Pitfalls of Establishing Your Employees' 401k

PRemployer on May 2, 2023

Today, top talent is highly conscious about their retirement plans. They are often willing to settle for a lower salary for better benefits, especially retirement plans like a 401(k). Employers that don't offer it are lowering their chances of attracting suitable candidates and holding on to existing talent. 

While establishing a 401(k) plan for your workforce is a step toward becoming an employer of choice, the process comes with many challenges. Not all businesses, especially SMBs, have the resources and opportunities to arrange and maintain a successful retirement plan. 

Let's examine the main issues an employer may face with 401(k) establishment. 

Challenges with Setting Up 401(k) 

While a high-quality retirement plan is one factor that influences the choice of employer, fewer than 30% of small businesses offer 401(k). That negatively affects the company's recruitment options and retention strategies. 

These challenges 401(k) plans come with are a major reason businesses don't implement them. 

High Cost and Complexity  

The costs of a 401(k) plan can be highly challenging for a small business. Implementing this retirement plan comes with such expenses as: 

  • Initial costs – Setting up the plan, administering it, and educating your workforce about it can cost thousands of dollars just to get started. It's possible to mitigate some of these costs with tax credits. 
  • Match costs – Many employees expect their company to match their contributions to the retirement fund. While you can cap the matching amount, the costs can still be significant. 
  • Administration costs – That includes accounting, plan operations, account management, and 401(k) maintenance activities. 

Maintaining a 401(k) plan comes with an array of responsibilities, including: 

  • Making sure that all employees are eligible 
  • Collecting contributions 
  • Monitoring the legal rights of employees to their benefits 
  • Fiduciary process and procedure maintenance 
  • Providing disclosures about plan information to participants 
  • Reporting to government agencies 
  • Distributing plan benefits 

All these activities aren't just time-consuming because they require specific expertise. Small businesses often have one-person HR teams that lack the bandwidth to maintain a 401(k) plan without losing focus on other issues. 

Employee Participation  

Your existing employees must join the program to receive the recruitment and retention benefits of implementing a 401(k) plan. Not all workers are willing to participate in 401(k) for a variety of reasons, including: 

  • Minimal employee match (this is especially common with small companies) 
  • High plan management fees 
  • A small selection of investment opportunities 
  • Problems with accessing your funds 

HR specialists must spend time and money educating employees about the plan and its benefits. If you can't provide a match for employee investment, convincing workers may be more challenging. 

Careful Attention Toward Compliance  

Compliance is one of the toughest issues employers face with 401(k) plans. Failing to understand all your responsibilities could lead to reputational issues, fines, lost funds, and much more. 

The most common compliance problems include: 

  • Not understanding eligibility guidelines 
  • Not enrolling eligible candidates 
  • Late filing of the 5500 form  
  • Not arranging or failing annual compliance testing 

The overwhelming number of nuances (for example, timely deposit of pre-tax employee contributions) complicate compliance management. The fear of non-compliance causes business owners to avoid the 401(k) plan altogether. 

Fiduciary Responsibility to Get Returns  

Besides arranging, designing, and implementing the 401(k) plan, the employer has a fiduciary responsibility to get returns from the program. Business owners must select suitable investment options and offer them to their employees. 

Ensuring the plan's performance requires an in-depth understanding of investment opportunities and operations. Not all business owners have sufficient knowledge of the way such investment works. Meanwhile, their financial responsibility to employees remains. 

Effective Communication 

A 401(k) plan is an extra responsibility for the employer and the HR team. They need to ensure smooth communication with employees. The process can be time-consuming and complicated, from convincing employees to join the plan to explaining investment options. 

Sometimes, small companies don't have enough HR specialists to set up and maintain a retirement plan while arranging transparent communication. 

Circumvent these Challenges with a PEO 

Another reason business owners avoid 401(k) is their lack of awareness about their options. By partnering with a PEO, a small business can meet the challenge of implementing a retirement plan. A PEO can: 

A PEO can simplify 401(k) establishment and help you achieve recruitment and retention goals by guiding your company through the plan implementation, management, and maintenance. 

Using a PEO to outsource 401(k) is only one of the advantages that come from such a collaboration. This valuable partner can help you offer better benefits, take over your payroll duties, improve HR compliance, manage workers' comp, help with recruitment, and much more. 

Taking Another Look at the 401(k) Plan 

By offering a 401(k) plan, you can position your business as an employer of choice and reduce employee churn. While implementing this plan comes with various challenges, especially for small businesses, 401(k) can significantly impact your company's bottom line. 

Instead of avoiding the 401(k) plan due to its serious challenges, consider asking for assistance. With a PEO, you can reap all the benefits of this plan while reducing the common downsides. 

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