Searching for Talent? Consider Setting Up a 401(k) for Your Small Business to Keep Up in the Market. If you're struggling to find or retain talent, providing employees with a 401(k) might just give you a competitive edge.
By Matt Baisden Edited by Jessica Thomas
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When looking for a job, 88 percent of employees say 401(k)s are a benefit they must have, according to Schwab. And with more job opportunities than demand, small businesses must offer these retirement vehicles if they want to recruit and retain talented employees.
In fact, a recent Fidelity survey found that in 2022, 39 percent of workers will probably look for new jobs. Candidates will likely have conversations with other businesses and compare offers during the job search process. Most companies have retirement plans (93 percent offer 401(k)s, in fact, notes the Society for Human Resource Management), so if your offer does not include a 401(k), it could tilt candidates' decisions toward other jobs. Plus, other companies' retirement benefits might attract your current employees. If you don't have a 401(k), that could be a reason for them to leave.
Despite the benefits of offering a 401(k) to employees, many small businesses worry about costs, plan administration and whether they're even qualified to provide 401(k)s or not. If you're wondering how your small business can offer 401(k) benefits, don't worry. The things you think are holding you back really aren't.
Related: Treat Retirement Plans Like a Business Unit, Not a Burden
Common misconceptions about 401(k) plans for small businesses
Small business owners often think their business is too small to qualify for a 401(k) plan. The truth is that even if you only have a handful of employees, there are different types of plans that could work for your company, including solo or group plans.
Next, many employers worry about matching employees' contributions. You can offer a plan without matching contributions, and there are benefits to offering a 401(k) to employees even without matching. Some small businesses provide an annual profit-share into the 401(k) if they meet or exceed annual revenue goals. Others offer matches that don't vest until after a few years. There's a lot of flexibility that makes it easy to set up a 401(k) for your small business without straining your cash flow.
Finally, cost is another common deterrent to offering 401(k)s. However, because of a recent law change, businesses that set up a new retirement plan are able to use tax credits to offset the cost of a new 401(k). The tax credit covers up to 50 percent of the cost (with a $5,000 limit) for up to three years.
Related: Learn About the Tax Benefits of Saving for Retirement
Still hesitant about setting up a 401(k) for your small business? There are other ways to make these retirement plans more affordable and less time-consuming for you:
1. Leverage integrated technology
Employees should be able to enroll in your 401(k) easily, and preferably with an app that allows users to enroll, make contributions and select investment options. These kinds of tools reduce paperwork and automate much of the labor for your business. Notably, handling important notices and enrollments becomes simpler when everyone has a single app to work in.
Additionally, operating your 401(k) is much easier if your payroll company and 401(k) provider are integrated. There are different levels of integration: 180-degree integration lowers your administrative burden slightly, and 360-degree integration lowers your administrative burden significantly. Ideally, your payroll company and 401(k) provider should have 360-degree integration so that whenever someone makes a savings rate change on the 401(k) system, it automatically updates your payroll.
Importantly, you'll want to talk with your payroll company about how it integrates with certain 401(k) providers. Your payroll company should send 401(k) contributions to your plan provider every time you run payroll. This saves you time and money and reduces the chances that you'll miss payroll deposits for your employees.
2. Take advantage of small business tax credits for 401(k) startup costs
When the SECURE Act was signed into law at the end of 2019, it added a tax credit that helps businesses start retirement plans for their company. If you don't currently have a retirement plan set up for your business, you are likely eligible for these credits.
The tax credit is up to $5,000 a year for the first three years your retirement plan is in place — but is limited to 50 percent of your total costs. The credit is calculated by multiplying the number of non-highly compensated workers you employ by $250.
Be sure to discuss how this credit affects your business while putting your 401(k) plan in place. You'll also want to notify your CPA to ensure the credit is claimed and the costs are properly assessed and accounted for. Some fees, if charged a certain way, might not be eligible for this credit, so make sure the way you pay provider fees enables those fees to be used for the tax credit.
3. Remove the administrative burden from your team
Adding a 401(k) plan is partially meant to improve recruitment and retention. However, if your small business only designates one or two people as your retirement plan administrators — a huge job and burden — it could drive those employees away and therefore counteract the benefits of offering a 401(k) to employees.
To avoid putting the burden on your team, look for an experienced retirement plan advisor when you decide on a 401(k) plan. Essentially, you'll need an extension of your HR team rather than a salesperson who makes the sale and walks away. Check the references of any provider you hire, understand how they get paid (do they get a commission if you use certain investments or products, for instance?), and assess their experience in the retirement space.
Related: 3 Tips to Help You Find the Vendor of Your Dreams
The fight for talented employees is fierce. Any benefit you can offer employees will give you a higher chance of recruiting and retaining valuable team members. Don't let the cost or process stop you — setting up a 401(k) for your small business can be as simple or as complicated as you need it to be for your organization.
