Generally, small business owners and startups have been at a disadvantage against larger enterprises when it comes to the benefits that they’re able to provide for their employees. To put it simply, larger businesses have been able to negotiate better, volume-based discounts for things like employee medical insurance and retirement savings plans based on the sheer size of the organization.
More recently, though, the benefits landscape has shifted in favor of employees of smaller businesses as multiple states have instituted legislation requiring certain benefits to be made available to all employees, no matter the size of the business they work for.
To learn more about this developing dynamic, UpCity recently surveyed 300 SMB leaders who make decisions about employee benefits in their roles. Our survey gathered insights from this community on the importance and impact of employee 401(k) programs.
In this competitive, post-pandemic job market, employees are seeking more from their employers and are more willing to change jobs in order to find the right mix of compensation, benefits, and quality of life.
In fact, our survey found that more than 3/4 of the SMBs we surveyed are offering a 401(k) plan for their employees.
In this report, we’ll look at a brief overview of 401(k) retirement plans, including details on recent legislation that has forced SMBs in a number of states to offer retirement benefits. From there, we’ll dig into our survey findings on:
- The benefits of offering 401(k) programs
- Challenges SMBs face when offering 401(k) programs
- How SMBSs are structuring and running their 401(k) plans
- and much more.
Let’s get started.
How do SMB 401(k) programs work?
Retirement plan administration is a highly detailed, complex topic that has many variables depending on the individual situation. There are numerous options available that businesses can choose to offer their employees.
Because of these variables and complexities, it would be impossible to cover everything related to SMB 401(k) plans in this space.
From a high level, though, offering employer-sponsored 401(k) plans is a great way to give your employees an affordable path to long-term financial security and well-being while also opening up powerful tax savings for your business.
Initializing a 401(k) plan
The United States Department of Labor (DOL) provides SMB owners with fantastic resources that can help explain the full complexities of small business-focused 401(k) plans[1].
This guidance from the DOL lays out the initial steps that an employer must take to establish a new plan:
- Formalize the plan design in a written document.
- Arrange a trust for the plan’s assets.
- Implement a recordkeeping system or secure a service provider who will do so.
- Distribute the necessary plan overview, including benefits, rights, and features, to all eligible employees.
Specific types of SMB-friendly 401(k) plans
At a high level, there are several types of 401(k) plans a small business owner can choose to offer their employees.
- Traditional 401(k) plans provide the most flexibility, allowing employers to decide whether they wish to participate, and if they do, whether to contribute on behalf of plan participants, match participant contributions, or offer some combination of these options.
- Safe harbor 401(k) plans do not require the annual nondiscrimination testing that traditional plans are subject to. In exchange, safe harbor plans require employers to contribute on behalf of employee participants, and in most cases, those contributions are immediately vested.
- Automatic enrollment 401(k) plans are designed to boost participation by allowing business owners to automatically enroll employees at default contribution tiers and investment portfolios. Employees are able to modify their investments manually, or choose to opt out of the plan altogether.
- Roth 401(k) plans are a cross between a 401(k) and a Roth IRA, and allow employees to make post-tax contributions rather than pre-tax. Employees only pay income tax on their contributions, and no taxes are levied against distributions or withdrawals, so you’re both growing your funds tax-free and have access to them as needed without having to pay additional withholding.
Deductions and participation
Once an SMB 401(k) plan is established, all participants can contribute to the plan via pre-tax salary deductions. These plans also allow the employer to make matching contributions on behalf of the employee, and to enjoy the tax benefits of those contributions being deductible.
There are opportunities for employees to also make additional after-tax contributions as well, which are treated differently from the tax-free contributions. There are contribution limits that employees must adhere to that change year-to-year based on IRS rules.
Because administering 401(k) plans is such a large undertaking, businesses often outsource these responsibilities to a third-party service provider. The service provider then becomes responsible for the investment management, oversight, and government agency reporting requirements.
Are SMB 401(k) programs required by law?
There’s an important distinction to be made when discussing legislative efforts to mandate employee access to retirement benefits. While there are states with laws in place mandating employee access to either employer-sponsored plans or state-administered plans, those laws don’t specifically mandate that employers offer 401(k) plans.
State-mandated plans are typically some form of Roth IRA or automatic-enrollment IRA plan. As of June 2023, 19 states have either enacted laws or passed legislation requiring retirement plans to be offered to all employees.
What are the benefits of small business 401(k) programs?
As 401(k) plans gain momentum with employers of all sizes, the benefits these plans provide to small businesses in a difficult economy are becoming more apparent.
Small business retirement plans help with employee retention and employee morale
It’s no surprise that employee benefits are a primary driver of employee retention and overall workplace satisfaction. Just ask yourself where you would rather work: at a company that provides benefits to help take care of you and your family, or at a company that tries to cut costs by withholding these perks?
Our survey found that this held true especially for 401(k) plans. While a significant number of our respondents (25%) reported that they started offering 401(k) plans to remain competitive in an extremely competitive employment landscape, more than 60% of respondents said that attracting new talent or retaining existing talent was their primary reason for offering these plans.
Employee retention is critical for SMBs
Proven, reliable employees are like gold for small businesses, and this was reflected in our survey results, as 40% of our respondents pointed to employee retention as the primary driver for their 401(k) plans.
Having access to these benefits prevents your employees from feeling like they have to seek out that stability and investment in their well-being from other employers. A feeling of financial security can also help your employees perform better at their jobs, because they have less to worry about outside of work.
Offering a 401(k) is a simple way to cancel out a competitive advantage that your competition might have otherwise been able to leverage to pull away your top talent.
SMBs that offer a 401(k) report improved employee morale
After asking our field of SMB decision-makers about their reasons for implementing a 401(k) plan, we asked them about the biggest benefits their business saw after offering their employees a 401(k) plan.
Perhaps unsurprisingly, given the focus of the previous section, employee retention was the number one benefit reported, with 60% of our respondents citing that as a leading benefit.
But improved employee morale and financial wellbeing was only a shade behind employee retention, with 58% of our respondents citing that as a top benefit of their 401(k) plan.
By implementing a 401(k) retirement savings plan, your business is giving employees the reassurance that you have the long-term wellbeing of them and their families in mind. This reassurance can inspire not only higher morale and job satisfaction, but can also boost performance and efficiency in the process.
Contributions to a 401(k) plan can be made prior to taxes being deducted from your employee’s paycheck. By automating this process in payroll, it takes the hassle off of the employee to manage their savings and retirement fund themselves while helping them enjoy tax-deferred gains in the long run.
Having a 401(k) program brings in stronger candidates
Employer-sponsored retirement benefits or state-sponsored retirement accounts are among the top five benefits employees are looking for most when considering an employer, according to Forbes[2].
By offering a 401(k) plan as an employee perk, your organization can attract top talent looking to change jobs, perhaps even from one of your competitors that doesn’t offer 401(k) plans to their employees.
SMBs that offer a 401(k) plan can improve their reputation
While adding a 401(k) retirement plan to your benefits package takes time and resources, it is time well spent. Benefits that support employee well-being and future goals can echo through the way your employees talk about your company with their peers and in online reviews. Your organization will gain a reputation for taking care of its employees.
What are the biggest challenges of SMB 401(k) programs?
Despite the advantages, there are significant challenges that may prevent some SMBs from implementing a 401(k) program. While budget–either directly through employer contributions or indirectly through program administration–may seem like the most obvious deterrent for a small business with limited resources, our survey uncovered several other significant challenges worth exploring.
Education tops the list of SMB 401(k) challenges
Well ahead of budgeting in the minds of SMB leaders, educating employees on how 401(k) plans work, how they are administered, and how they are beneficial was cited by 53% of respondents as the most challenging undertaking in running a 401(k) program.
Clarity seemed to be a theme in these challenges, as tracking performance (35%), understanding and meeting requirements (30%), and finding the staff (28%) and tools or service providers (23%) to run the program all rung true with our respondents.
Luckily, many of these challenges can be resolved by outsourcing to a HR expert to assist in overseeing this type of program, preserving all of the benefits while negating most of the downsides.
Budgeting is an even bigger challenge for very small businesses
More than half of our respondents from businesses with 10 employees or fewer said that budget was among their biggest concerns when providing a 401(k) plan for their employees.
Small organizations are certainly at a disadvantage compared to larger organizations because service providers can offer discounted rates to larger organizations due to the higher number of potential enrollments they bring to the table.
Why do some SMBs choose not to offer 401(k) plans?
When we asked the 23% of business leaders that don’t offer their employees a 401(k) plan why they made this decision, 53% claimed a lack of demand from their employees.
Worse, 19% of respondents don’t offer 401(k) plans because they aren’t required by law, despite the benefits they might have over legally-required IRA benefit plans.
However, with studies showing that 80% of households with older adults are at risk of economic insecurity as those individuals age[3], it’s possible that SMBs who don’t think their employees would welcome a 401(k) plan might be severely out of touch with their employees.
How do SMBs run their 401(k) programs?
We think that the benefits of implementing a 401(k) program make it well worth navigating any challenges posed by the process. But there are different approaches that businesses can take when offering a 401(k) program, and certain arrangements may work for some businesses better than others.
In-house teams are largely responsible for running SMB 401(k) programs, supported by a healthy dose of service providers and software
Like many business processes in the modern economy, benefit plan administration—including that of 401(k) plans—can be outsourced to HR service providers.
However, our survey uncovered that 56% of respondents use an in-house team to administer their 401(k) program.
That isn’t to say that our respondents were averse to leveraging other resources in plan administration. More than one-third of respondents turned to third-party service providers and almost 20% outsourced to an individual consultant of some sort. Software-as-a-service (SaaS) tools were also a popular go-to for 33% of respondents.
With limited budgets and personnel, SMBs stand to benefit greatly from involving an outside service provider or contractor in the administration of a 401(k) program. Bringing in outside expertise can help alleviate some of the challenges we explored earlier, such as employee education, performance tracking, and requirements compliance.
A dollar-for-dollar match was the most popular arrangement for SMBs that contribute to employee 401(k) plans
While most (but not all) employer-sponsored 401(k) plans include some form of contribution matching, there are a number of different options that businesses can choose from to implement this added benefit.
Our survey found that 75% of respondents preferred a dollar-for-dollar matching strategy to complement employee contributions. Where they differed was on how much they would agree to match. Among those companies that offered a dollar-for-dollar match:
- 34% will match up to 4-6% of an employee’s annual salary
- 23% will match up to 1-3% of an employee’s annual salary
- 18% will match 7% or more of an employee’s annual salary
While a majority of responding employers choose to match employee contributions dollar-for-dollar, 17% reported that they were only willing to contribute half as much, and only up to 6% of an employee’s annual salary.
Only 7% of these SMBs reported not matching employee contributions at all
A not-insignificant number of respondents who had gone through the effort of setting up a 401(k) plan for their employees stated that they’d chosen not to match employee contributions at all.
Going through the effort of putting together a comprehensive 401(k) plan without taking advantage of the boost that matching employee contributions would provide in terms of retention, reputation, and tax advantages risks driving your employees to turn to your competitors who are offering these perks.
Your competition is offering retirement benefits, and you should be too!
While we appreciate that 77% of our survey participants understand the benefits of offering a 401(k) plan to their employees, it’s the 23% that aren’t currently offering this life-changing benefit that we hope to inspire to reconsider their stance.
While 44% of those not currently offering 401(k) accounts to employees do have plans to do so or are considering doing so within the next 1-2 years, we are more concerned with the 56% that said they have no plans of doing so within the foreseeable future.
Businesses that aren’t maximizing their benefits offerings are missing out on a massive opportunity to attract top-tier talent and retain the talent that you’ve already invested so much time and resources into.
And if staffing. educating your employees, or navigating the complexities of a 401(k) program are holding you back, the HR experts in the UpCity community are standing by and ready to help you enjoy all the benefits of a 401(k) program with limited friction.
Sources
- 401(k) Plans for Small Businesses, Department of Labor
- Best Employee Benefits in 2023, Forbes
- Addressing the Nation’s Retirement Crisis: The 80%, National Council on Aging
UpCity’s Survey Method
UpCity’s SMB 401(k) survey was conducted in July of 2023 among 300 respondents to learn more about 401(k) plans at small and midsized U.S. businesses. All respondents were screened for decision-making roles in employee benefits at companies with 1,000 or fewer employees.