If you could create your own fantasy Board of Directors who would be on it? CO— connects you with thought leaders from across the business spectrum and asks them to help solve your biggest business challenges. In this edition, a CO— reader asks whether it is feasible for a small business to sponsor a 401(k) plan for employees.
Ben Thomason, executive vice president of revenue at Vestwell, answers…
Companies know it’s vitally important to have the right people on board to build the business, and a solid benefits package attracts the top talent they need. However, many small businesses assume they do not have the option to offer a 401(k) retirement savings plan.
That misconception is understandable, Thomason told CO—, because cost and complexity had once put 401(k)s out of reach for companies with lean resources. That’s no longer the case today, he said, thanks to the emergence of outsourcing options and technology advancements that streamline and ease the burden of 401(k) setup and administration.
“Retirement security is such an important concept for all employees,” he said, noting 401(k) plans are a benefit job hunters seek out when choosing where to work. An overwhelming majority (87%) of U.S. consumers polled by the Investment Company Institute view 401(k)s favorably.
“To me, that is the ‘why’ of offering 401(k)s — to attract the right talent so your business can grow the right way,” Thomason said. “The right people make all the difference.”
401(k)s and other investment vehicles like SEP and Traditional IRAs (individual retirement accounts) enable workers to contribute to retirement savings on a tax-deferred basis. Thomason, whose company provides a digital platform financial advisers use to set up and administer clients’ 401(k) plans, said he favors 401(k)s over other investment vehicles based on their flexibility, the amount of contributions that can be made and tax-deferred, and the ability to incentivize workers to save for retirement.
Unlike other worker benefits such as flex-time and fitness memberships, a 401(k) plan carries liability that is not to be taken lightly. By law, employers have a fiduciary responsibility to ensure the program is run appropriately, in the best interest of participating employees, he said.
Keep it simple to begin with. There is always a chance to change the plan in the future.
Ben Thomason, executive vice president of revenue, Vestwell
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Vestwell's Ben Thomason explains how small businesses, too, can offer retirement benefits like 401K plans to employees. Read on for more most-wanted employee benefits.
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Small companies typically lack in-house expertise to navigate the complex maze of protocols, documentation and decisions involved with establishing and running a 401(k) program. “It is a very difficult topic to understand and build a strategy for, if you are coming at it from a novice standpoint,” Thomason said.
With the assistance of a financial adviser, however, a company is guided through options, fees and cost projections to determine whether a 401(k) aligns with long-term growth plans, he said.
“Truth of the matter is that 401(k)s can be really inexpensive for the employer, meaning a lot of companies that are small and can’t afford the plan on its face — that is, pay for everything — will often pass costs on to the employee.” This is done with complete transparency, of course, and employees are often willing to shoulder costs simply to have access to a 401(k) plan.
“First, talk to a qualified ERISA adviser,” Thomason said. ERISA is the Employee Retirement Income Security Act, the federal law that established conduct, accountability and compliance standards to protect American workers’ retirement savings. ERISA advisers are subject matter experts who understand fiduciary law and advise on 401(k) documentation, protocols, fees and service providers.
Keep it simple
While the structure of a 401(k) plan offers great flexibility, Thomason discouraged small businesses from customizing a plan, at first.
“Keep it simple to begin with,” he said. “There is always a chance to change the plan in the future. If you dive too much into customizing a plan before understanding how it works for your employee population, then you are asking for trouble.”
Matching funds is not a requirement
A 401(k) that offers employer-matched contributions is a good recruitment and retention tool, Thomason said, but employers are not required to match funds. A company can start a 401(k) plan without contributing to workers’ retirement and consider matching funds later, after a company determines how generous it can afford to be.
Ensure technology integration
Because employee 401(k) contributions are made through payroll deductions, Thomason urged companies ensure payroll processes integrate with 401k administration. Technology integration ensures smooth, accurate transmission of data and avoids human error tied to manual processes.
Employees determine what percentage of their wages are diverted to their 401(k) accounts and they are free to adjust contribution amounts up and down, adding to the administrative burden if handled manually. “If you have any more than 20 employees, that can become onerous pretty quick,” he said.
Integration provides the foundation to scale as a company grows. “If you’ve got the right systems in place from the beginning, then the growing process is much more facilitated than if you don’t.”
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
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