Earlier this year, UpCity conducted a survey to better understand the opportunity to improve benefits offerings and the quality of life of employees through the implementation of 401(k) retirement plans. This survey revealed a number of employer sentiments around the positive impact of offering such benefits and the challenges posed by managing these plans for small business owners.
To add further context to these findings, we recently asked small business and HR experts to weigh in on these findings and share their thoughts and tips on small business 401(k) plans. Here’s what we heard.
Should SMBs offer 401(k) plans? Why or why not?
Overall, the small business owners and human resource professionals who responded to our outreach agreed that offering 401(k) retirement plans, ROTH IRA plans, and other similar benefits made their companies more attractive to employees, but it’s important to be aware of the fiscal impact.
They also felt that the long-term benefits might not be as helpful for their employees as offering other benefits that employees might immediately benefit from.
“In my assessment, 401(k) benefits can be a magnet for SMBs in drawing potential talent. However, it’s essential to balance this against the operational overheads. For businesses with a tight margin, other benefits might offer more immediate value to employees.” —Aman Ghataura, Head of Growth, Nuoptima
While it’s a challenging undertaking, many SMBs we polled were actually more focused on the long-term benefits to their staff.
“Given our size, offering a 401(k) seemed almost Herculean, but it was a strategic move akin to planting a flag on a competitive landscape. It’s more than a perk; it’s a statement that you’re committed to your employees’ futures. However, it could be a better strategy. While larger companies can lean on their vast resources, smaller ventures need to juggle financial constraints with such future-forward benefits. But when done right, it’s a magnet for talent—people see the long game with you.” —Connor Gillivan, Founder and CEO, Trio SEO
For other respondents, implementing a 401(k) retirement plan provided mixed results, and put unforeseen pressures on the business after the fact.
“Offering 401(k) benefits certainly carries the allure of looking like a mature business that cares for its employees, and many SMBs feel that pressure. But, a startup I once advised faced financial strain after hastily implementing a 401(k). They hadn’t fully grasped the administrative costs and time investments. However, after some course corrections, it proved to be a decent tool for them, especially in the realm of employee retention.” —Keith Donovan, Startup Advisor and Founder, Startup Stumbles
Is a 401(k) plan a good employee retention strategy? Why or why not?
Popular sentiment of employees who both voluntarily and involuntarily left their jobs during The Great Resignation revealed a workforce more interested in being comfortable and safe in their long-term fiscal stability than their base salaries.
“Employees are seeking contentment and satisfaction in the job that they do, along with a paycheck that reflects their effort. They are greatly interested in how much value their employer places in their efficiency, their contribution towards improving the productivity of the business, and also how willing they are to reward these efforts in the form of compensation as well as in value. Here is where a well-crafted 401(k) plan comes in and effectively does the convincing job of talent retention, even in small and mid-sized businesses.” —Andrew Johnson, General Manager, Substance Abuse and Addiction Hotline
Our respondents have evidence from their own experience as consultants showing just how important 401(k) plans can be to retention.
“At one of the firms I worked for, we introduced a 401(k) plan, and the impact on employee retention was palpable. Employees appreciated the opportunity to save for retirement with the company’s support, which made them more likely to stay with us. Later on, we conducted internal surveys, and the majority of respondents cited the 401(k) plan as a crucial factor in their decision to remain with the company.” —Michael Barton, Personal Finance Advisor and Senior Writer, Wallet Savvy
Several of our respondents added that incorporating 401(k) plans had the added benefit of positioning them ahead of competitors who are not yet doing so. The competitive advantage is enough to offset the bulk of added costs and challenges.
“Retirement plans have become table stakes for top talent, positioning them in the benefits sphere as no longer a ‘nice to have,’ but instead a must. In my most recent conversation with a small business (under 30 employees), the owner’s most important objective was to remain competitive in the marketplace. Their employees were starting to ask why other companies in and beyond their industry were starting to offer 401(k) benefits, but their company did not.” —Rob Bacharach, Founder and Certified Financial Planner, RB Wealth Partners
What are the biggest roadblocks to implementing a 401(k) plan?
In the course of our original survey, we discovered that some of the most challenging aspects of implementing a 401(k) plan and other retirement plans revolved around costs and the need to properly educate staff about how they function and what benefits they have for plan participants. When we invited input from owners and human resources experts beyond our community, we found that these challenges resonated with the larger community as well.
For example, several respondents pointed to the ability to inform and educate employees about plans they’d implemented. They’ve found success, however, in creating tools and courses to inform and educate employees on how to manage their employee contributions, what to expect in terms of employer contributions, what contribution limits might be in place, and how to understand the pre-tax implications and tax benefits when filing taxes with the IRS.
“Implementing a 401(k) plan can pose unique challenges for a company focused on educating and empowering the next generation of tech professionals. For us, it’s not only about offering a standard retirement plan, it’s about making it relevant to our employees, many of whom are young and skillful. We’ve found success in designing educational programs and interactive tools that help our team understand the long-term benefits of saving for retirement. This approach ensures that our employees, including the younger ones, see the value in participating in a 401(k) plan and securing their financial future.” —Kaitlyn Siu, Founder and CEO, Teach Your Kids Code
Others pointed to the fact that the costs and inflexibility for employees in participating in certain types of affordable retirement plans can be a deterrent as well.
“It can be a significant cost for small employers on a safe harbor 401(k) plan and it isn’t a flexible benefit that can be started and stopped, or even changed year to year like insurance plans.” —Keri Kraatz, Head of HR, Big Leap
For inexperienced teams, the costs associated with implementing 401(k) are often conflated with the complexities in managing and administering the plans. For example, if handled in-house, plan administrators would be tasked with:
- Creating and maintaining plan documents
- Ensuring compliance with Employee Retirement Income Security Act (ERISA) and other factors such as nondiscrimination testing and reporting requirements
- Establish vesting schedules
- Managing recordkeeping
- Distributions
- Investment options and whether the company will make matching contributions
- Defining what factors determine employee eligibility
- Determining whether plans will take advantage of automatic enrollment and pre-determined salary deferrals
“The most significant challenges are often cost and complexity. Many SMBs operate on tight budgets and may find the upfront costs prohibitive. Also, the administrative burden can be daunting. However, there are streamlined, cost-effective options designed specifically for small businesses, so these challenges are not insurmountable.” —Michael Ryan, Financial Planner and Coach, Michael Ryan Money
The reality, according to a number of our respondents, is that these challenges are not necessarily deal-breakers, as long as they keep to plans that are easier to oversee.
“The perceived level of complexity. And I say perceived because it’s actually really straightforward to set up a 401(k), particularly if you go with a standard-type plan (like a safe harbor plan). There are a limited number of variables to decide on, such as how long a new employee will need to wait for eligibility, or whether or not the company will match any tax-deferred contributions made by employees, but with technology, the setup and plan administration is actually quite simple.” —Rob Rickert, CFO/Director of Sales, Eucalyptus LLC
Tips for SMBs who are considering implementing a small business 401(k) plan
Between our original survey and additional outreach, we found professionals who touted the importance of aligning 401(k) plans with the needs of the business overall by bringing in human resource professionals.
“Offering 401(k) benefits is not merely about aiding employees in their long-term financial planning, but about crafting an environment of stability and foresight. Offering 401(k) benefits was our ticket to not only attracting skilled professionals but also resonating with their career aspirations. If these are important factors for building your business, then it’s crucial to engage financial advisors to ensure a tailored approach to your 401(k) plan that aligns with your business model.” —Rodney Warner, Founder and CEO, Connective Web Design
There were also some very unique perspectives that supported the need for outside support from experienced financial services providers as well.
“There is a major misnomer within my industry, which causes a roadblock for SMBs. Namely, you need a lot of money to have low fees. My company mantra for 401(k) plans is that we offer ‘large plan pricing for the small and mid-size 401k markets.’ The all-in fees for most of our plans benchmark to the average fees on a $100mm 401(k) plan. Clearly, a start-up with no assets will tilt that fee but SMB’s can set up a plan today for $1,500/ year plus receive a possible tax deduction/credit if brand new. My tip, hire an RIA firm, such as a fiduciary, so that you know their interests align with your interest.” —John M. Nowicki, President, LCM Capital Management
One of the most prevailing pieces of advice from the community has been around the need to seek out the guidance of experienced professionals to make sure that 401(k) plans are a right fit for both your brand and for your employees.
“My advice is to start small. Understand your financial standing and determine what you can offer without overextending. Engage with professionals who can guide you through the legal maze. And most importantly, communicate with your employees and try to understand their needs and expectations. After all, a benefit is only beneficial if its recipients value it. Lastly, evaluating if it aligns with your company’s ethos and long-term vision is vital. But if you decide to go for it, know it’s a step towards fostering a culture of trust and commitment.” —Maria Opre, Cybersecurity Expert and Senior Analyst , EarthWeb
The professionals agree that 401(k) retirement savings plans are a boon when properly executed by experienced financial experts
It can be difficult for SMBs and entrepreneur-led startups to keep up with larger competitors, especially when it comes to providing a robust benefit package. Our surveys of the UpCity community and beyond overwhelmingly reveal that some employees and job seekers are increasingly seeing 401(k) plans and other employee retirement benefits as crucial components of a well-structured compensation package.
Despite challenges related to the costs of implementing 401(k) retirement accounts and educating employees about the benefits and how to participate, SMBs understand how doing so can position their brand for success by attracting stronger employees and helping them retain those they already have. However, without the expertise in-house to manage these plans properly, the effort of doing so can be greatly cost-prohibitive.
To avoid the extra costs and challenges, our community of professionals strongly encourages SMBs and startups to seek out and partner with third-party service providers or agencies that specialize in managing and facilitating retirement benefits plans. While there might be administrative fees involved, the long-term benefits of taking this route can be extremely lucrative.