(This column originally appeared in The Inquirer)
Only 24% of small businesses offered a 401(k) retirement plan for their employees, according to a recent study from ShareBuilder, a retirement plan provider.
The survey, put together by retirement plan provider ShareBuilder, looked at 500 small businesses with up to 50 employees and found that many companies said they couldn’t afford a company match or simply perceived 401(k) plans to be “too expensive.” A 401(k) is a retirement plan that allows employees to make contributions to their retirement while also deferring taxes.
Experts in the retirement space offer other reasons that companies may not be on board.
“There’s a fear of the unknown,” said Dave Koch, CEO of Two Rivers Benefits Consultants in Tinton Falls, N.J. “And it’s a concern because if small businesses want to attract good talent, they really need to have a good retirement plan.”
Retirement plans are among the most requested benefits by workers, according to Forbes Advisor.
There are many different types of retirement plans that businesses can offer their employees, but it’s widely considered that 401(k) plans have the most flexibility, scalability, and familiarity with workers while also being the most cost-effective for employers in the long run.
“It’s a lack of awareness,” said Christopher Zeoli, a vice president at Berwyn’s OneDigital, which offers retirement plan services. “There are too many myths around these plans that need to be better explained to business owners.”
What myths need explanation? Here are five.
Myth: The costs are too high.
It’s true that the costs for setting up a 401(k) program at a company can range anywhere from $500 to $2,000. The annual costs paid for an outside administrator also need to be considered; most charge based on the asset values of the plan. But thanks to the 2022 SECURE 2.0 Act, small businesses can receive up to $15,000 in tax credits over a three-year period to offset these costs.
“The SECURE 2.0 Act significantly reduces the cost to employers to set up a new 401(k) plan,” Zeoli said. “These are significant incentives that almost completely eliminates the barriers.”
In New Jersey, a new program called RetireReady also provides a no-cost option for employers to offer retirement plans for their workers. The plan launched this year and is still in a pilot stage, but it provides yet another great option for a small business.
Myth: Employers and employees have to contribute.
“Not true,” says Koch. “Just setting up a 401(k) plan does not require an employee to contribute to the plan or the employer to match their contributions.”
However, Koch points out, the SECURE 2.0 Act does offer additional tax credits for eligible small businesses that can be used to offset a matching contribution they make to their employees’ accounts.
“This is a great way for those small-business owners with new plans to make matching contributions and only incur a portion of the cost,” he said.
Will employees be required to contribute? Not yet. But beginning in 2025, employers will be required to automatically enroll their new employees in their retirement plan with a minimum contribution of 3% of their wages. The default contribution rate for a RetireReady NJ account is also 3% of an employee’s gross pay. However, employees can choose to opt out.
“Even so, behavioral studies tell us that given the opportunity to do nothing, the participants will do nothing,” Zeoli said. “So the hope is that many employees will continue to make their contributions.”
Myth: There is too much paperwork.
Most retirement plans require the filing of annual tax returns, and plans with more than 100 participants generally require an audit. But these tasks are normally handled by an outside administrator and are generally part of the annual cost mentioned above.
Zeoli said that good plan administrators will run compliance testing, file tax returns, and keep an eye out to make sure that the plan is following all the rules.
“That’s why you’re paying the experts,” he said. “It’s to make sure things are as simple as possible for the employer and plan sponsor.”
Myth: Speaking of plan sponsors, as an employer I’m concerned about my liability.
While employers do have a fiduciary duty as a plan sponsor, there are certain types of plans that can limit this liability. Both Zeoli and Koch recommend asking plan consultants about 3(21) and 3(38) fiduciaries, which can shift more responsibility away from the plan sponsor to its investment advisers. Multi-employer Pooled Employer Plans (PEPs), where assets are included with the retirement assets of other companies, can also help to further spread the fiduciary risk.
Myth: Many of my employees won’t participate.
There are incentives for both employees and employers to make contributions to a 401(k) plan. Obviously, the employee gets to save for retirement and defer their taxes.
The incentive for the employer is that the more their employees contribute, the more the business owner (and their immediate family members in the business, if applicable) can contribute while still being in compliance with discrimination rules. These rules test annually whether higher-paid employees are contributing an unequal amount compared to other workers.
Plus, it’s a great benefit that will help to attract and retain good workers.
“In end, it’s all about education,” Zeoli said. “It’s important to make sure you and your employees understand the benefits of saving for retirement. These retirement plans benefit both parties.”
