LAST REVIEWED Dec 18 2020 11 MIN READ
By Damian Davila
Workplace benefits are playing an even greater role in the final decision making of job applicants and individuals already employed. When 2,000 individuals were given the option to choose a list of 17 benefits for a lower-paying job to make it comparable to a higher-paying job, 80% of them would choose additional benefits over a higher salary and nearly four in five U.S. employees would prefer new or additional benefits to a pay increase.
A workplace-sponsored 401(k) is one of the highest ROI benefits, and can also help your clients stand out from the competition when it comes to attracting and retaining talent. Employees are seeking retirement plans and thinking well into the future. According to the 2018 EBRI Retirement Confidence Survey, eight in ten workers expect these plans to be a source of income in their retirement.
With such high demand, a comprehensive 401(k) offering is critical for a robust benefits offering. As a benefits broker, it’s a great idea to consider including one in your portfolio.
401(k) plans allow you to deliver more tax benefits to your clients
The U.S. government wants to encourage people to save for retirement and provides strong financial incentives for doing so through a workplace 401(k). They make corporate tax benefits and credits available to employers in various ways, the biggest of which is that every dollar a company contributes to their employees’ 401(k) plans is tax-deductible up to the applicable limit:
Owners of partnerships deduct them on Form 1065
This can be a major tax deduction for employers. For example, in 2018 some small business owners could deduct employer contributions up to 25% of the compensation paid (or accrued) during the year to eligible employees participating in the plan. For more information on how much a business can deduct from employer contributions to retirement accounts, consult Publication 560.
Also, an eligible small business can receive a tax credit through the Credit for Small Employer Pension Plan Startup Costs. A business may be eligible if it:
Has 100 or fewer employees who were paid at least $5,000 in the preceding year
Has at least one plan participant who is a non-highly compensated employee, and
Hasn’t offered a retirement plan to the same employees in the past three years
By filing Form 8881 qualifying businesses can receive a tax credit for up to 50% of startup costs, up to $500 a year for three years (for a total of $1,500!). The credit can be used to offset expenses needed to set up, administer, and educate employees about a 401(k) plan.
Many clients just see 401(k) benefits as costs, but by showing them the various ways they can save money, they may be more inclined to work with you and employ your services.
Imagine that an employer is considering giving her employee a $1,000 raise. That employee would have to pay income and employment taxes on the money, and her employer would also owe Social Security, Medicare, unemployment, and other taxes. Since the average worker faces a 22.4% tax burden, and the average employer an 8.9% tax burden, the $1,000 raise ends up costing employers an average of $80, while putting only $776 in employees’ pockets.
On the other hand, if a benefits broker were to help this employer set up a 401(k) and process the $1,000 as a matched 401(k) contribution, that money would grow tax-free until withdrawal. The employer would be able to write off the contribution, and the employee will enjoy preferential tax treatment as their nest eggs grow. Putting extra funds into a matched 401(k) provides tax benefits to both employer and employee. A benefits broker can make all of these tax benefits happen by effectively presenting and implementing a 401(k) plan to an employer.
Outsourcing 401(k) administration minimizes your liability and enhances your offering to clients
The paradigm is shifting and industry costs are going down. This is great news because some 401(k) providers are now willing to work with small companies with lower assets under management. Today, benefits brokers have more options to provide a comprehensive benefits package than they ever have before.
Hiring an external resource to manage your 401(k) offering plan shifts the liability burden to the outsourcing company, and reduces your risk and financial exposure, if any issues occur. Managing investment accounts requires not only financial insight; it requires a system for managing the funds, keeping up to date on legal requirements, withdrawing the money each pay period, and a process for employees to access their accounts. Unless your organization specializes in investments, a specialized 401(k) provider is an effective way to offer a retirement plan to your clients.
Being able to meet the unique needs of your customers is key, and that’s a 401(k) provider who delivers custom plan design, flexibility on fund selection, and advisor access – all backed up with full compliance – can be a huge boon to your business.
At Human Interest, we deliver on these four promises:
Custom plan design: Tailored designs include safe harbor, profit sharing, vesting, discretionary match, end-of-year match, specific eligibility requirements, and automatic enrollment.
Tech integration: With multiple new technology solutions for HR on the scene, you can take advantage of integrations and syncs across several external benefits tools — Human Interest is an online 401(k) tool that syncs with Gusto payroll!
Flexibility on fund selection: Customize your portfolio with an open architecture platform that gives access to a variety of publicly-traded funds, including ETFs, TDFs, index funds, and mutual funds.
Advisor access: Financial or HR advisors can manage employee enrollment and offer educational training and investment advising directly on-site or remotely through the advisor portal. Our 401(k) system is payroll agnostic.
Full compliance: 3(16), 3(21), or 3(38) fiduciary protection, and compliance testing, IRS Form 5500 filing, IRS-approved plan documents, audit package, participant disclosures, and recordkeeping services are all included.
Key selling points when offering a 401(k) to your clients
Highlight the advantage of a 401(k) administered by an external party
Small companies don’t often have a lot of resources, so the primary person running a company retirement plan is usually the same person managing its healthcare benefits and human resources duties. For employers who can’t afford the expense and effort of bringing retirement investment expertise in-house, outsourcing 401(k) administration makes it possible to offer this benefit. Benefits enrollment happens once a year, and for the majority of small- and mid-sized businesses, it doesn’t make much sense to have an in-house benefits expert who is busy for a few months and then doesn’t have much to do for the remainder of the year. When outsourced, a business owner can determine when and how they’ll need help, and pay accordingly.
Provide predictable fees to both employers and employees
About seven in ten 401(k) plan holders aren’t aware that they pay fees to their plan administrator and six in ten aren’t aware of how much they pay in fees. Investing involves dealing with plenty of unknowns—cost shouldn’t be one of them.
Human Interest 401(k) plans cost just $120 a month plus $4 per employee per month–less than half the cost of your typical 401(k) provider, and with no hidden fees. We aim to make our plans affordable to employees as well, so employees pay just 0.5% of their account balance, compared to a nationwide average of 1.89 for small plans%. Most small businesses want to do right by their employees, and we want to make it easy and affordable for them to do so.
Emphasize access to more investment options
Why limit your clients to a handful of target-date funds (a growth-oriented mutual fund allocation that reduces risk exposure as the fund draws near its target date)? Your clients are looking for investment options that better reflect their interests. By working with Human Interest, your clients will have access to a variety of low-cost mutual funds and index funds, including those from Vanguard, Charles Schwab, BlackRock, Invesco, Fidelity, and many more. Unlike other 401(k) providers, Human Interest does not accept kickbacks, so we have no financial incentive to recommend any particular fund.
Damian Davila is a Honolulu-based writer with an MBA from the University of Hawaii. He enjoys helping people save money and writes about retirement, taxes, debt, and more.