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The Challenges of Offering a 401(k) and How to Overcome Them

August 1, 2019 - PRemployer


In a telling trend, more than a third of employees in the private sector work for a company that doesn’t offer a 401(k) plan. Although offering a retirement savings plan yields multiple benefits for the company itself, including tax incentives and the ability to recruit top talent, many small and midsize businesses (SMBs) are hesitant to jump on board.

These businesses are not without good reason. There are many perceived challenges associated with offering a retirement plan, especially for private SMBs. However, they are not insurmountable. Here’s a brief look at the various concerns businesses have regarding 401(k) plans and how they can be addressed.

1. Retirement plans are difficult to set up and maintain

Many small business owners are daunted by administrative difficulties, such as creating 401(k) policies and administering the plan. These responsibilities can be time-consuming and laborious, which deters businesses from even offering plans. 

However, many companies that offer retirement services are moving toward automated and streamlined options. New technology and partnership opportunities have made it increasingly easy for businesses of all sizes to set up and maintain plans without taking away from other areas of operation.

2. Retirement plans are too expensive

Business owners already incur several costs in the process of running a business, paying employees, and other operational functions that take precedence. According to a survey by the Pew Charitable Trusts, about 37 percent of employers without retirement benefits believe setting up a 401(k) plan for their company is too expensive. 

Additionally, to avoid the administrative difficulties mentioned above, many companies pay anywhere from $8,000 to $25,000 to have an individual manage their plan. While the retirement market now offers more affordable plans for SMBs, many are still geared toward large companies with a high number of employees.

3. Plans require significant compliance

Retirement savings plans are subject to numerous state and federal laws and regulations. Businesses must undertake compliance testing annually to ensure they are adhering to relevant legislation and rules. When new regulations are passed, you have to adapt accordingly to stay in compliance. These measures can cost businesses both ample time and money. Additionally, errors and non-compliance issues – such as late deposits, invalid deferrals, defaulted 401(k) loans, and failure to send required notices – can lead to costly penalties for your business.

4. Sponsors assume fiduciary liability

The Employee Retirement Income Security Act (ERISA) creates a fiduciary hierarchy that employers need to be familiar with if they want to offer a 401(k) plan for employees. As the plan sponsor, employers assume certain fiduciary responsibilities – as they have a legal obligation to ensure their plan is managed in the best interest of the employees – and that comes with liability risk. 

Some of the fiduciary responsibilities they face include depositing employee contributions on time; only incurring reasonable expenses to be paid from plan assets; maintaining adequate ERISA fidelity bond coverage; and properly monitoring 401(k) plans. These tasks can be time-consuming, and the risk of not fulfilling them places employers in a precarious position.

5. Businesses have unique plan needs

Based on their organizational structure and budget, SMBs may need to customize various elements of their retirement plan, including the eligibility schedule, profit-sharing, and employer-matching component. When sponsoring a plan, employers need to consider the needs and preferences posed by both the business and the employees. They are concerned about accepting a cookie-cutter retirement savings program that is expensive and complicated, yet fails to satisfy the specific needs of either party.

How to Overcome the Challenges of Offering a 401(k) Plan

Before letting the various obstacles deter your SMB from offering a retirement savings program, you can explore the viable option of partnering with a professional employer organization (PEO). PEOs are valuable to businesses – especially small, privately owned ones – because they can provide additional human resource services and help give employees access to retirement benefits. By managing the plan, assuming fiduciary liability, maintaining compliance, and offering customization, PEOs provide the ideal solution to the aforementioned issues. If you are interested in offering an affordable yet quality 401(k) to benefit your employees and your business, explore how PRemployer can make this feasible, convenient, and stress-free.

401k for small business: 5 reasons to use PEO

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