• Steven Cima

The Founder's Guide to 401(k)s

While employee benefits like 401(k)s may not be at the top of a founder’s priority list, it quickly comes to the forefront of their minds as they attempt to attract top talent. The good news is that modern startup 401(k) plans are built for today's business environment. They leverage current technological resources to minimize employers' administrative burdens and increase account owners' access and education.


If you’re still on the fence about getting 401(k) plans for your current and prospective employees, consider these reasons:

1. Employees and Candidates Expect Retirement Benefits


Even more than that, they expect access to a 401(k). Around 88% of employees require access to a 401(k) when looking into prospective employers. That doesn’t mean SIMPLE IRAs and other retirement plans are valueless, but 401(k)s are the much-preferred option. A 401(k) allows individuals to contribute up to $19,500 in 2020 and 2021, with an additional $6,500 catch-up contribution allowance for older employees. This savings potential can’t be met by SIMPLE IRAs, which allow annual contributions up to $13,500 or $16,500 (depending on their age), or IRAs, which would enable grants of up to $6,000 or $7,000 (also depending on age). A 401(k) is also seen as valuable because employers can offer matching contributions or a guarantee to match a percentage of an individual employee’s contributions as an incentive.


According to the United States Government Accountability Office, only 14% of small businesses offer retirement benefits, but larger corporations frequently provide them. An excellent strategy for standing out and attracting talented professionals to your organization is joining the minority of small businesses with more robust retirement benefits.


2. Tax Credits


Traditionally, the cost of setting up a new 401(k) plan can be costly and time-consuming. To streamline this process and make saving for retirement easier for startups, Congress passed the SECURE Act Tax Credit. This tax credit offers eligible employers a tax credit of up to $5,000 per year for three years if they start a new retirement program. In addition, The SECURE Act offers an additional $500 credit (per year for three years) if the employer sets up a retirement plan with automatic enrollment. In total, the government is offering eligible small businesses up to $16,500 in tax credits (paid out over three years) to help offset the cost of setting up a retirement plan.


3. Tax Deductions


Employers aren’t required to make matching contributions or even offer 401(k)s or other retirement benefits in the first place. But they give companies a way to incentivize their employees and provide significant tax breaks. Employers can receive tax benefits for contributing to 401(k) plans too. The tax code wants to encourage saving for retirement, so employers are offered tax incentives to contribute to a 401(k)-tax deduction and offset the cost of setting up retirement plans.


If you’re starting to come around to the idea of offering 401(k) plans to current and prospective employees, your next thought may be, “how to choose a provider?”


Most 401(k) plan providers don’t just offer the infrastructure for employees to select funds and transfer funds into their accounts. They offer a wide range of services, such as auto-enrollment and automated contribution management, education, compliance and oversight, and more. Some plans act as a fiduciary and manage ERISA compliance to help employers. They also provide support, retirement resources, and investment prompts to help employees make the right investment choices for their financial plan. Be sure to look for these six characteristics as you browse through different plan providers:

  1. Transparent and low fees for both plan management and investments.

  2. Easy setup options that decrease HR workload and allow for fast account creation for new employees.

  3. Robust integration capabilities that can automatically handle payroll contributions.

  4. Compliance support, including no-discrimination testing, annual notices, and more.

  5. Customer service for both employer administrators and employee investors.

  6. Flexibility for employers to access a wide selection of fund options so you can design the right plan for your company. It should also allow you to set up your employer match formula.

Once you find a plan provider that offers the services you need at a price that fits your budget, you can start building the right plan for your business.