Plan administrators don’t always start off as such— sometimes, they begin as small business owners who want to offer their employees something extra for their service. These offerings attract more talent to the company in addition to helping employee retention over time.
However, offering a 401k plan is not a simple matter. With the various liabilities involved as a plan administrator, it’s essential to know how a 401 k plan will impact your business, finances, and employees for the years to come.
As experts in determining the health of 401ks, we put together a small guide to help small businesses navigate retirement planning. As new plan sponsors, keeping the following in mind can greatly improve the success of your plans.
Small Employer Tax Credits
There is a distinct divide between which employers offer a 401k and which don’t. Normally, the larger the company, the higher likelihood they will provide retirement benefits. The result of this structure is large businesses acquiring top talent and loyal workers, while smaller businesses are left behind.
The reason why small and medium-sized businesses are left out is due to fees. Often, the fees from various investment companies and the start-up costs themselves are exorbitant, making a 401k difficult, if not impossible, to provide. The good news is that while it may be a little more challenging for small businesses to offer retirement accounts, tax credits are available that make the process a financial possibility.
The IRS offers tax credits through a Form 8881— a form which covers nearly 50% of initial start-up costs. This break is good for 3 years worth of taxes extending either forward or backwards in your business’s lifespan.
Most employees look to 401k plans to have a nest egg when they are older. While this type of retirement allows them to take advantage of retirement savings, there are many factors you must disclose to employees. This is particularly true when considering added program benefits such as employer match to employee contributions, profit sharing, and any existing contribution limits.
By explaining the benefits and differences between these various perks, it allows your employees to make an educated decision as to whether, and how much, they want to contribute to their account. As a plan sponsor, ensuring your employees receive education on their savings for retirement is imperative to protecting your liability later on, especially if you are ever audited by the IRS.
While on the topic of audits, there are several other concerns for small business 401k plans.
For one, just like any plan sponsor, you must ensure your portfolio is performing well. To check your performance, you must benchmark your plan— comparing it to other similarly sized businesses.
Similarly, you must ensure your plan fees are reasonable. This is particularly challenging for small businesses as large 401k companies tend to price gouge smaller accounts, particularly in hidden fees. While these fees might not matter to a large company where plan participation is up to $100,000 per employee, a business with less than 5 workers will experience severe negative impacts.
Benchmark to Ensure Results
As a plan administrator, you have a personal fiduciary responsibility to ensure your retirement plans are running smoothly. The process can be overwhelming and is always improved by an extra set of eyes— this is exactly why ERISA law requires plan benchmarking. Through benchmarking, a trained financial analyst can catch fees, expenses, and performance troubles you may have overlooked.
At Benchmark, we understand the importance of this security to plan sponsors and employees alike. Since we know everyone can benefit from accurate information, we help offer it at no cost to you.
With a team of seasoned financial advisors, we can benchmark your plans, check your fees, and even answer some questions about the times ahead. Interested? We are just one message away.