Looking for a 401(k) for your startup? This post will help you understand everything you need to know about selecting a 401(k) provider designed to meet a startup's needs.
Need to choose a 401(k) for your startup? If you’re involved in running a startup, you know this better than anybody: Startups must continually fight for top talent. Your opponents in that fight include not just other startups, but all of the more established high-growth tech companies. They’re all around you.
And they all want the same talent.
Luckily, startup employees are a singular bunch, often motivated by the specifics of your mission, and willing to do without many of the perks offered by the larger employers in the space. They’ll bet on you, and expect that you will return the sentiment. However, while they’ll sacrifice some things to work for you, they’re also well aware of the baseline for startup benefits. So, it’s fair to say that, while Google can hand-pick their employees, your employees will hand-pick you (for the near-term, at least!).
Which brings us to the topic of this post. While we’ll focus on 401(k)s for startups, we’re really talking about helping employees pick you. And a 401(k) is part of a startup employee’s expectations, because, while 90% of small businesses don’t offer 401(k)s, tech workers increasingly expect a 401(k) plan.
The challenges for startups when choosing a 401(k)
How startups can address 401(k) challenges
Is there a 401(k) for startups?
How to evaluate 401(k) providers for your startup
The challenges for startups when choosing a 401(k)
The word “challenges” here is used to mean those things you should know before you decide anything. It’s just due diligence – before you move fast and break things, it’s a good idea to understand the playing field :)
Due to the complexities involved in administering a 401(k), many of the top providers of 401(k)s for startups will include services to administer your plan. Think of this cost as the alternative to hiring full-time expert staff to do the job in-house.
401(k) set-up costs: This is a one-time fee for setting up your plan and educating employees about it. Setup costs can range from $0 to $2,000 depending on the provider. So keep this in mind as you shop.
Administrative costs: Due to the complexities involved in administering a 401(k), many of the top providers of 401(k)s for startups will include services to administer your plan. Think of this cost as the alternative to hiring full-time expert staff to do the job in-house. It’s that much work. Day-to-day operation of a 401(k) plan generally includes:
Administrative fiduciary responsibility and liability
Administrative costs can generally range from $750 a year to $3,000. Many providers in this space will also charge a per-participant fee of about $72 to $96 a year for each employee enrolled in the plan.
Administering a 401(k) plan is a complex job that requires specific skills and knowledge. Not surprisingly, using technology and automation to do this job can be much less error-prone than even expert manual approaches.
There’s work involved to 1) find the right 401(k) plan, and then 2) administer the 401(k) plan. And finding the plan can be more complex than it needs to be. Most modern providers who understand the challenges of startups make it very easy on you. For example, at ForUsAll we offer a 401(k) Provider Worksheet that guides your shopping and makes it easy to compare providers. You can read more about that here.
As mentioned above, administering the plan is a complex job that requires specific skills and knowledge. Not surprisingly, using technology and automation to do this job can be much less error-prone than even expert manual approaches. And, since you are hardly in a position to staff this in-house, many providers for startups have already baked-in a solution, and will do it for you – some may go as far as to outsource your administrative fiduciary responsibilities and the attendant liability. That means that your fiduciary responsibility is to choose and monitor the provider, but the provider is responsible and liable for the day-to-day administration of your plan. Another thing to keep in mind as you shop.
According to Investopedia, “A fiduciary is a person or organization that acts on behalf of another person or persons, putting their clients' interests ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary thus requires being bound both legally and ethically to act in the other's best interests.”
It’s critical to note that, unless you outsource your fiduciary duties in these areas, then you are the fiduciary – responsible and liable for knowing and following the rules laid down by the IRS and the Department of Labor (DOL).
3(16) Administrative Fiduciary: Responsible for plan administration. Daily tasks include processing changes to employee savings rates or personnel, and syncing payroll data. In addition, this type of fiduciary will design the compensation and eligibility structures for the plan, track employee eligibility, and send related IRS disclosures and notices.
The IRS charges up to $250 per day, with a maximum of $150,000, for failure to file the Form 5500 on time. The DOL can levy an additional penalty of up to $2,259 per day, with no maximum.
The 3(16) fiduciary ensures compliance with requirements from the IRS and the DOL, runs regulatory tests, files paperwork with the IRS (including Form 5500), and reviews quarterly investment reports. The penalties for failing to meet these requirements can be steep. For example, the IRS charges up to $250 per day, with a maximum of $150,000, for failure to file the Form 5500 on time. The DOL can levy an additional penalty of up to $2,259 per day, with no maximum. Yikes.
3(38) Investment Fiduciary: Responsible for investment management. 3(38) fiduciaries take on the responsibility for selecting, monitoring, and reviewing the funds available in a 401(k). Because a 3(38) fiduciary is responsible for making investment decisions on your company’s behalf, they also assume the related liability. 3(38)s will provide a detailed fund report to you, most often on a quarterly basis. Like a 3(21), a 3(38) fiduciary can provide investment advice to your participants, but unlike a 3(21), they assume full responsibility for the investment choices available.
3(21) Investment Fiduciary: Responsible for investment advice. Therefore, they do not have as much control over investment options as 3(38) fiduciaries. A 3(21) has limited responsibility, and mostly provides insight and professional advice to participants about their investment choices. Many companies that are large enough to have a dedicated investment committee to select, monitor, and review their 401(k) investment lineup choose to hire a 3(21) fiduciary to assist participants. This type of fiduciary can be especially helpful for teams that already have some investment experience, but would like some expert guidance. However, when hiring a 3(21) fiduciary, the majority of investment liability still rests with the sponsor.
Offering a 401(k) alone makes your benefits package more tempting for top talent. However, it’s important to note that you can improve on that when, and if, you decide to offer a match.
A common misconception of the company match is that it is a very expensive requirement of offering a 401(k). The reality is that a company match is completely optional – an employer decides whether or not to offer a company match, and then decides the specifics of that match. Offering a 401(k) alone makes your benefits package more tempting for top talent. However, it’s important to note that you can improve on that when, and if, you decide to offer a match. Here are 3 quick reasons you might consider it at some point:
Attract and retain great people. All else equal, this may be the deciding factor between a candidate choosing one company over another. The data shows its importance: 75% of new hires at a company offering a 401(k) say the retirement plan provides a compelling reason to stay. A retirement solution is so important that 51% of employees joined their current employer largely because it offered a retirement plan. By structuring the 401(k) match so it vests later in an employee’s tenure, the 401(k) match has been proven as a consistent way to attract and retain great people.
Tax benefits. Matching contributions are deductible on the employer’s federal income tax return. The great news is that a company can deduct up to 25% of the compensation of all eligible employees participating in the plan.
Your competitors are doing it. In fact, the majority of companies offer some sort of matching contribution (averaging 2.7% of a person’s pay). The most common form of 401(k) matching is 50 cents on the dollar. About 40% of companies contribute 50 cents for every dollar employees contribute up to 6% of their pay. Another 38% match employee contributions dollar for dollar, but the maximum is normally lower — commonly 3% of pay.
Again, a match is completely optional, but keep the above in mind if your business is in a hyper-competitive space.
The good news is that there is a growing sector of tech-forward 401(k) providers who are very busy re-inventing the 401(k) for the 21st century.
How startups can address 401(k) challenges
The good news is that there is a growing sector of tech-forward 401(k) providers who are very busy re-inventing the 401(k) for the 21st century. Historically, the 401(k) has been nearly opaque in its complexity, but technology, automation, and the desire to make the 401(k) a much simpler benefit for small businesses is in full swing. Here are some of the areas where that simplicity is playing out for startups:
Low, transparent costs
Low costs provide a greater affordable selection for employers, especially high-growth startups, and help maximize savings for employees, which is the whole point of a 401(k).
Simple, transparent fee structure
Today’s high-growth startups now have access to modern 401(k) providers who use a simple, transparent fee structure:
Setup fees (if any)
A base monthly fee
A per-participant fee
Not all providers who can technically accommodate high-growth startups are the same. One of the best clues that you’ve found one of the right providers will be simplified, transparent pricing, so keep that in mind as you shop. Speaking of that, to make shopping easier for you we’ve listed 4 of the top modern providers and their pricing, later in this post, to help you get started in the right direction.
The 2020 SECURE Act set up numerous tax credits for small businesses, those with 1 to 100 employees, to offset the costs of setting up a 401(k) for the first time – up to $15,000 over 3 years.
Employer tax credits
Running a startup introduces you to all kinds of financial limitations. It comes with the territory. Many, many small businesses must do without a 401(k) plan, and many other things, to control spend. However, high-growth startups don’t always have that luxury – the price of admission to a competitive space is usually quite high.
The solution? Employer tax credits. The 2020 SECURE Act set up numerous tax credits for small businesses, those with 1 to 100 employees, to offset the costs of setting up a 401(k) for the first time – up to $15,000 over 3 years. If you decide to match employee contributions, you could also deduct this cost from your business income every year.
To encourage more workers to save, the government also created a tax credit for auto-enrollment: where your plan automatically withholds a percentage of every employee’s paycheck for their 401(k) account unless an employee specifically requests to change or stop withholding. The credit is $500 per year for three years from the point you set up this feature. For more info on these tax credits, see the IRS page on retirement plan tax credits.
The basic truth of retirement saving is that every penny an employee must pay in 401(k) fees reduces their potential for savings.
Low employee costs
High employee costs, even when justified by a tangible benefit for that cost, are a slippery slope. That’s because the basic truth of retirement saving is that every penny an employee must pay in 401(k) fees reduces their potential for savings. And maximizing savings is the whole point of a 401(k).
Any provider worthy of your business will keep employee costs simple and low. Employee costs usually come in the form of a simple, asset-based fee (where an employee pays a % of their balance annually, typically about 0.5%), and fund fees. Fund fees are charged by the fund providers (such as Vanguard, Fidelity, or whichever funds are included in your core investment lineup), and when high-quality, low-cost investments are used in the plan, this fee can be as low as 0.09% on average.
Reduced employer friction
Plan administration, including 401(k) payroll, are huge points of friction. The Department of Labor keeps a sharp eye out for even small errors in plan administration, which can cost you dearly. But, these tasks are rooted in repetitive, manual, and error-prone processes so (hint) they’re ripe for automation.
Automated plan administration and payroll integration
Look for a provider that offers automated administration and payroll integration. One small way we deal with this at ForUsAll is to deploy payroll integration software that includes 44 discrete checks on every payroll for every employee to catch and resolve errors before they can cause problems.
One of the better ways for an employer to avoid friction is to look for a provider that will act as your 3(16) Administrative Fiduciary.
3(16) Administrative Fiduciary
One of the better ways for an employer to avoid friction is to look for a provider that will act as your 3(16) Administrative Fiduciary. This puts the bulk of the responsibility, liability, and the day-to-day workload of your plan’s administration on the provider’s shoulders, not on yours.
Reduced employee friction
Employee friction is all too often traced back to bad plan design, especially lack of customer service. This friction manifests as confusing or non-existent guidance on how to set up and use the 401(k). Fortunately, the current crop of modern 401(k) providers focus on plans that make saving money (the whole point) easy.
Modern 401(k)s streamline the process of enrolling employees into the plan, and at least one provider includes automated interactive onboarding for every employee – on their phone. ForUsAll’s award-winning virtual advisor, DAVE, walks employees through the plan, explains the basics, then discusses plan customizations. If an employee wants, they can customize their plan right in the presentation and go back to work – all in about 90 seconds.
Smart plan design
Smart plan design makes it quicker and easier to both understand and use the plan, while making it effective and efficient. A smart plan allows for more than one way to go about using it, such as offering a default best-practice plan setup that’s ready right out of the box, but can then be customized by employees later.
The idea is to make sure the plan starts doing its job from day one, without wasting valuable time waiting for busy employees to free up the time to figure it out and then get it going on their own.
One example of a best-practice default plan setup is one that automatically enrolls employees, sets their savings rate at 6% of pay, and invests the money into an age-appropriate Target Date Fund. It then employs auto-escalation that increases an employee’s savings rate by 1% every year. All of these settings are, of course, customizable, but this default approach is excellent for employees new to the 401(k) who have no idea how to set things up, or who don’t have time to customize right away. The idea is to make sure the plan starts doing its job from day one, without wasting valuable time waiting for busy employees to free up the time to figure it out and then get it going on their own.
Expanded investment options
All plans should have a standard selection of low-cost, high-quality mutual funds, including Target Date Funds. These investments can be expanded if the provider offers a Self-Directed Brokerage Account which opens the door for savvy employees to invest in many, many more types of investments such as single stocks, bonds, and ETFs.
At ForUsAll we go one step further by offering a proprietary Self-Directed Crypto Window, powered by Coinbase Institutional. This Window (similar to a self-directed brokerage account) allows employees to invest directly into cryptocurrencies such as Bitcoin, Etherium, USD Coin, Solana, Cardano, and Polka Dot. Of course, we include guidelines, guardrails, and education for crypto investors – including a 5% cap on crypto – to avoid undue risk. Learn more about crypto in a 401(k).
Fortunately, the top 4 modern plan providers (and others) are aware of the 800 lb gorilla that is Plan Compliance. Look for as much help as you can get when it comes to your fiduciary responsibilities.
Protection can range from fiduciary coverage to financial advice – anything you need to keep the plan compliant and running smoothly, and anything your employees need to help use the 401(k) benefit to their best advantage.
Outsourced fiduciary services
Fortunately, the top 4 modern plan providers (and others) are aware of the 800 lb gorilla that is Plan Compliance. Look for as much help as you can get when it comes to your fiduciary responsibilities. At ForUsAll we take on the roles of 3(16) Administrative Fiduciary and 3(38) Investment Fiduciary.
3(16) Administrative Fiduciary: Responsible for plan administration, taking on daily tasks including processing changes to employee savings rates or personnel, and syncing payroll data. In addition, this type of fiduciary will design the compensation and eligibility structures for the plan, track employee eligibility, and send related IRS disclosures and notices.
The 3(16) fiduciary ensures compliance with requirements from the IRS and the DOL, runs regulatory tests, files paperwork with the IRS (including Form 5500), and reviews quarterly investment reports.
3(38) Investment Fiduciary: Responsible for investment management, taking on the responsibility for selecting, monitoring, and reviewing the funds available in a 401(k). Because a 3(38) fiduciary is responsible for making investment decisions on your company’s behalf, they also assume the related liability.
3(21) Investment Fiduciary: Responsible for investment advice only, and do not have as much control over investment options as 3(38) fiduciaries. A 3(21) has limited responsibility, and mostly provides insight and professional advice to participants about their investment choices (which a 3(38) fiduciary will also do). However, when hiring a 3(21) fiduciary, the majority of investment liability still rests with the sponsor.
Financial advice and wellness for employees
Advice: Some startup-savvy providers include financial advice. You should compare these services as you shop, since there are variations. At ForUsAll, we provide Registered Investment Advisors for every employee, not just those who participate in the 401(k), and our advisors offer holistic, lifestage-based financial advice beyond just the 401(k).
Wellness: There are a variety of financial wellness benefits to be had, so compare as you shop. We reach out to your employees on day one, offering bank account integration and inviting conversations about student loans, debt, and financial milestones like buying a house, then our patented financial insight engine provides actionable financial insights to your employees – because saving for retirement is also about managing finances today.
Is there a 401(k) for startups?
Yes, there is – and more than one. As we’ve discussed above, high-growth startups represent a specific set of business realities that separate them from other small businesses, and certainly from larger companies, when looking at benefits – especially a retirement plan. For example, you most likely have smaller internal staffing, a smaller budget, and less, if any, internal 401(k) expertise than larger companies.
Fortunately, there are a number of 401(k) providers that have anticipated your business realities. We recommend that you review as many providers as possible, but (helpful hint) it usually comes down to these four popular providers, which are tailored to the business realities of a high-growth startup.
The ForUsAll Alt401(k) offers what no other 401(k) can, and sets you free by automating plan administration, reducing liability and workload, even offering access to cryptocurrency and expanded investment options.
$120/month base fee
$6/month per participant fee
From Guideline's website: "At Guideline, we’ve made it our mission to help everyone arrive at a safe, secure retirement, whether you’re a small business owner, an employee, or self-employed. Our platform takes complexity and doubt out of retirement planning and replaces it with knowledge and clarity—so you can invest in your financial future with confidence."
Employer pricing (Max plan selection):
$129/month base fee
$8/month per participant fee
From Human Interest's website: "Human Interest makes it easy and affordable to help your employees save for retirement."
Employer pricing (Complete plan selection):
$150/month base fee
$6/month per participant fee
Betterment for Work
From Betterment's website: "At Betterment for Work, we believe that financial wellness benefits are the new way to attract world-class talent. Empower your growing team with a healthier, happier workplace."
Employer pricing (Pro plan selection):
$125/month base fee
$6/month per participant fee
How to evaluate 401(k) providers for your startup
We know that a retirement plan is a complex benefit – with many moving parts. Even the simplest 401(k) can be a Can of Worms, but it’s possible to find the right one on your first try – with a little help. So, here’s some help:
We’ve done some of the groundwork and created this 401(k) Provider Comparison Worksheet template to make life a little easier for you. This template will help you identify the key considerations to keep in mind when comparing providers.
It’s easy – the first thing to do is get access to the doc, then open it. Next, just make a personal, working copy of this Google Sheets resource. That’s it – just go to the “File” menu and select “Make a copy.” Save your copy in a convenient place and you’re ready to use it.
To make things even easier the worksheet comes with a column pre-filled with our answers to each question, so you’ve got one provider done already. Use the rest of the columns to flesh-out your comparison and then you’re ready to move forward in your decision making!
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David Ramirez, CFA, is a recognized 401(k) expert with over 20 years of experience in 401(k), ERISA, cash balance plans, and ESOPs. A UC Berkeley graduate, he played a pivotal role at Financial Engines, a 401(k) advisory firm founded by Nobel Laureate William Sharpe, Ph.D., where he was a portfolio manager who helped manage over $50B in 401(k) assets. His clients included some of the largest Fortune 500 companies and state governments.
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