It used to be that 401(k)s weren’t small business-friendly, that employers at small companies couldn’t offer this benefit that attracts and keeps top talent. But that has changed over recent years, as we explain here.
In fact, for financial advisors who see the potential in facilitating 401(k) services for a client, there are incredible opportunities, especially with the nearly turn-key options offered by FiduciaryShield.
So let’s take a look at how things have changed for 401(k) plans.
“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 led to a shift away from high-priced plans and excessive administrative burdens. Now, there are fewer barriers to entry, offering small business owners 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 401(k) 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 up these plans for failure from the start.
Then: 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.
Now: Lower Costs and Greater Transparency
Following a flow 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.
Then: 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.
Now: Reduced Liability and Increased Participation and Employee Satisfaction
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.
And the answer to low participation has come in the form of education. 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.
Is it Time for You to Explore the Small Business 401k Plan?
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. In the current environment, the positives to companies that offer a 401(k) plan far outweigh the cost.
But you have to have the right team. At FiduciaryShield, all we do is retirement plans. We design, create and administer plans suited to each individual company, and we service companies of all sizes.
So whether you’re a financial planner wanting to offer 401(k) services but don’t have the time or you’re a business owner who wants a 401(k) without the headache, we can help. Our cost-effective plans make it turn-key easy. Financial advisors can offer one of the most sought after services that business-owning clients want, and can do it with confidence because no one knows retirement plans like us.
Contact FiduciaryShield at firstname.lastname@example.org today to schedule a consultation.