401(k) for Small Businesses: It May Be Easier Than You Think

8 Min Read

Every employee deserves an opportunity to save for their retirement and plan for their financial future, but currently only 14% of small businesses in the U.S. offer some kind of retirement plan, according to the GAO. With almost 30 million small businesses in the United States, that means there are many hard-working business owners and employees who don’t have access to the most tax-incentivized, employer-sponsored retirement option: a 401(k), which is a standard benefit for any employee at a larger company.

Unlike larger companies with more resources and full-fledged HR departments, small companies typically stop looking into any additional employee benefits after health insurance is set up. There are many misconceptions, as well as very valid reasons, that this is the case: perceived high costs, administrative burden, and lack of employee interest are issues that are typically exacerbated at smaller companies.

However, given recent advances in technology and financial literacy, consumers are demanding more out of financial institutions, in terms of accountability, accessible pricing, and ease of use. This means 401(k)s have become a more realistic and appealing option, even for very small businesses. They’re now able to catch up to larger companies and take advantage of all of the benefits of this type of plan just as effectively – it’s been long overdue!

With year-end planning just around the corner, here are some things to consider when thinking about implementing a 401(k):

Tax Benefits for Employers and Employees

This is the #1 reason to set up a 401(k) as soon as you can. Every year you delay setting up a 401(k), you’re missing out on investment gains and tax savings. These are oft under-appreciated, huge financial upsides for both business owners and their employees.

  1. Long-term individual tax benefits: Employees (owners included!) are able to invest their money into the 401(k) before taxes are taken out of their paychecks. This means when they retire and start withdrawing money from their 401(k)s to live on, they will be taxed at their income tax rate at the time of retiring, as opposed to their current (typically, much higher) income tax rate.
  2. Short-term individual tax benefits: Each year, any pre-tax contributions made to a 401(k) account can be deducted from their taxable income, which means that they will pay less in income tax. Employers can also receive corporate tax deductions for contributions to their employee accounts and even receive a flat tax credit (up to $500/year) for the first three years of a new plan.

No HR Department Needed

Even if you’re not a huge corporation with an HR department focused on taking care of benefits and payroll, a 401(k) is still a realistic possibility. Historically, large financial institutions have entirely owned the 401(k) market and were mostly interested in creating products and services (and therefore, pricing structures) focused on large companies with in-house resources because they were more profitable to work with.

However, in recent years several new 401(k) startups and even small business 401(k) offerings from large financial institutions have sprouted specifically focused on creating 401(k) options to suit small businesses. At Human Interest, we’ve designed our 401(k) product and services to suit our small business clients. We work exclusively with small businesses across all industries and understand that they have very different needs and considerations compared to those of a large company.

Everything that touches 401(k)s – payroll, compliance, employee management, and more – needs to be adjusted to suit the reality of small business operations and budgets.

The Lower Fees Trend

The intricacies of 401(k)s aren’t common knowledge, and unlike a concrete “product” like a hamburger, it’s often fairly complicated to understand just how much a 401(k) should cost and who is responsible for paying. Some of this is intentional – unfortunately, it’s all too common that the financial industry is able to profit off of keeping their clients in the dark and using fine print to their advantage. Luckily, on all fronts, 401(k) fees are decreasing due to consumer demand for greater transparency and accountability.

To put 401(k) costs into perspective, the closest comparison is health insurance, in that it’s an employer-sponsored benefit that is paid for by both employers and employees and there is some degree of ongoing costs in the form of premiums, co-pays, and differently priced plans to choose from. On that same note, when you’re shopping for a 401(k), make sure you understand exactly who is paying for what features and services you will be receiving in return. In particular, find out if the 401(k) provider serves as a fiduciary – if not, it means that they’re allowed to receive kickbacks from the investments they recommend, which means your employees may be stuck paying high investment fees.

Interestingly enough, many people are surprised to learn that a 401(k) for an entire small business can cost less than what is paid for a single employee’s health insurance.

Simply put, a 401(k) is a thoughtful, strategic benefit that has a proven impact on recruitment and retention and provides a concrete financial benefit to employers and employees. Most importantly, it’s no longer only reserved for large businesses. Thanks to the growing number of tech-enabled products, it’s no longer a burden for employers, even those without an HR dept, to offer employees a robust 401(k) benefit. While you may have explored this option in the past or had it on your to-do list for several years, recent trends make it more realistic than ever for small businesses to offer a high-quality 401(k) and ensure their employees are able to plan for their financial futures.

Authored by Roger Lee, CEO and Co-founder of Human Interest

Roger Lee is the CEO and Co-founder of Human Interest (formerly known as Captain401). Based in San Francisco, Human Interest helps small businesses all over the country offer 401(k)s to their employees. Roger and his team focus on increasing 401(k) access through a high-quality, affordable solution that lowers the administrative burden for businesses and prioritizes employee experience and education. He was formerly a co-founder at Thunder and has a degree in Applied Mathematics from Harvard University.

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