All about small business 401(k)s: 6 myths debunked


By The Human Interest Team

A 401(k) is how most Americans save for retirement, but too many business owners think that a small business retirement plan is too expensive, too hard to manage, or too likely to be undervalued by employees. Many SMBs aren’t yet aware that a 401(k) plan is well within reach — let alone that there are good reasons why they should offer one:

  1. A 401(k) is a must-have. 88% of employees say a 401(k) is a must-have benefit when looking for a job.

  2. Employees will use it. When given a chance to save, most SMB employees will use a 401(k). 

  3. A 401(k) helps attract talent. Offering a 401(k) helps to attract and retain top talent. 

  4. It’s easier to run than you think. With payroll integrations and other technology, a 401(k) is lower cost and easier to set up and manage than ever before. 

  5. You’re not too small. Whether you’re an LLC or a sole proprietor, it’s important to save for retirement and a 401(k) is one of the best tools to do just that. 

Learn more about starting a 401(k) plan for your business:

But first, the retirement plan coverage gap

It used to be that the administrative burden of managing a traditional retirement plan, in addition to high fees, were too much for small companies — but now, technology-first modern 401(k) providers help make it easy and affordable. As a result, small business employees are 11 times less likely to have access to one vs. those at large corporations. It doesn’t have to be that way. We believe that people in all lines of work should have access to retirement benefits.

What do modern 401(k) providers offer that’s different from traditional 401(k) providers?

  • Automation that streamlines administration, including reporting, compliance support, payroll integrations, and more

  • Built-in investment portfolios for employees as well as additional services for onboarding and employee education

  • Affordability, including low-cost investment options, affordable plan and/or employee rates, and, ideally zero transaction fees

  • A track record; they have credibility and proven their capabilities

Now that we’ve covered traditional vs. modern 401(k) providers, let’s move on to examining six common myths about small business 401(k)s.

Interested in starting a retirement plan for your business? Talk to a specialist today.

Small business 401(k) plans: The complete guide

Do you have to offer a 401(k)?

The short answer is, “Not quite.” Currently, a handful of states require all but their smallest private-sector and nonprofit businesses to offer employees a retirement savings plan, or enroll eligible workers in a state-sponsored Roth individual retirement account (IRA) plan. However, these states do not require traditional 401(k) plans—at least not yet. Read more about state-mandated retirement programs and how they compare to a 401(k).

What do employers need to know?: 401(k) basics for employers

If you’re an employer who hasn’t offered a 401(k) benefit before – or even if you have – it’s important to understand the 401(k) basics before you decide on a plan provider. How does a 401(k) benefit the employer? What are 401(k) rules for employers? Learn the answers to these questions and more in our guide, 401(k) basics for employers.

Who qualifies for a self-employed 401(k)?

Are you self-employed and planning for your retirement? You may think saving for retirement with only an IRA is enough, but a 401(k) will help you grow your nest egg faster than an IRA. There are many advantages of a 401(k) for self-employed individuals. Learn if you qualify for a self-employed 401(k) in our guide.

How much does a 401(k) cost employers?

Examining 401(k) plan costs for both employers and employees is not a simple task. Plans can vary drastically from provider to provider and the 401(k) administration fees providers charge aren’t always clear. What is the small business cost to manage a 401(k) and how much does a 401(k) cost employers? See our guide to find out.

How do you choose a 401(k) provider?

Look to our free, online comparison tool to help you identify the questions to ask any provider you’re considering. 

How do you set up a 401(k)?

Setting up 401(k) for your small business can be easier than you might think. Learn how to set up a 401(k) in our guide.

How do you change 401(k) providers?

So you decided to offer a 401(k) to round out your benefits package to be competitive in the job market. But after a few years, you realize that you may not have chosen the right plan. Here, we’ll outline how to change 401(k) providers.

What are 401(k) deadlines for employers and employees?

To maximize the benefits of your workplace 401(k) program, you have to keep in mind 401(k) contribution deadlines for key events, including taking required minimum distributions, last day to contribute to 401(k), the 401(k) enrollment period, 401(k) set up deadline, and 401(k) open enrollment and more!

Here’s a comprehensive list of 401(k) deadlines for employers and employees, including action items and links where you can find additional information.

What is 401(k) compliance testing?

Also known as nondiscrimination testing, 401(k) compliance testing ensures that businesses are compliant with established federal requirements and regulations. Namely, that a company’s 401(k) plan doesn’t favor employees of a certain status (usually determined by compensation.) Learn more about the basics of 401(k) nondiscrimination testing in our guide.

Safe harbor 401(k): Everything you need to know

A safe harbor 401(k) plan is a type of tax-deductible 401(k) plan that ensures all employees at a company have some set of minimum contributions made to their individual 401(k) plans, regardless of their title, compensation, or length of service. A major benefit of safe harbor plans is that they are automatically exempt from IRS nondiscrimination testing. Learn everything you need to know about safe harbor 401(k) plans.

Low-cost 401(k) with transparent pricing

Sign up for an affordable and easy-to-manage 401(k).

Myth 1: 401(k)s are too expensive for small businesses

While no longer true, in the past, traditional 401(k) providers designed – and priced – their plans for large businesses with a high number of employees. Fees to administer plans, manage assets, and other charges made offering a 401(k) too expensive for small businesses. Modern 401(k) providers use technology to offload many of these upfront charges that make traditional plans so expensive.

Reality: Traditional 401(k) providers often charge high and hidden fees.

Asset-Based FeeTotal Annual Cost

*Assumes 10 participants with $500,000 in assets. Visit our pricing page to see how Human Interest compares.

The federal government offers tax incentives to start a 401(k)

After finally recognizing that 77% of Americans don’t have enough money to retire, Congress moved to expand existing tax incentives to help businesses close the retirement savings gap. The SECURE Act of 2020 provides:

  • Up to 10 times more than the previous amount of tax credits for businesses offering a new 401(k) plan. Depending on the size of your company (and how many employees you have that make over $130,000) the credits could cover a significant portion of the costs for starting a new 401(k) plan.

  • An additional $1,500 in tax credits per year over three years for automatically enrolling participants.

It’s important to note that the IRS also allows employers who offer matching programs to deduct those contributions on their taxes.

How Human Interest helps

By automating the administrative processes of managing a 401(k), Human Interest charges employers significantly less than traditional providers and is far less than the annual cost of just one employee’s health insurance!

On top of that, our investment philosophy is centered around keeping costs down for plan participants. A Human Interest 401(k) is designed to keep costs down with:

  • Low and transparent fees. Just as interest compounds, so can fees. Human interest is fully transparent with our fee structures. We do not accept kickbacks of any kind and only make money when you and your employees save more.

  • Low-cost investments. Our recommended investment lineup includes low-cost Vanguard index funds, which tend to have lower expense ratios and outperform actively managed funds. Customers also have access to nearly every mutual fund and index fund on the market so employees who want more flexibility can choose and manage their own funds.

Figure. The average annual cost of providing a 401(k) vs. health insurance for one employee.

*Note: Estimates here are shown for illustration purposes and do not include plan start-up fees. Contact us for more details on pricing for your business. The average price of health insurance is sourced from the Kaiser Family Foundation’s 2019 Employer Health Benefits Survey.

Myth 2: 401(k)s are too complicated to set up and maintain

Reality: 401(k) plan administration has improved a lot over the last decade

While it used to be that the paperwork from starting a plan can overwhelm business owners, who already juggle many responsibilities throughout their day, that’s no longer true.

Small and medium-sized businesses can find what they need: a 401(k) provider that uses automation to streamline the process of setting up and administering a plan with features like:

  • Seamless integration with popular payroll providers

  • Support with compliance testing and filling required IRS forms

  • Reporting functionality to monitor how employees are using and saving with the plan

How Human Interest helps

With Human Interest, starting a 401(k) has never been so easy. What used to take months of back and forth with traditional providers, now takes as little as 15-minutes. And after that, we put the plan on autopilot. Letting small business owners focus on what matters most: running their business.

Human Interest’s modern 401(k) platform:

  • Automatically syncs with your payroll journal, census data, and maintains employee contributions with each payroll cycle, saving you hours of work every month.

  • Handles all compliance-related tasks like annual nondiscrimination testing, preparation of IRS Form 5500, and the distribution of required statements and notices.

  • Comes with robust reporting capabilities that make it easy for plan administrators to monitor investment performance over time as well as employee participation (choose from one of our built-in reports or customize your own.)

Myth 3: Small businesses don’t need 401(k)s

Reality: Business owners can’t rely on an IRA or the profits from selling their business to be their only source of retirement income

There are a lot of reasons why some businesses owners believe they don’t need a 401(k), but two of the most common we hear are:

  • “My business is my nest egg” 

  • “My IRA (or SIMPLE IRA) is enough”

Let’s examine each and see why these beliefs aren’t correct.

“My business is my nest egg”

The second most popular way small business owners secure funding to start their business is through a retirement account rollover as a business start-up (ROBS). But it’s not enough to rely solely on your business to meet your retirement goals. Consider the following:

  • According to the U.S. Small Business Association (SBA), business owners over the age of 50 are less likely to have well-funded retirement funds than their employees: the majority of their wealth remains invested in their business.

  • What if the business doesn’t sell? Some studies show that 12 million business owners nearing retirement entered the market looking to sell their business. However, 75% of these could not sell at the asking price, forcing business owners to sell at a discount or close and find employment elsewhere.

Don’t leave retirement to a “what if?” Business owners now have options that allow them to build their retirement savings while they build their business. There’s no need to compromise either.

“My IRA (or SIMPLE IRA) is enough”

While 401(k)s and Individual Retirement Accounts (IRA) are both tax-preferred ways for individuals to save for retirement, they differ in their annual contribution limits. The limit for each in 2020 (will remain unchanged in 2021) is determined by the age of the individual.

Under 50$19,500$6,000
Age 50+$26,000$7,000

Business owners should note that they have the additional benefit of being able to contribute up to $57,000 to their 401(k) in 2020. 

What does a larger contribution limit mean?

In short, it could mean a $500,000 difference when you retire. The higher contribution limit of a 401(k) can help your nest egg grow bigger faster. Here’s an example of what it would look like if a person maxed out their retirement savings using a Human Interest 401(k) versus an IRA over a 20-year period (assuming the same 5% rate of return). In this example, by using a 401(k), their nest egg would grow to roughly $719,700 whereas it would get to just $219,900 using an IRA.

*Note: Depicts hypothetical savings based on a $6,000 annual contribution for an IRA versus a $19,500 annual contribution for a Human Interest 401(k) over a 20-year period.

What about a SIMPLE IRA?

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a popular alternative to a small business 401(k) and businesses with 100 or fewer employees are eligible to offer one. Like a 401(k), employers have the option to match and can either choose to make a 2% retirement account contribution to all employees or an optional matching contribution of up to 3%.

For their part, employees can contribute more than two times the amount of a regular IRA. The yearly contribution limit of a SIMPLE IRA in 2020 and 2021 is $13,500 (with an additional $3,000 allowance for those age 50 or older), which is $6,000 short of the $19,500 contribution limit of a 401(k) or $26,000 for those age 50 and up.

Takeaway: Business owners shouldn’t leave retirement to chance and you should look for the most efficient way to grow your retirement savings.

You need to save for retirement, and there are many tools available, but you definitely need to save and not just rely on your business as your nest egg. When you save, a 401(k) can help you build your nest egg faster. And there are special allowances for business owners to help them grow it even faster.

Myth 4: 401(k)s require an employer match, and I can’t afford that

Reality: Employer matching programs are completely optional

You can offer a 401(k) plan for your employees to invest and save for their own retirement even if you’re not able to afford a company match. That said, 51% of plans offer a match and it can be a great way to incentivize employees to save. The average match is 4.7% but the typical range is between 0 and 6%.

If you are thinking about offering a match, consider vesting schedules – i.e. the requirement you set for the period of time that employees must have worked at your company before the employee owns any matching contribution. The majority of plans require 12 (or more) months of service before employees are eligible for employer matching.

How Human Interest helps

Human Interest knows that retirement plans are not one-size-fits-all. We allow businesses to customize their plan according to their needs. In fact, 54% of our customers don’t offer a match at all.

Myth 5: My employees won’t take advantage of a 401(k)

Reality: After health insurance, work-sponsored retirement plans are the most-requested benefit amongst employees.

In fact, 40% of employees working for small businesses say that they would leave their current company for another that offers a 401(k) plan. And a 401(k) could be even more important for businesses competing for younger talent: 90% of employees 18 to 34 years old say they would prefer benefits over a raise.

So why do business owners and HR professionals still believe that their employees won’t take advantage of retirement benefits if offered? Because no one has ever had data into the saving habits of America’s SMB workforce until now. According to our research, the majority of SMB employees contribute to a 401(k) when given the opportunity. And that’s across age, industry, sex, and marital status.

Figure. How many SMB employees are participating in their company’s retirement plan?

What happens when SMB employees, who make up the bulk of the 60% of Americans without a workplace retirement plan, finally have access to a 401(k)? Find out in our exclusive report

How Human Interest helps

Our customers have participation rates averaging between 70-90%, far higher than the industry average of 34%. Human Interest’s 401(k) platform was designed to encourage high participation rates with features like automatic enrollment and built-in investment advising.*

*Investment advising provided by Human Interest Advisors, LLC.

Myth 6: It’s too difficult to choose and manage investments

Reality: Modern 401(k) platforms offer built-in tools that help plan participants choose investment strategies for their retirement goals

In the past, traditional 401(k) providers offered an open architecture for employers to select which funds to invest in. This required a deep understanding of thousands of investments with confusing names, which is a daunting task unless you have a financial advisor—which many businesses can’t afford.

How Human Interest helps

Human Interest gives our customers the flexibility of customizing their investment portfolios. We recommend low-cost index funds that focus on long-term growth and we never accept any kickbacks. You have the choice between starting with our default lineup of 30 funds that focus on long-term growth, or if you prefer, customize your investments from several low-cost funds. Click here to learn more about our investment funds and philosophy.

We put retirement savings on autopilot for plan participants with features like automatic investing* so participants can easily contribute to their plans according to their risk tolerance. Our intelligent risk setting feature helps them find an investment strategy to meet their retirement goals based on their age, lifestyle, and other personal settings. And lastly, we offer an automatic rebalancing tool that customers can turn on to help them keep risk in check and possibly enhance returns.

*Investment advising provided by Human Interest Advisors, LLC.

What’s in a myth?

Throughout the course of this article, we examined 6 persisting myths about 401(k)s for small businesses. While they used to be out of reach for many small businesses, 401(k)s are now accessible to – and critical for – SMBs and their employees.

Human Interest’s modern 401(k) platform provides a simple, streamlined administrative experience, without sacrificing quality or price. Contact us today if you have any questions or are ready to get started.

Low-cost 401(k) with transparent pricing

Sign up for an affordable and easy-to-manage 401(k).

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 education, and integration with leading payroll providers.

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