Many business owners, especially those operating smaller companies, want to offer retirement plan options, such as a 401(k), to their employees. Most, however, avoid pursuing a plan because they think they’re too complex to manage, or too expensive to afford.
Fortunately, there are options for business owners that make 401(k) plans easier to manage, mitigate compliance risks and more affordable to provide.
Smart Business spoke with Jim McElwain, regional sales manager at Paychex, about 401(k) options for smaller companies.
What are some of the reasons business owners don’t provide a 401(k) plan?
Many business owners believe they need to match employee contributions to a 401(k) plan. While that’s a nice perk for employees, a match is not required. Employers can start by simply providing a 401(k) plan and then begin matching later. It should be noted that matching is tax deductible.
Along the same lines, business owners often choose not to offer a 401(k) plan because they think it’s too expensive. What they might not know is that the IRS offers tax credits for business owners creating a 401(k) program for their employees that covers 50 percent of eligible plan startup costs up to a maximum of $500 per year.
The other more common misconception is that 401(k) plans are too complex for a smaller business to manage, which puts the owner at risk for a compliance breach. While it’s true that business owners need to be careful when managing a plan and the record keeping aspect is critical, there are third-party providers that understand these plans and can offer administrative support. This relieves the time burden while mitigating the risk of noncompliance.
What outsource services are available to help business owners struggling with 401(k) administration?
Business owners that choose to offer a 401(k) plan can benefit from having a strong partner. Companies have a fiduciary responsibility when offering these plans, which means they must operate the plan with the employees’ best interests at heart. Either the business becomes the fiduciary or a third party will need to be engaged to take over those responsibilities. This is an important decision because fiduciary responsibility also comes with liability. If a business cannot adhere to the basic rules of fiduciary responsibility, it can become liable for losses to the plan.
Plan administration involves rigorous legal and fiduciary requirements that smaller companies may not have the staff to manage. By engaging a third-party provider to administer the retirement plan, companies gain the benefit of its expertise, technology, and reliability while streamlining the tasks associated with both functions, making 401(k) an accessible option for companies of all sizes.
What are the benefits of offering a 401(k) plan?
Offering a 401(k) plan gives a company a competitive advantage over companies that do not. It can be the difference between landing top talent or watching them take a job with a competitor.
Because there are very affordable plans in the marketplace and third-party providers that can help with administration and compliance, many companies are offering 401(k) plans that previously did not. Profitable companies with few employees that might have passed on the idea of offering a plan should reconsider. Ultimately, it’s a small price to pay to compete for the best talent.
There is a lot of flexibility with today’s 401(k) plans. This open architecture allows companies to pick a plan that works best for everyone involved. Not long ago only larger companies could afford to offer plans. In today’s market, it’s possible for companies of all sizes to offer nearly the same benefits at the same price.
Retirement savings plans are a coveted employee benefit that many candidates expect potential employers to provide. Offering a 401(k) can help a business attract and retain top talent.
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