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Small business owners know that having a 401K plan can help increase employee satisfaction and save on personal and business taxes. In fact, employees who are offered a retirement plan are almost twice as likely to be satisfied with their company’s overall benefits package.
However, choosing the right 401K plan provider for your small business can be a complicated, expensive, and confusing process. For this reason, we have decided to create this article, where we explain in a simple way everything you need to know about how to choose the best provider of the 401 K plan for small businesses.
Table of Content
- Let’s start with some misconceptions about the 401K plan
- What are some of the key responsibilities that 401K plan providers should offer
- Steps to Choosing the Best 401k Provider for Your Small Business
- Know the fees and rates
- Ask about plan features and options
- Prioritize the user experience
- Question about payroll integrations
- Final Thoughts
Let’s start with some misconceptions about the 401K plan
Myth: They are difficult to set up and maintain.
Truth: While these plans can certainly be difficult to understand and exhausting to both create and maintain, small businesses now have more options. In recent years, 401(k) providers have appeared that do the heavy lifting for employers, thereby taking over most of the setup and management responsibilities.
Myth: My employees will not participate.
Truth: If a 401K plan seems confusing to you, your employees may feel the same way. So choosing a modern 401(k) with a user-friendly interface will make things easier for everyone.
Myth: They are for the big companies that can afford them.
Truth: Many 401(k) provid ers now offer small business solutions at affordable prices. In addition, the tax benefits of offering retirement plans to employees often offset some plan fees.
Myth: I can’t pay employer matching contributions.
Fact: Not only do matching contribution programs vary widely, they are optional. Even if your small business can’t afford a matching program, you can offer your employees a 401(k) plan so they can contribute their own money.
What are some of the key responsibilities that 401K plan providers should offer?
- Design and configuration of the plan. Document plan, coordinate contributions with payroll provider, and designate fiduciary responsibilities.
- Enrollment and education. Explain the plan to employees, informing them of investment options and any changes.
- Administration and record keeping.Deduct and deposit employee contributions from payroll, make employer contributions, and keep track of transactions.
- Compliance and reporting. File IRS Form 5500 and complete compliance tests annually.
- Investment Management. Choosing a provider and a selection of investments. Make sure that all processes are carried out correctly.
Steps to choose the best 401(k) provider for your small business
Decide how involved you want to be
No matter how seamless the employee experience may seem, offering retirement benefits involves a lot of behind-the-scenes work.
Of course, there are plenty of challenges ahead, like finalizing your plan design and deciding whether to offer both traditional and Roth 401(k) contributions. But the biggest time commitment might involve daily maintenance, compliance, and reporting. Here are some of the main tasks a 401(k) plan administrator handles.
- Preparation of a summary plan description for participants and beneficiaries
- Participant Disclosure Documents and Account Statements
- Approval of operations (for example, loans, distributions)
- Compliance with plan rules and federal laws
- Discrimination testing and audit support
- Employee registration and communications
- Comply with Internal Revenue Service and Department of Labor requirements (for example, Form 5500 )
If that sounds like a full-time job, that’s because it is. Small businesses often turn to Third Party Administrators (TPAs) to handle these responsibilities on their behalf. Even TPAs vary widely in their scope, responsibilities, and accountability.
For example, ERISA 3(16) fiduciaries assume the duties of administration and responsibility for ensuring that your plan complies with the Employee Retirement Income Security Act.
As if that wasn’t discouraging enough, remember that there is more to managing a retirement plan than administration and compliance. Unless you want to manage the plan’s investment strategy yourself, you need an investment advisor and manager.
Know the fees and rates
Retirement benefits come at a cost, not only to businesses, but also to their employees. Choosing the wrong 401K plan provider could take a bite out of participants’ savings. There are typically three different types of fees associated with offering retirement benefits: management fees, investment fees, and individual service fees.
If you’re looking for a metric that adds up how much your 401(k) could cost employees, look no further than the total expense ratio. This is simply the percentage that participants are charged based on their participation. For example, a 1 percent expense ratio means that an employee with $100,000 in their 401(k) account would be charged $1,000 per year. When evaluating providers, ask about their average expense ratios and other charges.
So what is considered a fair share of market spending? It depends on your size. As counterintuitive as it may sound, small businesses tend to have higher expense ratios. Companies with 50 employees have an average cost of 1.68 percent. By comparison, the average ratio for a company with 2,000 employees is 0.7 percent.Although those percentages sound small, they result in exponentially higher fees as companies grow.
Ask about plan features and options
There is no single approach to saving for retirement.Employers have access to a variety of creative solutions to drive engagement and reward employees who save. Therefore, you will want to make sure that the providers you are considering can accommodate your needs.
One of the first things you’ll want to confirm is whether the provider supports both traditional and Roth 401(k) contributions. The difference between the two has to do with when the dollars are taxed. Employees with traditional 401(k) accounts make their retirement contributions on a pre-tax basis, and these amounts grow tax-free until they begin withdrawing funds. The thinking is that the tax brackets will be lower after retirement.
By contrast, those with Roth 401(k) accounts make their contributions after taxes. In this sense, this capital grows tax-free as long as it is maintained for at least five years. Although Roth contributions have a greater impact on employees paychecks, the arrangement is popular with younger workers, as they have a greater trajectory toward retirement. The choice is the most important, any reputable seller should support both types of contributions.
Safe Harbor 401(k) plans are also worth considering. These special plans are exempt from certain compliance obligations but, in turn, require the company to contribute to employees 401(k) accounts. Since both employer matching and profit sharing are two great ways to drive engagement, retain talent, and even save on taxes, the deal could be a no-brainer for your business. Just make sure the 401(k) plan providers you’re evaluating can actually accommodate Safe Harbor plans and matching agreements.
Prioritize the user experience
The management of retirement benefits must be easy to manage for both your company and your employees. When considering your options, pay close attention to the user experience. Does the provider’s technology make it easy for participants to renew a previous retirement account? Do you give employees access to a single dashboard where they can check their balance, view transaction data, update contributions, and verify their employer contribution?
The harder it is to find this information, the less perceived value employees get from your retirement offer. Also, consider whether the provider has a mobile app or is enabled to offer mobile services, so employees can securely access their account information on the go.
As intuitive as the software is, it’s a safe bet that employees will have retirement-related questions along the way. Your small business’s human resources team (if they have one) must be very busy, so don’t force them to add “retirement expert” to the list. You may want to work with vendors that bundle their software with a service that caters to all of their users, including HR professionals and 401K plan program participants.
Ask about payroll integrations
Payroll and retirement go hand in hand. When employees update their contributions, they trust that those amounts will be deposited into their retirement accounts after payday. In the past, for that to happen, HR had to manually enter deferrals into payroll. This approach is time consuming and prone to administrative errors.
When considering 401(k) providers, consider whether they have full 360 integration with your HR and payroll software. There are also benefits beyond streamlined contributions. If you want to automatically enroll new hires in a 401(k), ask if your vendor integrations support that. Investing in a solution that keeps HR, payroll, and retirement in sync not only saves time and money, but also improves the overall employee experience.
Evaluating different 401K providers can be intimidating, which is why small businesses often procrastinate. But delaying it any longer can put yours at a competitive disadvantage, as employer-sponsored retirement benefits are increasingly seen as a must-have by job seekers.