A 401(k) is a retirement saving plans provided for employees by their employers, which allows workers to save a portion of their pay check before taxes.
Despite the benefits of a 401(k), just 14 percent of all employers offer a defined retirement contribution plan to employees, based on U.S. Census research into tax data. This could be because more people are working for small employers, which tend to believe it's too expensive or complicated to offer retirement savings plans.
"Most small businesses don't offer 401(k) plans, but it's good for the nation as a whole to start saving for retirement," said Paul Davidson, director of human resources services at payroll processing firm Paychex. "It's not just about the [individual] benefits; there's a social good that comes from establishing more 401(k) plans."
Here are some tips for owners of small businesses on how they can offer a 401(k) without compromising profits.
Understand your costs (and how to reduce them)
One reason employers are hesitant to offer a 401(k) is simply due to costs – and for good reason. There are numerous expenses involved in setting up a 401(k) plan, including an upfront set-up fee and ongoing administration costs.
Stuart Robertson, president of Capital One Advisors 401(k) services, said it's crucial to understand the true costs of setting up and offering a retirement savings plan.
"The real expenses to pay attention to are the investment expenses," he said. "On average, small business owners believe 5 percent is a fair amount to pay in 401(k) investment expenses. This is way too high. Look for a plan where the total of the average fund expense ratio and any other investment expenses charged to participants is less than 1 percent. Remember, every dollar you pay in fund and investment expenses is one less dollar that remains invested in the market."
It's also important to remember that you're not obligated to match employee contributions. Spark 401k's recent Small Business Retirement Planning Index found that 22 percent of small business owners don't offer 401(k)s because they can't afford employer-matching contributions. However, it's better to offer it with no employer matching contributions than not at all.
"Whether you opt out of a match completely, offer an annual profit share or require any company match to vest, you can still offer yourself and your employees the retirement benefits of a 401(k)," Robertson said. "Moreover, you can always decide to start a plan without matching and add it down the road."
One way to reduce the cost is by taking advantage of government tax credits, said Davidson. According to the IRS, startups that implement a SEP, SIMPLE IRA or other qualified retirement savings plan can claim a maximum $500 annual credit for the first three years of the plan if:
- You had 100 or fewer employees who received at least $5,000 in compensation for the preceding year;
- You had at least one plan participant who was a non-highly compensated employee; and
- In the three previous tax years, your employees didn't receive contributions or accrued benefits in another plan sponsored by you, a member of a controlled group that includes you, or a predecessor of either.
"Even if you only have three people who want to participate, the tax savings makes it a profitable decision," Davidson added.
Find a provider that serves as a partner
Another problem employers have is that they don't want to take on the work of managing the investment offerings. Employers that offer 401(k) plans have to deal with annual compliance testing, making payroll contributions on time, and ensuring employees have all the proper information, said Davidson. The right provider will handle all the administrative responsibilities without taking time away from your business.
"This time, work and energy can be offloaded to a provider that takes on the investment management role (called an ERISA 3(38) Advisor) and all the responsibilities to monitor and adjust the lineup ... based on costs, historic performance, etc.," said Robertson. "It simplifies running a plan and helps ensure a high quality lineup for you and your employees to build for tomorrow."
Davidson advised choosing a vendor with the experience to lead you through the decision-making process.
Educate yourself and your employees
Establishing a retirement plan is a big step for your company, and with that step comes a lot of information that you'll need to learn and pass on to your plan participants. Davidson advised understanding what kinds of investment options you want to offer, and if you're not sure about them, spend some time doing research or speaking with a financial professional.
"Make the time to educate your employees on the program, and help get them signed up," Davidson added. "Good communication about the plan will help your staff feel secure and confident in their investments for their future."
Remember, a 401(k) plan is not just for your current employees. It benefits you in your retirement plans, and it can be a great tool for selling why your company is a great place to work.
"Whether you have two, 10, or 50 employees, or even if you are a solopreneur, a 401(k) is a great way to grow your retirement nest egg while you grow your business," said Robertson. "[These plans] also enable you to save for your retirement, while allowing you and your company to take advantage of tax benefits."
Additional reporting by Nicole Fallon. Some source interviews were conducted for a previous version of this article.