5 Myths Around 401(k) Plans, Debunked
Between the fees, investment choices, various plan provision elections and nondiscrimination testing requirements, rolling out a 401(k) plan has been known to baffle even the brightest of leaders. While the benefits of offering a 401(k) plan—retention, recruitment, retirement security—are obvious, less so are the facts for small to midsize businesses (SMBs).
The substantial amount of misconceptions could steer employers away from offering a 401(k) plan to their employees, stalling their ability to save for retirement. Read on as we debunk five myths making the rounds.
Myth: It’s too expensive to offer a 401(k) plan
Truth: 401(k) plans are no longer only for the big employers with a large number of employees; the number of plan providers that cater to small employers is growing. Employers are often able to pass the plan administrative costs back to their plan participants so there is little to no out of pocket expense to the employer under this arrangement. Additionally, as a means to make 401(k) plans more affordable for SMBs, the IRS offers a tax credit that covers 50% of necessary startup costs up to $500 per year for three years. It’s likely that the credit is greater than the cost of the plan for a company of this size.
Myth: My employees aren’t interested in participating and can’t afford to contribute
Truth: According to a 2016 survey, nearly 80% of U.S. employees believe that employers should be required to offer a retirement plan. Nearly three-quarters of these employees also said that employers should be required to make contributions to participating employees’ accounts. Specific to current participation, a PLANSPONSOR survey found that 23% of participants with a household income of less than $50K deferred more than 6% of their salary to their retirement savings. Over 70% of employees in another survey are in favor of the idea of automatic features in a 401(k) plan, which suggests that employees are more interested in plans than employers think – they may just need more hands-on guidance.
Myth: Administering a 401(k) plan is complicated and time-consuming
Truth: The ins and outs of administering a 401(k) plan are a valid concern as the regulations can be complicated and there are penalties associated with administering a plan incorrectly. However, TriNet can assume these responsibilities for employers and remove some of the burden. A proposed solution for many small businesses that want to offer retirement benefits but are afraid they might be prohibitive is the TriNet multiple employer 401(k) plan (MEP). An MEP is a single plan adopted by a group of employers that have a common interest but do not have common ownership. By comparison, a single employer plan covers employees of one employer or several employers that are part of the same related group of employers.
Under an MEP arrangement, a third party serves as the plan administrator and allows employers the ability to offload most, if not all, of the plan administration. Also, due to economy-of-scale pricing, administrative costs in an MEP are often lower than what an employer could get if they were to sponsor their own plan.
Myth: I have to be a retirement plan expert
Truth: While hiring a 401(k) service provider and implementing a plan is an employer’s fiduciary responsibility, they don’t need to be 401(k) compliance or investment experts. By participating in the TriNet MEP arrangement, employers are alleviated of some fiduciary liability. Additional resources provided in an MEP arrangement include enrollment workshops, ongoing employee training, explanation of distribution options and investment choice additions and deletions.
Myth: Matching employees’ contributions is required
Truth: A company matching contribution is not required when offering a 401(k) plan. The plan can be designed to apply a company match at the employer’s discretion. However, there are several mutually beneficial reasons to provide an employer contribution: employer contributions are tax deductible, improve employee morale and retention, and incentivize employees to save for retirement. If an employer can’t initially afford a company match, the 401(k) plan can be amended at a later date to add a contribution. Regardless of the ability to match, offering a 401(k) plan is still a valuable retirement savings vehicle.
This communication is for informational purposes only; it is not legal, tax or accounting advice; and is not an offer to sell, buy or procure insurance.
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