401(k) plans for startups: Pros & cons to consider

LAST REVIEWED Feb 12 2021 9 MIN READ

By The Human Interest Team

Employees at small and medium-sized businesses face a disproportionate lack of access to retirement benefits. Whereas 55% of individuals in corporations with at least 1,000 employees had retirement plan coverage in 2017, only 21% of individuals at companies with 99 or fewer employees could say the same. 

Part of this is due to the traditional structure of 401(k) plans and management requirements. The administrative burdens, compliance requirements, and bulky fees were too much for small businesses to both manage and afford. Not only were traditional 401(k)s, which first gained traction in the 1980s, burdensome to employers, but they also left employees with heavy responsibilities regarding investment choices, contributions, and maintenance fees.

But modern startup 401(k) plans are built for today’s employees. They take advantage of today’s technological resources to minimize administrative burdens for employers and increase access and education for account owners. Three key improvements modern 401(k) plans offer are:

  1. Better pricing: Compared to heavy percentage-based fees of traditional plans, modern 401(k) plans offer transparent pricing. The prices are also much more reasonable than in previous decades because of easier online management.

  2. Better experiences: Administrators and account owners can choose plan sponsors that offer intuitive online interfaces instead of having to manage physical paperwork and communicate over the phone.

  3. Better participation: Increased participation is important for both employees, who save for a more comfortable retirement, and employers, who receive tax benefits and can more easily comply with ERISA’s nondiscrimination requirements. Modern plan providers foster more participation with resources that help employees make confident investing decisions, online prompts and reminders to facilitate more saving, and more.

Because 401(k) plans are much more feasible and manageable for small and medium-sized businesses than in the past, it’s important for companies to reconsider their current selection of, or lack of, options.

3 Reasons Your Company Should Start a 401(k) Plan

Employers have many options when it comes to choosing a retirement benefits package for their company. However, offering a 401(k) plan has become the veritable gold standard. Here’s why:

1. Employees (and Candidates) Expect Retirement Benefits

Even more than that, they expect access to a 401(k). Around 88% of employees require access to a 401(k) when they look into prospective employers. That doesn’t mean SIMPLE IRAs and other retirement plans are valueless, but 401(k)s are the much-preferred option.

A 401(k) allows individuals to contribute up to $19,500 in 2020 and 2021, with an additional $6,500 catch-up contribution allowance for older employees. This savings potential can’t be met by that of SIMPLE IRAs, which allow annual contributions up to $13,500 or $16,500 (depending on their age), or IRAs, which allow contributions of up to $6,000 or $7,000 (also depending on age). A 401(k) is also seen as valuable because employers can offer matching contributions, or a guarantee to match a percentage of an individual employee’s own contributions as an incentive.

According to the United States Government Accountability Office, only 14% of small businesses offer retirement benefits, but larger corporations offer them far more frequently. An excellent strategy for standing out and attracting talented professionals to your organization is by joining the minority of small businesses that have more robust retirement benefits.

2. Retirement Benefits Are Just as Much an Incentive as Healthcare Benefits

Healthcare and retirement benefits are the top two benefits employees request and prioritize. The majority of Americans receive health insurance through their employers, and, while individuals have access to some retirement planning options, the same is true for tax-advantaged retirement accounts. While employees also prefer workplace considerations such as flexible scheduling and career growth opportunities, 76% of the surveyed workforce weighs available retirement benefits options when choosing future job options. Not only is it important for small employers to offer a retirement plan, but it’s vital that they offer a competitive one.

3. The SECURE Act Makes 401(k) Plans More Attainable for Small- and Mid-Sized Businesses

Startup 401(k) plans are more accessible than ever before on the employer’s side because of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The act offers more tax incentives for business owners who are considering starting their first 401(k) plan, including a $5,000 tax credit for three years, which covers qualifying expenses from setup and administrative tasks. This is a 10-fold increase from previous acts, which only provided $500 in tax credits. Choosing auto-enrollment, which has other benefits like increasing participation and encouraging employees to save, provides employers with another $500 tax credit.

How To Start a 401(k) for Your Small Business

Starting a 401(k) plan may sound like a huge undertaking, but handling the process online makes it simpler than ever. As you select a provider, you can decide how much direct management you want to provide and how much you want to leave management and administrative tasks in the hands of the plan sponsor. Start with this step:

Find the Right 401(k) Plan Provider

Most 401(k) plan providers don’t just provide the infrastructure for employees to select funds and transfer funds into their accounts. They offer a wide range of services, such as auto-enrollment and automated contribution management, education, compliance and oversight, and more. Some plans act as a fiduciary and manage ERISA compliance to help employers or provide support, retirement resources, and investment prompts to help employees make the right investment choices for their financial plan. Look for these characteristics as you browse through different plan providers:

  • Transparent and low fees for both plan management and investments.

  • Easy setup options that decrease HR workload and allow for fast account creation for new employees.

  • Robust integration capabilities that can automatically handle payroll contributions.

  • Compliance support, including no-discrimination testing, annual notices, and more.

  • Customer service for both employer administrators and employee investors.

  • Flexibility for employers to access a wide selection of fund options so you can design the right plan for your company. It should also allow you to set up your employer match formula.

Choose Human Interest for Comprehensive 401(k) Plan Management

Once you find a plan provider that offers the services you need at a price that fits your budget, you can start building the right plan for your business. At Human Interest, we offer extensive support services so you can build plan options, integrate the plan with your HR and payroll software, and start auto-enrolling employees. Contact us today to learn more and see how easy your 401(k) startup plan can be.

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.

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