As the “Great Resignation” continues into 2022, business owners are escalating their quest for employee recruiting and retention tools to help them stand out in an ultra-competitive labor market.
In addition to increasing wages and enhancing bedrock employee benefits packages, some companies are also looking to revise their current retirement plan offerings. For example, businesses with existing 401(k) plans are considering immediate eligibility and vesting, and/or increasing their employer-matching contributions. Businesses that do not have a 401(k) plan are looking to add one to their benefits package.
What is a 401(k) plan and how can this offering benefit your company and your employees?
A 401(k) plan is a flexible retirement savings plan. Employees participate through automatic payroll deductions (pre-tax dollars from each paycheck), which are invested in the plan’s offerings—typically an assortment of stock and bond mutual funds. In addition, companies can add value by matching a portion—or all—of their employees’ contributions, which helps them save for retirement.
Providing a 401(k) helps demonstrate your commitment to your employees’ long-term financial health and wellbeing, which studies show job seekers are considering as they evaluate potential employers.
of workers who are offered a retirement plan at work participate in the program
of workers expect self-funded savings (like a 401k) to be their primary source of retirement income
Key findings in the Transamerica Center for Retirement Studies’ 21st Annual Transamerica Retirement Survey of 3,100 workers illustrate the importance America’s workers place on their retirement savings:
- Almost half (49%) of workers surveyed report that the pandemic has negatively impacted their financial situation, and 59% said saving for retirement is a top priority
- Three in four workers (75%) have access to a 401(k) or similar retirement plan. However, more full-time than part-time workers are offered a 401(k) or equivalent retirement plan by their employer (80% and 51%, respectively). Note: The SECURE Act enacted in late 2019 requires certain employers to offer retirement benefits to long-term part-time employees by 2024.
- Most workers (81%) who are offered a retirement plan at work participate in the program and contribute an average of 12% of their annual salary.
- Remote workers (87%) and those with a flexible schedule (86%) are more likely than in-person workers (74%) to participate in a retirement plan—and they contribute more.
- More than half of the workers (53%) expect self-funded savings to be their primary source of retirement income. Specifically, 41% expect that to come from their 401(k)s, 403(b)s, and individual retirement accounts (IRAs). Only 21% expect to rely on Social Security income through retirement.
“Amid the pandemic, employers have been navigating a public health crisis, a turbulent economy, financial woes, and difficult business decisions impacting employees. However, employers are also finding ways to support them during this challenging time,” reports Catherine Collinson, Patti Rowey, and Heidi Cho in their article for the Transamerica Institute and Transamerica Center for Retirement Studies, “Navigating the Pandemic: A Survey of U.S. Employers.”
“A competitive employee benefits package is often a win-win situation in the workplace,” they write. “It can help employers attract and retain talent while providing their employees with the ability to save for retirement and protect their health and financial wellbeing.”
Adding a retirement savings option to your company’s benefits package gives you an edge when recruiting talent and retaining employees. If you already have a 401(k), you can take steps to enhance its value in the eyes of employees and recruits. If you own a small or mid-sized business and are concerned that it will be difficult—or too expensive—to operate your own 401(k) plan, you have options. Pooled- and multi-employer plans can help address those pain points and put your business in a position to offer employees access to a competitive 401(k) retirement plan.
5 Ways to Make Your 401(k) Plan Stand Out from the Crowd
1. Establish a 401(k) Plan if You Don’t Already Have One
Consider setting up a 401(k)-retirement plan if your company does not yet have one. There are three primary types of 401(k) plans to evaluate depending on your business needs:
- A traditional 401(k) plan allows employees to make pre-tax contributions through payroll deductions and employers to make contributions based on a vesting schedule.
- A safe harbor 401(k) plan is like a traditional 401(k) plan but must provide for employer contributions that are fully vested when made.
- A SIMPLE 401(k) plan is available to employers with 100 or fewer employees who received at least $5,000 in compensation from the employer in the preceding calendar year. Like a safe harbor plan, employer contributions are fully vested when made.
"A 401(k) plan allows employees to make their investment and contribution choices while simultaneously giving employers an edge over their competitors when recruiting top talent, the owner tax deductions are also a benefit to employers."
— Tilisha Conley, Retirement Plan Manager for G&A Partners
Retirement plan information and the benefits your company—and your employees—can realize through participation in a 401(k) include:
- Employers’ matching contributions are not mandatory—and they are flexible. A company can determine a matching contribution amount that is affordable yet appeals to employees and quality candidates.
- Employers are entitled to a tax deduction for their contributions to employees’ accounts.
- In 2022, employees can contribute up to $20,500 to traditional and safe harbor 401(k) plans and $14,000 to a SIMPLE 401(k) plan. Employees over 50 can contribute an additional $6,500 in “catch-up” contributions to traditional and safe harbor plans or $3,000 to SIMPLE plans.
- Money contributed through employee and employer contributions can grow through investments in stocks, mutual funds, money market funds, savings accounts, and other investment vehicles.
- Contributions and earnings generally are not taxed by federal or state governments until they are distributed.
- The auto-enroll feature (that allows employees to opt out) can significantly increase employee participation in a company’s 401(k) plan
- A 401(k) plan may allow participants to take their benefits when they leave the company and transfer it to another retirement savings plan.
- Employees can form lifelong savings habits by making automatic contributions from their paycheck.
2. Relax Your 401(k) Eligibility Requirements
Many employers establish a service eligibility period that new employees must complete before electing to participate in the company 401(k). (According to the Internal Revenue Service (IRS), plans may require up to one year of service before employees make elective contributions.)
Working within federal law, you can relax your service eligibility requirement to allow new employees to participate immediately upon hire or, for example, after completing 90 days of employment. This is attractive to new hires because they can put their elective deferrals (contributions)—and any employer contributions—to work earlier, earning money for retirement. In addition, elective salary deferrals are excluded from the employee’s taxable income.
3. Add (or Increase) Employer 401(k) Matching Contributions
Though not required by federal law, an employer can make matching contributions for an employee who participates in their 401(k) plan. For example, you can elect to contribute 75 cents for each dollar that participating employees contribute from their paychecks. In addition, your company can make contributions on behalf of employees who do not participate in your 401(k). In other words, you can invest into every employee’s retirement whether they make contributions or not.
For a candidate evaluating multiple job offers, a considerable 401(k) matching contribution can influence their decision-making process. Many companies are recognizing this competitive edge and increasing their matching contributions.
4. Reduce Your Vesting Requirement for Employers’ Contributions
Employees are always 100% vested in their salary contributions, but, according to the IRS, companies can require that employees participate in their 401(k) plans for up to two years before becoming eligible for employers’ matching contributions to their retirement accounts. For example, a plan may require that the employee complete one year of service for a 20% vested interest in employer contributions and additional years of service for increases in the vested percentage.
Some companies are reducing—or eliminating—vesting requirements to bolster their recruiting and retention efforts. For example, if a company has a 90-day vesting requirement, a new employee need only complete 90 days of service before gaining access to employer contributions to the company’s 401(k) plan.
5. Automatically Enroll all New Hires in Your 401(k)
Employers can automatically enroll employees in their company’s 401(k) plan, though it is not required (at this time) by federal law.
How it works: Employers automatically reduce an employee’s wages by a fixed percentage (3% is common) and contribute that amount to the 401(k) plan—plus any employer match they elect to make. Employees can opt-out at any time or can choose to have their wages reduced by a different percentage. However, the automatic enrollment feature has proven to boost retirement savings in 401(k) plans.
According to a Vanguard study based on 813,918 newly hired eligible employees:
- Participation rates in defined contribution plans tripled to 91% under automatic enrollment, compared with 28% under voluntary enrollment.
- Over time, nine in 10 participants increased their deferral rates, either automatically or independently.
- Employees earning less than $15,000 had a participation rate of 82% under automatic enrollment vs. 4% under voluntary enrollment. Similarly, nine out of every 10 employees younger than 25 were plan participants under automatic enrollment, vs. fewer than two in 10 under voluntary enrollment.
You can also extend the automatic enrollment feature to employees who are not yet participants in your 401(k) plan.
Flexible (and Affordable) 401(k) Retirement Plan Options for Small Businesses
Offering a solid retirement plan as part of a comprehensive benefits package is essential during the current employment crisis, which has and will continue to spur substantial workplace transformation.
Results from 86% of survey participants in Charles Schwab’s “2021 401(k) Participant Study” ranked a 401(k) retirement plan at the top of the list of “must-have” workplace benefits—above even health insurance, which ranked second on the list.
Yet, almost half of small businesses do not offer retirement plans to employees. Transamerica Institute and Transamerica Center for Retirement Studies’ “Navigating the Pandemic: A Survey of U.S. Employers” reports that small companies are significantly (50%) more likely to not offer any retirement benefits, compared with medium (4%) and large companies (1%).
Many small business owners believe that 401(k) plans are designed for large companies with hundreds of employees and that it would be too expensive and difficult for them to administer and manage assets on their own.
Following are compelling options that offer small businesses many of the same benefits as a traditional (larger) 401(k) plan, including the multi-employer plan (MEP) 401(k) and pooled-employer plan (PEP) 401(k).
Multi-employer Plan (MEP) 401(k)
Companies in the same industry can join a multi-employer plan (MEP) 401(k), which provides access to a Fortune 500-level retirement plan by pooling assets and sharing administrative costs.
For example, G&A Partners’ MEP 401(k), provided through Slavic401k, includes the following services and benefits:
- 401(k) plan administration, including non-discrimination testing, loan and distribution processing, trustee services, and IRS Form 5500 preparation.
- Retirement planning options designed to match your company’s needs, including automatic enrollment, safe harbor provisions, employer matching contributions, accredited investment funds, flexible vesting and eligibility schedules, Roth contributions, etc.
- Mutual funds purchased at Net Value Asset (NAV) and without a commission or sales charge, which means your company and your employees enjoy lower fees than other MEPs.
- Transparent participant fees, which are disclosed as a line item on your statement. In addition, funds with a 12b-1 or Sub-TA fee paid to Slavic401k are credited back to investors.
Pooled-employer Plan (PEP) 401(k)
The pooled employer plan (PEP) 401(k) option was created through the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. Unlike the MEP, the PEP does not require participants to be in the same industry. Therefore, businesses of all types and sizes can join forces to share in costs and benefits.
“The ultimate goal is to increase opportunities for all companies and their employees to have 401(k) retirement funds,” Conley says. “This is a huge advantage for small and medium-sized businesses as it gives many who do not currently provide employees with a retirement savings option the ability to offer a plan.”
How to Get Started with an MEP or PEP
To participate in an MEP or PEP, you must find a plan sponsor. The sponsor performs administrative duties for member companies, known as “adopting employers,” and handles the costs, liabilities, and paperwork required to run a retirement plan.
How G&A Can Help
The 401(k) experts at G&A can help you design and set up the best plan for your business and will guide you through each step.