Should You Offer a 401(k) Plan?
With so many people concerned about the uncertain future of Social Security and the continued elimination of company pension plans, it's alarming how few small businesses offer their employees a 401(k) plan. According to the SBA, only 29 percent of full-time employees in companies with fewer than 25 employees currently work at firms that sponsor a retirement program.
In some ways, it's understandable: Most small-business owners just aren't retirement experts. Their time is consumed with growing their business and reinvesting their money back into the company. When asked why they don't offer a 401(k), many business owners cite apprehensions about the cost, administrative burden and availability of plans for their small size.
But what the majority don't know is that these beliefs they have are very common misconceptions. Today, small businesses of any size can easily establish a 401(k) plan that's inexpensive, quick and simple to implement, requires little time to administer, and makes a firm stronger and more competitive.
Here are five good reasons why I urge every small-business owner to offer a workplace retirement savings plan:
1. A 401(k) is much more affordable than you think. A new study from Fidelity Investments shows that 43 percent of small-business owners perceive cost as the major barrier to offering a 401(k). Compared to other operating expenses, however, a 401(k) program is relatively inexpensive. There are a number of excellent plans that cost as little as $300 per month--that's less than many small businesses' monthly telecommunications bill.
Existing tax legislation also reduces the cost of starting a workplace savings plan. Employers can receive a tax credit that offsets 50 percent of the costs to establish a 401(k), up to $500 annually for each of the plan's first three years. A business can also receive a federal tax deduction of 15 to 40 percent of any contribution it makes to the plan. And here's more good news: Congress recently passed the Pension Protection Act, which now makes permanent the 2001 tax relief legislation that allows business owners and employees to put a larger percentage of their annual salaries in a 401(k). In addition, the new legislation allows employers to automatically enroll employees in the company's 401(k) plan and legally raise their contributions without the employees' express consent.
2. It strengthens your business by attracting and retaining high-quality employees. With employees' assuming more and more of the responsibility to save for their retirement, offering a retirement benefit is a powerful incentive that will help you retain and attract current and prospective employees. It not only shows that you care about your people, but it can make your company even more competitive in its industry. It's simple, really. Employees who are happy with their benefits are going to be happier workers. And consider this: If you offer a job to someone but don't have a 401(k) and the prospective employee has a similar offer from a company that does offer a 401(k), it's pretty obvious which job the candidate will choose. A higher employee retention rate also means you'll spend less time and money on recruiting new employees.
3. The administrative burden can be minimal. In addition to price concerns, many small-business owners express reservations about 401(k) fiduciary responsibilities and plan administration. They're concerned that they don't have the time or know-how to understand their retirement plan options. But today's small-business 401(k) plans streamline or even eliminate many of the processes that used to be complex. With a quality provider, entrepreneurs will discover their daily plan administration efforts require only a minimal commitment of time. In fact, they'll likely spend more time traveling to work than dealing with issues related to their retirement plans.
4. Most small-business 401(k) plans are web-based, which helps eliminate paperwork while offering 24/7 access to account management. Today's web-based small-business 401(k) platforms and online tools eliminate the need for costly on-site representatives and plan education. Employees can manage their enrollment and account online on a 24/7 basis, freeing business owners from many of the time-consuming demands of plan administration and paperwork. Most providers also have retirement specialists on call seven days a week to support you and your plan participants every step of the way.
5. It can help secure your own retirement. Unfortunately, too many small-business owners shortchange their personal retirement security. Often, those who don't offer a 401(k) have no other means of lifetime income. That's why it makes sense to establish a workplace savings plan now, no matter how long you've been in business. A tax-deferred 401(k) plan is an effective platform to manage and pursue a financially secure retirement for you and your staff. It's also portable, meaning you can roll it over if you decide to start another company.
These are just a few of the many practical benefits a workplace retirement savings program offers to entrepreneurs and their employees. The next step I'd suggest? Contact a quality provider, and listen to what they have to say, ask questions, and compare plan costs and features. This step won't cost you a dime and will likely be the most time you'll need to spend in establishing and administering your new 401(k) plan.
Edmund F. Murphy is executive vice president of Boston-based Fidelity Institutional Retirement Services Co., a unit of Fidelity Investments, a provider of workplace retirement savings plans.