Why You Should Consider Offering a 401(k) Plan in 2017

December 20, 2016
By

Category: Payroll

If you’re like most, the final days of December have us thinking of all things 2017 and how we can make personal improvements in the new year. In addition to goal setting around ever-popular wellness, financial health often tops many resolution lists. After spending more than we traditionally do on gifts, outings and events, January is the perfect ground to assess your bank account and set goals for yourself and your business. As an employer, one of the best programs that you can offer your employees is a 401(k) plan to help them save and demonstrate your investment in their future.

What is a 401(k), why should I provide one, and how do I get started?

A 401(k) is a tax-advantaged retirement savings account that gives employees responsibility for their retirement income. This usually includes employees contributing part of their salary and, in many instances, directing their own investments.

A 401(k) can be an employee’s sole retirement account OR coupled with other investment accounts like IRAs, pensions etc.

401(k)s are typically broken into two categories:

  1. Traditional (Pre-tax contributions that are taxed during retirement) and
  2. Roth (Post-tax contributions that are taxed at the time you deposit them)

To encourage enrollment, employers often match part of their employees’ retirement contributions.

For example, an employee named Susan sets aside 4% of her paycheck to her 401(k). Her employer can opt to match her contribution, adding an extra 4%. This ensures that Susan saves a total of 8% for retirement. The best part? She only has to pay for the 4%, as the extra 4%  comes from her employer.

As an employer, why is a 401(k) plan valuable to me?

Attracting and Retaining talent

According to the NYTimes, 1 in 4 small businesses offer 401(k). Which means offering a 401(k) gives you an advantage over ¾ of small businesses when hiring; in addition, offering 401(k) signals sense of stability and that the company is employee-centric. Moreover, when an employer decides to match their employee’s contributions, it shows that the company wants to invest in and retain their employees.

How to set the terms:

Employers choose who and when employees receive 401(k) benefits. In addition, 401(k) accounts offer a wide range of investment funds to choose from (Index, mutual etc).

What are the tax benefits?

If the employer contributes a 401(k) match, employer has the opportunity to pay less in company taxes.

  • Economic Growth and Tax Relief and Reconciliation Act (EGTRRA) created a tax credit to offset the startup costs of 401(k) for small employers
  • IRS Form is linked on the Resources Slide

More Options, Higher Limits:

When you contribute beyond your 5,500k IRA limit ($18k total), you can take possible retirement savings to $23,500.

Easier Management:

Many employees are attracted to the fact that payroll providers will deduct their 401(k) directly from their paycheck. This avoids the hassle of employees depositing their 401(k) contributions separately.

Tax Benefits:

You get to choose when you’re taxed (now or later depending on your tax picture. Regardless of the timing, all savings grow tax free!

 

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One of the most powerful incentives to enroll in a 401(k) plan early, is seeing the difference in retirement savings for those who start young and those who wait. Saving early allows your interest to compound, and the earlier you get your money to work for you, the larger amount of savings you’ll see in  your future.

 

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Start Up Costs to Employer:

This is a one-time fee paid at the beginning of the process and usually hovers between $495 to a few thousand dollars.

Ongoing Service Fee

This is charged to the employer on a monthly basis and comes in four possible buckets:

  1. Asset-based: expenses based on the amount of assets in the plan, represented as percentages or basis points. This also usually lumps in “custodial fees”. Typically 2-3%.
  2. Per-person: expenses based upon the number of eligible employees or actual participants in the plan. Can range from $8 to $750+ per month per person
  3. Transaction-based: expenses based on the execution of a particular plan service or transaction.
  4. Flat rate: fixed charge that does not vary, regardless of plan size.

Employee Fees: these usually occur on a quarterly basis and can be paid by employer OR employee.

NOTE: If your company matches employees’ 401(k) contributions, you will also want to consider this in your company’s cash flow.

As you mull these over and consider the financial implications of offering a 401(k) plan, it’s helpful to know where you can find a 401(k) provider, and the differences between them. Visit BrightScope’s website for a helpful comparison offered by different companies. 

Providers can roughly be divided into three categories:

Traditional Investment Firms

  • Designed to hold your hand; their employees often choose and control investments for employees.
  • Usually higher fees and higher prices.
  • Great for larger companies or companies that have custom needs.

Online, Low-Fee Providers

  • Allows independent fund management.
  • Sometimes, the drawback is that client support is done online or via phone and not one-on-one.
  • Perfect for smaller companies on a budget or anyone who is self-employed.

Bundle with Other Benefits

Meaning, you can use your current insurance or other benefits provider to set up your 401(k).

  • Allows streamlined benefits experience and support for employees.
  • Simplifies onboarding/offboarding
  • Possible discounted rates

Want a more in depth explanation of all the above financial information? Tune in to hear the webinar recording from Zenefits & eShares to ensure your financial fluency in 2017 – watch it here: 

 

Want to learn more about Zenefits and how our all in one dashboard can make running your business a breeze? We’d love to chat – sign up today!

About

Caitlin is a content marketing manager who loves telling small business success stories. When she’s not tweeting at industry influencers, you can find her crafting pickles and exploring San Francisco.

Category: Payroll


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