“401(k) plans are only appropriate for large corporations. They’re far too expensive and time-consuming to make sense for small business owners.” – Right?
While this may have been true at one time, major changes in the retirement plan industry have now made this statement outdated and misinformed. A shift away from high-priced plans with excessive administrative burdens has reduced the barriers to entry and provided small business owners with new opportunities.
Here’s a look back at why 401(k) plans were once out of reach for most small business owners, and how things have changed.
Traditional Barriers to Entry
When you take a look at the history of small business 40k plans, it’s not surprising that they quickly fell out of favor. High costs, administrative burdens, and lack of interest combined to create a perfect storm, setting these plans up for failure from the start.
Limited Offerings and High Fees
In the past, the small company 401k market wasn’t attractive to investment advisors or plan custodians. Businesses with few employees and relatively low participation rates didn’t bring many assets to the table. The income that advisors and custodians stood to make wasn’t sufficient to cover the time and effort required to design, implement, and service the plan.
Administrative fees were added to 401(k) plans to make up for the lack of asset-based revenue. Unfortunately, the costs were generally so high that they pushed the plans well out of a small business owner’s budget. In some cases, these fees could run as high as several thousand dollars a month! In addition to administrative fees, small business 401k plans were often burdened with high advisory fees and fund expenses.
Fiduciary Liability and Lack of Interest
Without the luxury of a full HR team, the liability of meeting compliance and regulatory requirements fell back on employers, creating yet another burden. This often left them wondering whether sponsoring a plan was worth it, particularly since many employees seemed uninterested.
Employees of small businesses typically received smaller salaries than their counterparts working for large corporations. Combine this with limited information about the benefits of the plan, and it’s not surprising that participation rates were relatively low. These factors eventually led to small business owners switching to different types of company retirement plans or deciding to abandon the benefit altogether.
A Shift in the Environment
Technological advances and major changes to the industry have turned the tides and created new opportunities for small business owners to offer company 401(k) plans.
Lower Costs and Greater Transparency
Following a rash of lawsuits and increased public awareness, companies are scrambling to lower fees and provide value for the fees they charge. They’re providing true transparency with improved disclosures and new products like “clean” share classes.
The ability to hire a full-service outsourced administrative fiduciary reduces liability for both employers and advisors, making small business 401k plans a much more attractive option. Your plan fiduciary and advisor can work together to help you choose the most cost-effective plan for your business and evaluate it on a regular basis to ensure it remains in compliance.
Increased Participation and Employee Satisfaction
Many plan advisors now provide employee education as part of their services. This improves participation rates by helping your employees understand how much they’ll need to save to reach their retirement goals. This added benefit, along with the confidence that their savings aren’t being depleted by high fees, increases employee satisfaction and lowers turnover rates.
In an environment where over 65 percent of Americans aren’t saving enough for retirement, offering a 401(k) plan levels the playing field for small employers competing for top-notch talent.
Is it Time for You to Explore the Small Business 401k Plan?
It’s clear that in the current environment, the opportunities created by offering a 401(k) plan far outweigh the cost. Having the right team in place will help ensure that you choose the perfect plan for your unique needs.
Whether you’re thinking of starting your first company retirement plan or you are ready to explore the benefits of switching from your current plan to a 401(k), we can help. Contact FiduciaryShield today to schedule a consultation.