A company that doesn't offer a retirement plan loses a competitive edge faster than you can say 401(k). While around 50% of American adults lack retirement savings, an increasing amount of people are investing in their future earlier.
Top talent that searches for work during the Great Resignation pays special attention to stability. However, many small and mid-size businesses have difficulty offering robust retirement plans since they require a significant investment.
Employers can cut costs, improve recruitment efforts, and maximize top talent retention by looking at alternative ways to provide retirement planning options to their workforce.
Challenges in Providing Affordable Retirement Plans
While businesses of all sizes understand the importance of offering their employees a suitable retirement plan, many face various challenges. These issues usually involve costs, implementation, compliance, and availability.
Complex Investment Selection
Choosing the right retirement plan from a significant variety of options can be complicated. Many HR teams don't have the time, experience, and resources to determine which plan suits their workforce best, especially if employees' needs differ.
Many financial firms provide retirement plans for businesses. Studying their strength and weakness could take a while, especially for cost-conscious employers.
When an employer doesn't have a good understanding of how a retirement plan works, they put their money – and their staff's money – at risk. Many companies simply don't want to deal with the hassle a retirement plan brings or risk the money they invest in it.
According to research, 37% of companies without retirement plans cite expenses as the key reason they don't offer them. Costs associated with arranging retirement plans for employees can be significant.
While the starting costs of defined contribution plans may not be that high, administrative expenses can be hard to cover. The more complicated a retirement plan is, the higher its administrative costs become. You also need to consider hidden costs, like changing the plan design, integrating the plan with a payroll platform, or transferring one plan for another.
Large companies have an opportunity to negotiate for lower fees. However, small employers don't have the bargaining power because they invest smaller amounts. Small plan participants often face higher investment management fees than larger companies.
Lack of Administrative Support
Once selected, a retirement plan needs continuous administrative support. Many companies, especially smaller ones, don't have the time or expertise to maintain retirement plans to avoid unexpected expenses or compliance issues.
Types of Retirement Plans
While 401(k) is one of the most popular retirement plans, employers can choose from various options that suit their needs and budgets.
- Defined contribution plan – a tax-deferred plan that involves an employee contributing a fixed amount (or percentage) from the paycheck to an account that funds the retirement. Examples are 401(k) or 403(b). Employees have the option to match the employee's contribution to the account.
- Individual Retirement Account (IRA) – an employee savings account to save for retirement and take advantage of certain tax benefits. Employees usually choose IRAs if their employer fails to offer a defined contribution plan.
- Defined benefit plan (also called pension plan) – an employer-sponsored retirement plan that involves calculating employee's benefits based on certain factors, including time with the company. The employer is responsible for managing the money. A failed investment doesn't free them from making payments to the employee in the future. These days, only a small percentage of companies offer defined benefit plans. The majority opts for defined contribution plans.
- Cash balance plan – a defined benefit plan where the employer credits the employee's account with a set percentage and interest charges.
- Employee stock ownership plan – an employee support plan that gives employees an ownership interest in the company in the form of stocks.
Today, only 26% of small businesses offer a 401(k) plan. The majority also try to avoid other options due to high expenses, administrative problems, and compliance issues.
How PEOs Can Offer Optimal Solutions
One of the reasons why small and mid-size businesses avoid funding retirement plans is the lack of knowledge about the available options. One of them is working with a PEO.
When you partner with a PEO, you can use the organization's 401(k) plan. It allows you to delegate fiduciary liability over the plan assets and reduce administrative costs related to retirement plan management. The key benefits of this option include the following:
- Lower fees
- Compliance (PEO is responsible for retirement plan compliance)
- No fiduciary liability
- Lower administrative burden
Additionally, a PEO can cut other costs by handling your healthcare plans and providing valuable guidance for business growth. That can help you increase retirement plan investments.
Offering Affordable Retirement Plans Without Breaking the Bank
Employers wanting to compete for top industry talent while reducing internal churn must offer retirement plans. Unfortunately, only a small percentage of small businesses consider this option due to its costs, complexity, and risks.
Exploring the available opportunities for affordable retirement plans, such as PEO collaboration, is essential to becoming an employer of choice without exhausting your resources.