The tide has shifted – unemployment is lower than it has been in a long time and most potential recruits have multiple options when looking for work. Employers who want to vie for their attention need to offer more than a fair salary and good working conditions; they also need to offer attractive benefits. In addition to good healthcare coverage, workers want help planning for retirement.
Most bigger companies offer retirement packages, but many small and mid-sized businesses (SMBs) put it off, believing they can’t afford it. Because of the labor shortage, however, many are looking to add 401(k) plans or improve existing benefit packages to attract workers and retain the ones they already have. And, since the economy appears to have some staying power, more are stepping up.
If your company is considering adding 401(k) benefits for your employees, here are some answers to common questions and best practices you’ll want to keep in mind.
As mentioned, success in recruiting is a major benefit to your business. Retirement benefits weigh heavily in a potential employee’s decision to work for your company, especially among millennials who understand the power of compounding interest.
Younger generations are increasingly interested in getting a head start on retirement planning, many at the urging of their parents who failed to do so and now face financial struggles as they age.
People talk a lot about wellness as it relates to physical health. By helping employees plan for retirement, employers can feel good knowing they’re helping improve their financial wellness, too. It’s more than just a good feeling, however.
Creating a vibrant employee culture is a major part of an organization’s success as well. Good benefits can improve employee satisfaction and morale by providing a level of assurance about their futures, and they’ll spend less time worrying about how they’ll provide for themselves and their families down the road. Offering a good retirement package can also boost your company’s reputation in the community, among clients and to others through word of mouth.
One of the biggest mistakes for companies that already offer retirement benefits is not talking about it, whether that be internally with employees or on recruiting platforms. Potential hires want to know what your company offers, and it’s crucial to provide proper education to existing employees so they understand how to maximize their retirement savings tools.
Another mistake some company owners make is asking their personal financial advisors to step into the role of managing a corporate 401(k) plan. Make sure the advisor you choose is experienced in managing a company’s retirement plan as there are many considerations and best practices applied to group retirement plans versus individual accounts.
Recent fiduciary rules need to be followed, and an advisor that specializes in retirement plans can provide proper guidance and make sure fees are aligned as a plan grows. A competent advisor should also provide recommendations based on the plan’s size, number of employees, industry averages and more. A good advisor will also take time to meet with employees and answer questions. With consistent reviews of the plan, an advisor can also keep a pulse on its performance and make recommendations for changes or replacing it with a better option.
Educating employers and employees is important. In the past, it was typical for an advisor to conduct a large group meeting with all the employees. However, because each employee is different, this isn’t always as helpful as it should be. Some people are just starting their careers while others are ready to retire. It’s best for an advisor to set up one-on-one meetings with those who are interested to cover important topics based on individuals’ unique pain points.
Most meetings end up covering other financial issues that need to be addressed beyond just the 401(k), such as student loans, other debt, impending children’s college tuition and other financial challenges. These are the issues that are stressing many people out the most, and they need to be educated on how to shift their focus on saving for the future while still dealing with potential financial pitfalls of the past and present.
Offering an employer match for employee contributions significantly increases participation and the appeal of your plan to potential recruits. A lot has to do with what your company can afford, so take a close look at your budget and discuss options with your advisor. In general, there are two routes you can go:
Traditional The contribution match percentage can be set at whatever level the company chooses and can have a vesting schedule. A traditional 401(k) must complete ADP, ACP and Top Heavy testing.
Safe Harbor A Safe Harbor 401(k) is similar to a traditional 401(k). Safe Harbor plans require a match (there are two common match formulas) and those employer match dollars are fully vested when made. Safe Harbor plans are not subject to annual nondiscrimination tests that apply to traditional
Determining the type of program and the level your company matches can be a challenge, so work with an advisor to assess your needs.
The average employer match has changed over the last decade. Prior to the market collapse in 2008, many business owners were relatively generous with their contributions. That changed with the market downturn and many employers reduced or cut their matches all together. With the recent upswing in the economy and with many industries rallying, the average match now hovers somewhere around 3% and is slowly climbing.
When an employer chooses the Safe Harbor matching program, there is no vesting period and employees who qualify for employer matches are automatically 100% vested. For organizations that offer a traditional package, the most common scenario is based on a six-year graded schedule to incentivize and reward longer tenures. A six- year schedule would not offer a match during the first year and then offer 20% for each of the following five years until an employee becomes fully vested. While this is the most common vesting schedule, the vesting period can be set to fit the company’s needs.
You can have only one employee and still have a retirement plan, but there are different options you’ll want to consider based on your company size. For example, if you’re not ready to offer a 401(k) plan, a SIMPLE IRA might be the way to go. SIMPLE plans can be less costly to administer while 401(k)s — due to their potential complexities — can be more expensive.
It’s important to consider, however, that if the plan doesn’t provide enough incentive or benefit to you or your employees, it might not be sensible to implement one. The annual costs may not be worth it, especially if you’re not able to match and are in an industry where employee compensation and retention is relatively low.
The hardest part of setting up a retirement plan is finding a trusted advisor who knows the ins and outs of group benefit plans and can provide options and guidance based on your unique needs. He or she will help you determine an appropriate match, assist in the TPA search and provide administrative support throughout the enrollment process. Look for someone who can walk you through the process step-by-step and alleviate a lot of the administrative tasks to help manage stress and uncertainty.
As we’ve mentioned, there are others involved in the process aside from just the advisor. You’ll also need a record keeper to hold the assets, and a TPA will be required to do your tax filings and ensure compliance. Your advisor should help manage these other providers so you’re not spending excessive amounts of time trying to handle multiple relationships and details.
Attracting and retaining good employees today is challenging, but offering a retirement plan can help set you apart from the competition. The key to success is working with a financial advisor who is experienced in managing group plans. At McClone, we specialize in helping businesses assess and identify the best options for the financial benefit of the organization and its employees. Reach out to us today to learn more.
For Plan Sponsor Use Only – Not for Use with Participants or the General Public This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
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