Retirement saving plans have long been part of big companies’ benefits packages and today are par for the course as medium and smaller businesses seek to remain competitive in the ongoing battle for talent.
“I think it’s becoming really a standard benefit in an employee benefits package anymore, regardless of company size,” said Andrew Hunt, partner with Hiley Hunt Wealth Management. “It’s such a hot job market and workers have come to expect retirement savings options.”
In an HR Digest survey, about 75% of employees said they expect employers to provide better retirement benefit pension plans and 60% of people would instead opt for a job with lower pay but excellent retirement benefits. Moreover, just under one in four respondents reported turning down a job offer because the retirement package was lacking.
But while the need and desire for offering retirement plans are clear, small companies should nonetheless proceed with due diligence to select the right plan.
“With unemployment levels low and competition for human resources as challenging as ever, offering a strong benefits plan is critical for small businesses to attract and retain talent,” said Ross Polking, partner and lead advisor- business development, Foster Group. “The challenge, unfortunately, is that group retirement plans can be administratively challenging and cost-prohibitive to small employers.
“Varying forms of retirement plans exist with a range of savings limitations and filing complexities. What works best for one business may not for another. It all depends on their goals and financial means.”
The Right Plan
Some of the initial questions a business owner should ask when embarking on offering a retirement plan revolve around having a clear picture of the outcome.
“The first thing a small business owner needs to do is establish goals for what they want the retirement plan to accomplish,” said Chris Wagner, director of retirement plan services, principal, Lutz. “These goals will be the primary driver for setting up the right retirement plan for their business and choosing the right providers. What level of responsibility do I want to maintain as the business owner and what responsibilities do I want to delegate to professionals? What specifically will the business owner be responsible for?”
Hunt added that it’s also a good idea to ask employees for their input, to help ensure the plan is widely adopted once purchased and implemented. In this way, companies can help ensure the time and money invested in setting up a plan is well spent.
“These plans aren’t cheap,” he said. “The worst thing a company can do is to go spend all the money to set up one of these plans and then nobody participates because it doesn’t match up with what the employees want. Talk with employees – especially what I would call your key stakeholders – to make sure that the plan you’re designing meets with what they’re hoping for.
“At the end of the day, the objective is to have employees allocate to the plan. That’s to everybody’s benefit. But if the plan doesn’t match up with what they want then there’s no point. You just wasted a bunch of time, effort and money.”
Wagner said another benefit of talking to employees about plan options is to help employees be more informed about how to grow their money. Depending on the plan selected, workers can be as hands-on or as hands-off as they choose.
“Most 401(k) plans are participant-directed,” he said. “Employees are provided with a list of investment options selected by the company or adviser. Employees can choose how their money is managed from this list of investment options, which typically includes target date funds, risk-based portfolios and a diversified mix of mutual funds.
“Many vendors are also making managed accounts available to employees who would like to have their money managed for them. In this case, the employee may answer a series of questions and the managed account service will build an investment allocation for the employee and adjust as needed.”
Retirement plan products aren’t particularly difficult to find, especially when dealing with a reputable service provider. However, the level of administrative and operational complexity associated with these plans can vary depending on which type of vehicle a business owner chooses. From sorting through the myriad of plan choices to introducing the plan to employees, even a relatively straightforward plan such as a 401(k) can take up to two months to set up, Wagner said.
“Things for a small business owner to consider: How much do I want to contribute to the plan? Does the company have highly compensated employees that want to contribute to the plan? Is the company going to make contributions to employees’ accounts? Are there specific employees we are trying to reward?” he said.
“These types of questions will help determine the complexity of the retirement plan, the best provider, and estimated costs. Working with an adviser who specializes in retirement plans can help you answer these questions and find a provider that best fits your situation.”
While there’s no getting around the additional expense that comes from offering employees a retirement plan benefit, recent changes in federal law continue to make things incrementally easier for business owners to do so.
“A recent law that was passed called SECURE Act 2.0 is really interesting,” Hunt said. “For years and years and years, employees have had the option in their 401(k) plan to make their contributions to a Roth 401(k). But by statute, the employer’s matching program had to go into a traditional portion.
“What the employees ended up with was they’d have the Roth balance and then their employer match contribution ended up in a traditional balance. Now, under the new law that just came out this year, employers can make their contributions to the Roth as well. It’s a huge benefit for those who find themselves in lower tax brackets.”
The new law could offer a win-win for the employee and employer.
“The new tax credits associated with the passing of SECURE Act 2.0 will provide an additional incentive for small businesses to offer retirement plans for their employees,” added Wagner. “Small businesses can qualify for tax credits up to $5,000 each year for three years to pay for administrative costs.
“In addition, a tax credit is now available to small businesses who establish a retirement plan and make contributions on behalf of their employees. The credit is a percentage of the employer’s contribution up to $1,000 per eligible employee.”
Not surprisingly, the No. 1 suggestion from experts is to seek the most qualified and reputable service provider you can find when setting up such a plan. Employee retirement plans must meet strict compliance guidelines under ERISA (Employee Retirement Income Security Act of 1974) law through the U.S. Department of Labor to ensure the funds are being managed properly and those overseeing the program at the company level must understand these expectations.
“Plan sponsors serve as fiduciaries, thus taking on significant liability in offering a retirement plan,” Polking said. “Critical in this is hiring the appropriate partners to serve in varying roles such as the investment adviser, record-keeper, custodian, third-party administrator, etc. These entities must be trusted partners who help alleviate and/or share in the fiduciary duties of the employer.
“When audited, if costs are found to be too high, investment options limited or plan provisions restricted, significant penalties await the offender. Therefore, employers must fully appreciate the role and responsibility of being a fiduciary.”
Participation in a plan can be built-in, as federal law permits employees to be auto-enrolled in a retirement plan once they qualify, with the option of opting out. Wagner said this feature is highly effective in getting workers to invest in their future.
“Including an auto-enroll feature in the plan design is the single plan feature that has the most meaningful impact on employee participation,” he said. “It is common for plans with auto-enrollment to have participation rates above 90%. Auto-enrollment has been so successful that companies who start a new retirement plan will be required to have auto-enroll as a feature beginning in 2025. This was a provision in SECURE Act 2.0.”
At the same time, companies should also take steps to educate employees on the “why” behind retirement savings to move from a posture of passive participation to understanding and taking ownership of one’s money.
“The more informed employees are of the retirement plan offering, the more likely they are to participate,” Polking said. “Too often employees are presumed to understand how retirement plans work and just trust their money is working for them, when in fact they have no idea where their money is going. The servicing providers, particularly the investment adviser, should ideally provide in-person education and recurring meetings with participants to help them best leverage the plan.”
Investing such time and effort after installing the retirement plan benefit is as crucial to the ongoing success of the plan as the initial selection of the benefit itself, Hunt said.
“One big ‘don’t’ is don’t just set it and forget it,” he said. “As a 401(k) plan provider, you have a fiduciary duty to the plan’s participants. This means that you have a duty to make sure that the plan is structured properly, that the investment menu is broadly diversified and the funds you’re using are the most efficient, the most cost-effective and the most diverse.
“But you also have the responsibility in employee education, giving them lots of opportunities to learn and ask questions or to get in front of them regularly and telling them about the power of compound interest, what Albert Einstein called the eighth wonder of the world. You really need to have this be part of your playbook.”