There are many reasons why a 401(k) Plan is that important to your business and this article will explore and review many compelling reasons. Even if you already have a 401(k) Plan, you may not be aware that your plan may have issues or not flexible enough for your employees to fully participate and contribute. This is all above and beyond making sure you are in Fiduciary Compliance.
At the core, a 401(k) Plan is meant to “Attract, Retain, Motivate and Reward” employees. The war for talent is peaking and its getting tougher to Attract and Retain the employees that are the best fit and high performers for your organization. If you don’t have a 401(k) Plan that may already be a deal breaker to the potential candidate. Some 20 and 30 somethings may not have that on their top priorities to make sure that is part of their compensation package, but as candidates mature, a solid retirement plan becomes more important. Many of the following reasons in this article are mission-critical to why a candidate and current employee would stay with your company, but at the core, benefits, specifically a 401(k) is paramount to your success in acquiring and retaining talent, probably more so than salary.
Company Match is just as important to having a plan. As candidates and even current employees desire a good 401(k) Plan, you need some type of a company match program. If you don’t have one, your competitors probably do. Participants of the plan see this as free money and part of their compensation package. Without it they feel as if they are losing money in reality. To many of them it’s a right, not a privilege. There are too many types of company match programs to mention for this article, but you need to research what your competitors are doing. You can start by asking your best employees what their previous company offered, that’s easy research, but ask your candidates you are interviewing too. Obviously at the end of the day, the company needs to be profitable to offer and pay a match, but it is possible to be flexible there too.
Profit Sharing offers several flexible options to you and your company. If you aren’t sure about your profitability over the next few years, you still should offer a match program, but based upon their performance you can offer a bonus in the form of profit sharing. If you are under 50 years old you can contribute $18,000 per year and then another $36,000 (total of $54,000) could be added in a combination of company match and profit sharing. If they are over 50 years old, the contribution max is $24,000 (including the $6,000 catch-up) and the additional amount is the same for a maximum of $60,000. By offering profit sharing you are also reducing the tax burden of the company. Essentially you are distributing profits above the participants contribution and the company match. But with uncertain profitability forecasts, you could offer a 1% company match plus profit sharing as a bonus. If the participants perform and the company does well, they will be rewarded for their performance. This helps reduce the commitment to a larger company match and keeps the budget in perspective. In many companies a 1% match won’t cut it, even if the profit sharing payoff is larger at year-end. It’s the certainty that participants want, but a combination of all these methods may be the best to offer. If needed, you could even setup the profit sharing in a “vesting” program over “x” years. Again, options and flexibility is key, but they need to be reasonable and competitive that also makes sense for the company.
Another great option for a company match is a “Stepped-Up Match Program”. This happens to be a personal favorite because it competitively compensates employees, but rewards tenure and loyalty with the company. For Example, if someone has been with the company 1-4 years the match is 3%, 5-9 years 4%, 10-14 years 5% and 15+ years 6%. Again, you can create your own matrix for the match and percentage that makes sense for your company, but employees that have tenure may think twice about leaving if they are close to that next rung on the match matrix to get the extra 1% per year. We have found that as people approach their last 10-15 years until retirement, this becomes a much bigger deal. Why you ask, because they know if they leave for another job, if the salary is about the same, they will actually lose in compensation because they will be getting less of a match. The average company match is between 3%-4% and a “Stepped-Up Match Program” is simple to add to your 401(k) plan but may make a tremendous difference based upon your participants view of the program offering.
When we ask prospective 401(k) clients what they don’t like about their plan, usually one of the top three(3) reasons is their asset/fund lineup offering . There are many factors that go into the dislike of this plan component, but is probably one of the most important. The asset/fund lineup can make or break a plan many times because of its diversification, fees and/or performance, or lack of. Sometimes neglect of monitoring the asset/fund lineup could expose you to potential participant citations and DOL audit. At Atlas we offer an ETF lineup and Model Portfolio based upon life stage and risk instead of Mutual Funds and Target-Date Funds(TDF). This is not a shameless plug, but wanted to give you a proper comparison since most companies only offer a Mutual Fund and TDF lineup. Either way, you need to explore and understand both options and choose what’s best for your company. Typically a plan has three(3) categories of fees, a TPA (Third-Party Administrator), Record Keeper and an Investment Advisor Management Fee. Within those categories there are additional levels of fees and if you choose a Mutual Fund/TDF lineup, many of those fees are hidden/included within the Expense Ratio (EXP, a.k.a. FER or GER). Those fees are not line itemized on your account activity and pulled out of price of the Mutual Fund/TDF during the year. Also, by doing this, depending on how the fees are structured, the company may be putting “some of”(or most of) the administrative costs (Trustee, SubTA, Record Keeping, etc.) on the participants versus the company (Plan Sponsor) absorbing the fees. Depending on how those fees are structured, this may cause a future issue if the fee burden put on the participants may be too high.
An ETF (similar to a Mutual Fund, but trades like a stock) usually has much lower fees than a Mutual Fund/TDF, usually a third(1/3) to half (1/2) of the cost or more on average. But the fees and administrative costs for the TPA, Record Keeper and Investment Advisor are not included in the ETF Expense Ratio (EXP). That is usually split between the Plan Sponsor (Company) and the Participant, but the fee burden to the participant is significantly less and over time; 10, 20 and 30+ years the participant will benefit because they are paying less in fees, ultimately their portfolio performance will be higher. By choosing an ETF option, you are also mitigating risk to the plan and reducing a possible DOL audit because the fees are much more reasonable on how they are spread out across the board. Take a hard look at your asset/fund lineup and consider getting an independent benchmark analysis to compare, plus you are satisfying a fiduciary responsibility.
Helping business owners and senior management save more and reducing company tax burden. We have seen it too many times where business owners sacrifice personal and family time to keep their business going, continue to reinvest profits to build the company and when a rough patch its, the business ownership has nothing saved for retirement or a safety net for unexpected expenses. The 401(k) plan can be used to build that retirement nest egg faster for business ownership, reduce tax burden and grow the business in more efficient ways. Business ownership and senior management can distribute profits up to the maximum amounts annually if there is a healthy cash and profit surplus. Why give it to the government in taxes when you can reduce your tax burden by distributing a portion of it. Of course you need to pass the three major plan tests; Top Heavy, ACP and ADP discrimination testing. The details of how this works is a completely separate article, but a good TPA(Third-Party Administrator) can help you pre-test those numbers throughout the year so you know what you can do and pass all the testing prior to tax filings.
In summary, offering a 401(k) may not be good enough, the components and flexibility will make all the difference to higher participation rate, steady contribution rate and attracting and retaining top talent for your company. The old adage, “the devil is in the details” and the 401(k) plan is the epitome of why understanding what and how a 401(k) plan works and how to tailor it to your company’s needs is mission-critical to a “must have” benefit. Participants want to be “Retirement Ready”, the company wants the participants to perform at a high-level, since most employees are “coin-operated” to perform at a high-level, the 401(k) plan is a critical component to help achieve everyone’s goals.
Ronald E. Lang, Principal
Atlas Wealth Management, LLC
www.AtlasBuildsWealth.com – (888)403-9400
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