Day 7

3 myths keeping small businesses from starting a 401(k)

A 401(k) plan is one of the most valuable benefits a small business can offer its employees. However, a 2013 Forbes article reported that of businesses with less than 50 employees, only about 24 percent offer a 401(k) plan. With so many retirement options available, why would nearly 80% of employers choose not to offer the benefit? There are a few concerns that often scare small business employers away from adopting a plan. This blog alleviates those concerns and helps employers reconsider offering it as an employee benefit.

  1. There are a lot of fees and costs incurred with operating a plan.
    Depending on the options, it can be expensive to adopt a 401(k). Employers typically pay for start-up, record-keeping platform, and participant fees. On average, small business employers with 100k in total assets with 10 employees can expect to pay a range of $500-$1000 in start-up fees and $1500-$3000 as the annual cost of plan administration. These figures do not include participant fees and any additional fees the plan may incur.

    Remedy: There are low-cost retirement solutions available to small businesses. And there's more of a chance of finding cost efficiencies when a business works with a Professional Employment Organization (PEO) to administer a 401(k) plan. DHR offers a Multiple Employer Plan (MEP) geared specifically to small businesses. The economies-of-scale pricing helps reduce overall plan costs while increasing the service provided for each adopting employer and their participants.

  2. There's too much liability involved in managing a plan.
    Many of the actions needed to operate a 401(k) plan involve fiduciary decisions. The fiduciary responsibilities include, but are not limited to, proprietary due diligence, proper distribution of participant notices, a plan audit, and filing compliance reports. With these responsibilities, there is also liability of all the assets, which should not be taken lightly.

    Remedy: As if administrative tasks weren't enough, fulfilling fiduciary responsibilities take an extra toll on an employer, and even worse, holds the employer 100% liable. The best solution is to partner with a PEO to offload these activities. A PEO takes on the fiduciary role on behalf of the plan and its adopting employer. Furthermore, activities like audits, tax filing, and compliance testing often involve a separate cost to perform. Depending on the PEO's retirement solution, activities like these are often covered so employers don't have to pay extra.

  3. It's difficult to find a flexible solution to meet the business needs.
    Many retirement solutions available are pre-packaged, offering limited benefits to both employers and employees. These pre-packaged solutions aren't for every level of business. Employers should choose a solution that employees will love and continue to contribute over time.

    Remedy: The right solution for small businesses should have design flexibility options such as eligibility, vesting, matching, and profit sharing contributions. Many employers are often concerned that matching is required, but a good solution offers matching as an option that is tailored to the business. For example, some employers will only match after employees have been at the company for a certain amount time, and some employers may only match at 50%. As discussed previously, the MEP is a good option for small businesses because it also has the flexibility to accommodate a business no matter if they have 10 employees or 50.

There are many reasons for small business employers to opt out of 401(k) benefits. However, there are solutions out there that work for small businesses of all types and sizes to meet their needs. Don't know where to start? A PEO is a great recommendation to partner with to find the right plan. Not only will a PEO offload a lot of the administration and liability, but they will find cost efficiencies needed to reduce fees and save the business time and resources.

STAT

24% of business with less than 50 employees offer a 401(k) plan
The average American retires at age 63.
45% of Americans have saved nothing for retirement, including 40% of Baby Boomers.

Download

A Beginner's Guide to Starting a Small Business 401(k) Plan

The 401(k) plan has a bad reputation amongst small business employers, and we can't blame them. Some options are too expensive to set up and some aren't flexible to fit a small business' needs. Many employers realize there's a lot of administrative work involved to get one off the ground and to maintain—reasons enough to scare small business employers away.

But there's good news! There are plans available to small business employers that actually work. How can you be certain you're picking the right one to fit your business needs? This guide provides you with the information you need to set up and operate a 401(k) plan. In addition, this guide works to dispel the myths associated with a small business 401(k) plan and gives a recommendation for the best path forward.

Download this valuable eBook to learn more about 401(k) plans for your employees.

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