough to make your head spin. This complexity is just the tip of
the iceberg and just one of the many reasons most small businesses do not have a 401(k) plan. Fortunately, it doesn’t have to be this complicated and there are a number of new service providers that provide a fully bundled solution for small businesses.
Regardless of the decision to go with a newer and more comprehensive 401(k) provider or the more traditional approach, there are a few major things to consider before making the decision to implement a 401(k) plan. The biggest consideration is the type of plan and the various provisions or rules that will govern that plan.
Owner Participation – Safe Harbor 401(k)
First and foremost, do owners want to participate in the 401(k) themselves? If so, and the company is on the smaller size (generally fewer than 30 employees), you’ll most likely need to set up a safe-harbor 401(k) plan. Here’s why: 401(k) plans are subject to certain compliance tests to ensure they are a benefit for the company as a whole and not just the owners or high earners. When there are fewer individuals participating in the 401(k) plan, the ratio of savings from owners versus employees is often much higher which results in the plan failing testing which would require owners to remove funds from their 401(k). Fortunately, a safe-harbor is exempt from these tests so owners can freely use their company 401(k) plan without worry.
To Match or Not to Match
Offering a 401(k) benefit for employees doesn’t require a company match. Simply providing a simple but powerful way for employees to defer some of their pay for retirement is a solid benefit already, the match is just the icing on the cake but certainly not required. Additionally, an employer can choose to wait until the end of the year and do a form of profit sharing contribution to the 401(k) or, if it was a bad year, not make any sort of contribution. However, if an employer sets up a Safe Harbor plan for the reasons mentioned previously, some form of a match is required. The employer match can vary somewhat but the minimum commitment is 3.5% for a QACA Safe Harbor Plan. So, if you have an employee earning roughly
$60,000 a year, the most the employer would be required to match would be
$2,100 – and that is only if the employee is actively saving and deferring pay.
A key thing to remember is there are a lot of ways to structure an employer match and contributions but in the case of smaller companies with owners that want to participate, more strict rules governing the match are required to be followed.
Vesting & Eligibility
A 401(k) is a great way to incentivize and reward loyalty. Helping employees save for retirement and boosting their retirement by matching contributions shows a company cares. Employees in-turn reciprocate loyalty by working hard for the company and staying much longer than if a 401(k) wasn’t in place. This is certainly ideal but often less likely in the current job market. While a 401(k) does improve retention, most employers simply prefer to focus more on employees that show loyalty which is where eligibility rules and vesting come into play. Employees can be required to work for up to a year before being allowed to participate in the plan.
Additionally, once an employee is eligible to participate, the portion that an employer contributes as a match can be subject to certain vesting rules. For example, an employee might be required to work for 2 years before they can keep the employer match portion of their 401(k). This helps to reward loyal employees while saving on employees that don’t stick around.
It’s Easier Than You Think
Beyond the key points discussed above, there are many other powerful features of a 401(k) (Roth contributions, Loans, Hardship Withdrawals, tax credits) that can be accommodated. While a 401(k) certainly can be complicated, the complexity can be managed with technology. A typical plan document for a 401(k) is often 40+ pages of complexity that few business owners or executives need to understand. While in the past it would require an HR team and someone within the company with some expertise to run a 401(k) plan, today, it’s simply not necessary. Fintech based service providers like 401GO have vastly simplified the process of setting up and administering a 401(k) plan. A plan can be up and running in less than 15 minutes and with a payroll integration, the ongoing administration is virtually nonexistent and the costs to offer a 401(k) can be as low as $9 a month. So, whether the motivation is out of concern for employees, concern for reducing employee turnover costs or more than likely, some combination of both, there really are no more excuses for neglecting to offer a 401(k).
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