This article is from our friends at Captain401.
If you’re a small business owner, you probably think providing a 401(k) isn’t a possibility, given your budget. A 2014 Government Accountability Office report found that just 14% of businesses with under 100 workers offered an employer-sponsored retirement plan, even though 68% of businesses that didn’t offer a 401(k) said that it would help attract and retain talent. Employees agree: a 2016 study found that nearly half of employees surveyed rated defined-contribution retirement plans like 401(k)’s “very important” to job satisfaction.
Offering a 401(k) helps your employees, your business, and yourself – and it’s more affordable than ever. We’ll break down six myths about providing 401(k)’s, and make the case for offering this much-valued benefit.
Myth 1: Small businesses can’t afford 401(k)’s
You may think that 401(k)’s are only financially viable for big businesses. Not so long ago, that might have been true – small businesses were paying disproportionately more for a 401(k). A 2012 GAO study found that companies with under 50 employees paid nearly twice as much for record-keeping and administrative services (0.43% of assets) than did companies with over 500 employees (0.22%). However, recent developments in technology and outsourcing have made 401(k)’s affordable for businesses of all sizes.
Plus, 401(k)’s offer much better tax advantages than simple salary increases or bonuses. You can get tax deductions or credits for setting up the 401(k) plan, maintaining it, and matching employees’ contributions. From the employer and employee perspective, a 401(k) offers better tax treatment than a salary bump or bonus of the same amount.
Myth 2: There’s too much red tape
Again, even as of a few years ago, the amount of paperwork required to offer a 401(k) might well have been more than a small business could handle. The bookkeeping, accounting, and record-keeping work was daunting, especially for companies without a formal human resources department.
In recent years, though, technology has changed the retirement benefits landscape. For example, enrolling in and managing your 401(k) plan can now be done entirely online, and outsourcing HR benefits administration to a third party drastically reduces the burden on small business owners, who are already wearing plenty of hats as it is.
The manual processes of withdrawing contributions from employees’ paychecks, changing contribution amounts, and fielding employee questions can be taken entirely off of your plate – and many 401(k) providers sync with payroll providers to further reduce friction.
Myth 3: My employees won’t participate anyway
If your employees know the benefits of saving for retirement in general, and the tax advantages of contributing to a 401(k) in particular, they’ll likely show a high participation rate. When a 401(k) is available and easy to sign up for (i.e. no faxing of paperwork required), employees tend to be on board. According to the Department of Labor, around 70% of employees overall participate in their companies’ 401(k) plan; automatic enrollment could up that number to 85%.
If your plan provider educates your employees about the new plan and offers low-friction signup, you’re likely to see great participation rates.
Myth 4: Finding good investments is too time-consuming
The 2013 GAO study found that small business owners thought selecting investment options was too challenging, especially if they employed both older and younger workers. Fear of choosing the wrong investments, or even facing legal challenges, deters many business owners.
However, you can choose a 401(k) provider with a wide selection of investment opportunities that range from aggressive (for younger employees) to conservative (for older ones). Low-cost mutual funds allow you to invest based on industry, location, company size, and risk tolerance while minimizing fees. A good 401(k) provider will provide cost-effective options that appeal to all of your employees – without causing you and your employees unnecessary stress.
Myth 5: I should invest in my business instead
You’ve bet big on your company, and it’s only natural to want to maximize profits to ensure your own comfortable retirement. However, relying solely on your business to fund your retirement is a risky proposition at best: the reality is that 80% of small businesses fail within a year and a half. Even worse, a full 60% of small business owners say they haven’t saved enough for retirement. If your business offers a 401(k), you can make tax-advantaged contributions to your own safety net, setting yourself and your employees up for a financially secure retirement.
Are you considering offering a 401(k)? See how much 401(k)’s actually cost employers and check out Captain401’s low-cost retirement plans.