Mike Rowland, founder and co-chief executive officer of Droplet, a startup that provides digital forms and automated workflows, was too busy managing his Orem, Utah-based business (even raising $2 million earlier this year in a seed round). When one of his employees asked for a company-sponsored 401(k), Rowland was at a loss.
“I didn’t think we needed it,” he says. “I told her, ‘Can’t you just do it on your own?’ And she told me, ‘No, it has to be company-sponsored.’”
Rowland’s employee explained that a company-sponsored plan would allow the staff of 16 to save more than they could on their own. And Rowland wouldn’t have to make any matching contributions. After researching providers, she recommended 401Go, a provider of 401(k) plans for small businesses.
It’s been several months since the 401(k) plan is in place, and Rowland believes it’s made a difference in helping to recruit more senior talent as his business grows. “When we try to pull in an industry veteran, they’ll say please send me your benefits package. Now I have something to show them,” he says.
BenefitsPRO spoke with a number of plan sponsors, 401(k) providers and plan advisors. Here’s what they said plan sponsors should be looking for when launching a plan.
The first question is why even have a retirement plan. For Rowland of Droplet, a 401(k) was a recruitment and retention tool.
Other business owners want to maximize their own retirement savings. “If you tell me, ‘I’m trying to get tax deductions for myself and I don’t care so much about my employees, I would say don’t do a 401(k) plan. Your motives aren’t pure,” says Michael Kane, managing director with Plan Sponsor Consultants, a 401(k) advisor.
Some businesses are simply too small to have an employee-sponsored plan.
“If you and your employees can’t afford to save more than $500 a month, an [individual retirement account] might be great for you,” says Chad Parks, founder and chief executive officer at Ubiquity Retirement + Savings. “You don’t need all the extra bells and whistles. But if you want to save more than $500 a month, then that opens up a whole lot of possibilities.”
For many plan sponsors, the demands of starting a retirement plan are daunting and overwhelming. Working with an advisor alleviates some of that burden––though not entirely because plan sponsors still remain the ultimate fiduciary.
In fact, that’s what most plan sponsors do. According to the latest Fidelity Plan Sponsor Attitudes Study, 92% of plan sponsors work with an advisor and a majority believe they are getting good value from that relationship.
But plan sponsors may not realize the need for help from the get-go. “Most small plan sponsors don’t reach out to an advisor first; they reach out to a recordkeeper who then loads them up with all their own funds,” says Kane.
A retirement advisor can help sift through the different recordkeepers to determine the best fit and then craft the plan, create a plan design, implement it and monitor it.
Plan sponsors who do have not the bandwidth to actively monitor a plan should consider assigning 3(38) fiduciary responsibility to their advisor rather than have their advisor act as just as 3(21) fiduciary, which is more of an investment advisor.
Most financial advisors agree that auto-enrollment and auto-escalation plan designs are 401(k) best practices because they eliminate a point of resistance for employee participation in retirement savings. Yet small businesses are less likely to include this feature in their plans. According to the Defined Contribution Institutional Investment Association, 73% of large plans have an auto-enrollment feature, but only 63% of small firms do, though that number is growing.
“Auto-enrollment plans are more complicated and most small employers are looking for the simplest possible design,” says Barbara Schwartz of Schwartz Retirement Benefit Strategies in Los Angeles.
Employers are responsible for distributing notice to eligible employees explaining auto-enrollment and withholding wages from those employees who are automatically enrolled at default deferral rate of the plan.
The newly enacted Secure Act could move the needle on participation rates by giving employers who include auto-enrollment in their new plans a $500 tax credit up to three years.
For small business owners, simplicity is key and that increasingly means choosing plans that use digital tools to streamline the process for both plan sponsors and participants.
“I’m wearing 50 different hats, including HR and payroll provider,” explains Rowland of Droplet. “Having a system that manages it all for me is important.”
To that end, he chose 401Go as his 401(k) provider because it could integrate easily with Gusto, his payroll company. “I wanted a clean dashboard interface,” he explains.
Parks of Ubiquity agrees: “Can you go through a series of screens to sign up, which is the best case. The worst case is that you’re going to get a bunch of papers in the mail.”
Sponsors should look for a plan provider that can take the plan rules and take care of participant enrollment.
To be sure, starting a 401(k) plan is time-consuming and complicated, but it doesn’t have to be. Plan sponsors who understand what they’re trying to accomplish can find partners who can alleviate the pain points.
“Unless you fancy yourself an investment expert, you don’t have to do it yourself,” says Parks. “That part of the puzzle has been solved.”