Are you thinking about offering retirement benefits for your employees?
Maybe you want to help your employees build their retirement nest eggs. Or you’re ready to start saving for retirement yourself. But you’ve heard that 401(k)s are expensive and a chore to run.
That’s true with some providers.
But thanks to a new breed of 401(k) providers, that’s no longer always the case.
And today, 401(k) plans are affordable and easy to offer.
Retirement Plan Benefits For Employees
There are different types of tax deferred retirement plans. These include the traditional 401(k), the SIMPLE IRA, and the SEP IRA. For this blog post we will focus on the 401(k). You can learn about other retirement plan types here.
A qualified retirement plan like a 401(k) may be one of several benefits a company offers to employees. But a 401(k) is much more than an employee perk.
Now, let’s look at some of the benefits a 401(k) can provide.
How a 401(k) Benefits Employees
Incentive to Save
When a company provides a matching contribution, employees have more incentive to save. For those who contribute to the 401(k) with an employer match, it is like getting paid to save money.
Who wouldn’t want that job?
Everyone hates paying taxes.
They’re necessary, but nobody enjoys paying a big percentage of their hard-earned wages to Uncle Sam. But that’s where employee retirement benefits come in.
Contributions to qualified plans are generally made with pre-tax income. That means that 100% of that income ends up in the employee’s 401(k) account.
Lowers Taxable Income
The flip side of that pre-tax deferral is that a 401(k) contribution reduces taxable income. By making a 401(k) contribution, the employee pays taxes on a smaller amount, which could put them in a lower tax bracket.
Retirement contributions grow without incurring taxes. This enables the retirement plan account to grow at a faster pace than the same investments in a taxable account at a brokerage firm or bank.
You can see this by comparing the assets accumulated in a taxable account over 20 years to those in a tax-free account.Let’s assume both accounts start the year with $10,000.
Let’s say they each earn 6% each year in interest, dividends and capital gains. Let’s also assume all of those earnings are taxed each year in the taxable account at a 25% rate. After those taxes are paid, what’s left is reinvested. By the end of Year 20, the taxable account will have accumulated $24,117. But the account allowed to compound tax free will reach a value of $32,071. That’s a 33% difference!
Saver’s Tax Credit
The Savers Tax Credit can help moderate and low-income employees save even more. This savings incentive is available each year eligible employees contribute. The size of the credit varies by income level. The maximum credit of $1,000 reflects a 50% credit for the first $2,000 contributed to the plan.
Supplementing Social Security
Deciding when to draw Social Security is a major decision for most retirees. But whenever taken, Social Security checks can fall far short of replacing a pre-retirement salary.
According to the Social Security Administration, a worker with average earnings can expect Social Security to replace only about 40% of income. But most financial advisors say that retirees need 70% of pre-retirement income to maintain their standard of living.A good retirement plan helps retirees fill that gap.
How a 401(k) Retirement Plan Benefits Owners
Of course company owners benefit from the company 401(k) just like the employees. They too can reduce their taxable income, benefit from tax-deferred growth, and boost their account balances with company matching (or profit sharing) contributions.
It is true that owners may have to limit their contributions if the 401(k) is in danger of failing certain non-discrimination tests. But a plan with good employee engagement and clever automatic features can pass non-discrimination testing, helping owners max out their 401(k) contributions.
Diversify Exit Strategy Risk
Here’s a key benefit to owners that is seldom discussed: a growing 401(k) account balance can ease the owner’s transition to retirement. Too often, the business exit strategy determines the owner’s subsequent standard of living.
For example, will be the business be sold, liquidated, or passed on to heirs? And is the timing good for a business liquidation? The answers to these questions can have a major influence on an owner’s finances in retirement.
A 401(k), provides the ability to regularly save over long periods. These growing assets can help limit the impact of a one-time transaction on an owner’s standard of living.
How a 401(k) Retirement Plan Benefits the Company
Like many retirement plan benefits, the 401(k) is often only thought of as a benefit for employees and owners. But the truth is, the 401(k) can be a significant benefit for the company’s bottom line as well. Here’s how:
Your company’s 401(k) may be the difference maker when it comes to hiring that next great employee. Most smaller businesses don’t offer great retirement benefits. A 401(k) can give you a big competitive advantage when it comes to attracting top talent.
And once those employees are hired, a retirement plan is one more reason to stay. So a 401(k) can serve as a recruitment and a retention tool. Not only would this reduce the company’s recruiting and training costs, but good employees sticking around mean no negative impact on productivity or the customer experience.
There are tax advantages the come with the 401(k).
Company contributions are tax deductible. And a matching or profit sharing contribution is likely to benefit the employee more than a salary increase – and cost the company less.
Companies can also deduct administrative costs associated with running a 401(k). And a small tax credit is even available to offset some of the costs of setting up retirement benefits for employees. The maximum credit is $500 per year for the first three years the plan is open.
Yes, You Can Offer a Low Cost, Efficient 401(k)!
Ok, so a 401(k) retirement plan can benefit employees and owners while boosting recruiting and retention efforts. But do you need an HR staff to set up and run the company retirement plan? And what about paying for the 401(k)?
A 401(k) plan does come with direct and indirect costs. The company pays direct costs. Participants pay indirect costs. These are typically a percentage of their investment assets.
In the old days, smaller businesses had two options when it came to offering 401(k) retirement benefits:
- Devote substantial employee resources to administering the plan and complying with 401(k) rules.
- Outsource much of the investment management and administration, but wind up with a high cost plan.
Neither of those are good options.
In high cost plans, participants pay hefty expenses in the form of fees deducted from their investments.
Such costs can take a big bite out of their retirement savings.
High cost plans still exist, but why get one? It’s now possible to get a virtually turn-key retirement benefit for your employees at a very low cost.
That’s because a new breed of company has entered the 401(k) market offering lower costs and automated administration. Look for a 401(k) company that connects with your cloud-based payroll provider.
And ask providers if they maintain plan documents, send required notices, and complete and sign Form 5500. These are all things that you’ll have to do if they don’t.
And decide if you and your employees want to be investment managers. If not, look for a 3(38) fiduciary to take on that work and liability of selecting and monitoring your fund line-up.
Need Help Setting Up Your Company’s 401(k)?
Our team of experts have managed 401(k)s of Fortune 500 companies and small and mid-sized businesses. Unlike traditional 401(k) advisors, ForUsAll takes on both the investments and administration. That means minimal liability and workload for a smaller company offering 401(k) retirement benefits for their employees.
Talk to us today and let us estimate your all-in cost to start up a 401(k). Learn more about the costs, as well as the benefits, of starting a 401(k) by calling us today.