The Top Five Incentives for Small Businesses to Start a 401k
Written by: Lance Reising
According to a recent Transamerica companies survey, fully 34% of employers do not offer any retirement benefits to their employees. And according to a similar Fidelity survey, fully two-thirds of small businesses do not offer retirement benefits.
Among the reasons cited for not offering a plan are feelings that their companies are too small, that they are concerned about the costs, and/or that their employees are not interested.
Given these perceptions, one of the principal objectives of the recently passed legislation known as the SECURE Act and SECURE 2.0 is to incent more employers to establish retirement plans for their employees regardless of a company’s size. This is significant because of all the workers who are not offered a plan by their employers, fewer than half (46%) are saving for retirement. This is not good for anyone.
The SECURE Act and SECURE 2.0 seek to reduce the administrative burdens of offering a retirement plan and to make it more cost effective for small businesses to adopt a qualified retirement plan. Certain aspects of the legislation and other developments are making the formation of new retirement plans more conducive, such as:
SECURE 2.0 establishes a new tax credit to offset plan startup costs and expands an already-existing credit. This startup tax credit has increased to 100% for companies with 50 or fewer employees extended for several years. This means that in most cases, the cost to start a plan might be fully offset by the tax credits. (Please consult your tax expert.)
The legislation expands the capability for employers to join a pooled plan arrangement such as a multiple employer plan (MEP), or a pooled employer plan (PEP).
Professionally managed investment services such as target date and target risk funds, and model portfolios have become widely available options in 401(k) or similar plans. Given that 57% of workers would prefer to rely on outside experts to monitor and manage their retirement savings, they are more interested and willing to participate in a new plan because of these developments.
Employer matching is NOT required if starting a plan so employees can still make payroll contributions and enhance their retirement outcomes.
The administration of a retirement plan for the employer has been streamlined and simplified due to huge advances in the information and technological systems available in retirement plans provided by the industry experts that run these plans. Employees can manage their own investments and plan needs such as enrollment, savings amounts, and investment changes much more easily than in the past, thus greatly reducing the burden on the employer.
Will these help? Together, they all should. We have already seen some progress ourselves and are actively working with small and medium-sized companies to get more employees started on better retirement paths. For us, no company is too small, startup expense is not too great, and all employees are interested in a better retirement outlook.