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401(k) Plan Advantages Small Business Owners Should Know

Why offer your employees a 401(k) plan? The answer is simple: by doing so, you’re sending a powerful message that you’re invested in their future and committed to helping them achieve financial security for their retirement.

If you’re a small business owner who’s currently thinking about providing a 401(k) plan for your employees, now may be an excellent time to take action. The passage of the landmark retirement plan legislation known as the Setting Every Community Up for Retirement Enhancement (SECURE) Act in late 2019 has made it easier and less costly for small business owners to offer a 401(k) plan.

But, if you’re still not sure that a 401(k) plan is right for your business and employees, consider the following advantages of providing this valuable retirement savings benefit.

What is a 401(k) plan?

In today’s ultra-tight labor market, companies of all sizes need to offer a retirement benefit like a 401(k) plan. Basically, a 401(k) is a retirement savings plan sponsored by an employer. It’s “tax-advantaged” because it allows employees to save and invest a portion of their pay before taxes are taken out. Employers also have an option to match employees’ contributions or make profit-sharing contributions.

A 401(k) plan can be a key differentiator in your benefits package. Today, most prospective job candidates expect to be offered a retirement plan, and existing employees value the ability to save for retirement at work. Therefore, if you do not offer a 401(k) plan, you risk losing top talent to another employer who does.

One main concern for many small business owners is not. However, 401(k) plan fees have declined significantly in recent years, making them more affordable, regardless of business size. Moreover, offering a 401(k) plan benefit is an excellent way to hold yourself accountable for setting money aside for your retirement — after all, 60% of small business owners aren’t saving enough for their post-work years. Another perk: business owners receive tax deductions for 401(k) plan matching contributions.

Differences between a traditional 401(k) and a Roth 401(k)

Some small business owners choose to offer a traditional 401(k) plan, a Roth 401(k), or both. The primary difference is how the money is taxed when it goes into the plan and when it comes out.

As mentioned above, contributions to a traditional 401(k) are made on a pre-tax basis, and the money invested grows tax-deferred inside the plan. Withdrawals from a traditional 401(k) are taxed as ordinary income, usually at retirement. With a Roth 401(k), on the other hand, employee contributions go in after-tax, and investment earnings and withdrawals are tax-free.

Employers can offer both a traditional and Roth option in a single 401(k) plan. Statistically, younger, millennial-aged employees prefer to make after-tax Roth contributions. From their perspective, they prefer to pay taxes on their retirement savings now, so they don’t have to worry about what the tax rates will be when they retire. However, older employees who want to minimize their taxes in retirement can also benefit from making after-tax contributions to a Roth 401(k).

401(k) matching contributions

As an employer, you aren’t required by law to offer matching contributions to the employees in your retirement plan. Although, it is a great way to show that you’re invested in helping them achieve their retirement goals, and remember, your business receives tax advantages for doing so. A match is an employer’s contribution to a 401(k) plan made on behalf of their employees. Small businesses have a few options when it comes to offering a match:

Safe Harbor Contributions

Safe Harbor 401(k) plans are designed to ensure a retirement plan benefits all employees equally. One benefit of a Safe Harbor plan is they are exempt from most annual compliance testing requirements. In a Safe Harbor retirement plan, employers must make contributions on their employees’ behalf, and those contributions must vest immediately. 

Employer Safe Harbor contributions include:

Basic Safe Harbor Match: The employer matches 100% of the employee’s contributions, up to 3% of their pay, and 50% of the next 2%. Employees must contribute to the plan to receive the match.

Enhanced Safe Harbor Match: The employer matches 100% of the employee’s contributions, up to 4% of their pay. Employees must also make contributions to the plan to get the match.

Non-Elective Contribution: The employer contributes at least 3% of eligible employees’ salaries each year. The contribution vests immediately, and employees receive it whether or not they contribute to the plan.

Benefits of the match

Small business owners have the option to design their plan and matching contributions to fit their unique culture and needs of their employees. There are many different ways to offer a match. For example, some employers choose to make a dollar-for-dollar contribution; others match 50 cents on the dollar.

There’s no minimum or maximum employer match — it’s really up to you to determine what works best for your business and employees. That said, the Internal Revenue Service does impose annual limits on employees’ 401(k) contributions; in 2020, the contribution limit is $19,500. Retirement plan participants who are age 50 or older can make additional catch-up contributions up to this year’s annual limit of $6,500. 

If you don’t offer a 401(k) plan with a match, chances are, your competitors do. Providing an employer match makes it more attractive for your employees to participate in the retirement plan and enables you to encourage them to save more for the future. Besides, it can help improve your company’s employee retention and recruiting efforts.

Costs and regulations

Concerns about 401(k) plan expenses and regulatory compliance are also common barriers for small business employers. As mentioned earlier, 401(k) plan costs have come down significantly within the past several years. So, costs needn’t be an issue, especially if you hire a team of 401(k) experts who can help you navigate these complexities, and in many cases, manage them for you.

A typical 401(k) administration team consists of three key players:

1. The recordkeeper, where plan contributions are held;

2. A financial advisor, who handles the investments; and

3. A third-party administrator (TPA) who handles testing for the plan and making sure the plan is in compliance.

An experienced third-party administrator has the capabilities to handle all of the day-to-day administration and operations of the plan. At Alpha Wealth Advisors, we can serve as both the advisor and the third-party administrator, and we partner with several recordkeepers to keep our clients’ plans running smoothly and efficiently.

The fees you can expect to pay for recordkeeping, the advisor, and the third-party administrator vary, depending on the investment funds you choose for the plan, the plan’s assets and the size of your participant population. Furthermore, some firms will charge a la carte for their services, which means the fees can add up quickly. That’s one of the many benefits of working with us.

At Alpha Wealth Advisors, we offer a flat fee, and we’re completely transparent about our pricing — there are no surprises.

Our group is hands-on with all of the plans we manage, which means we can take care of everything from inbound calls from employers and 401(k) plan participants to automating payroll deductions and ensuring the plan meets IRS regulations and testing requirements. When you partner with us to help implement and manage your 401(k) plan, you get a dedicated partner who can help you with all of your retirement plan needs.

If you’re a small business owner who’s thinking about implementing a 401(k) plan benefit for your employees, let’s talk. We’re happy to help you adopt and design a retirement plan that fits the unique needs of your business and your staff while helping you attract and retain top talent.