Small Plan 401(k): What’s Working and Not Working for U.S. Small Businesses?

by Douglas Dubitsky 

For many small business owners, offering their employees a retirement plan may seem like an onerous task. It may feel like it is already too late or too expensive to -begin. However, worker savings remain low since many don’t have access to workplace retirement plans.

Nearly half of workers without a retirement plan are not confident about their financial security in retirement, and have less than $1,000 in savings, according to the Employee Benefit Research Institute (EBRI).

Employees need more options, not fewer, to attain financial security in their retirement. Adding access to a workplace retirement plan, such as a 401(k), continues to be one of the most appreciated benefits of any company. Yet, many small businesses are still without a 401(k) plan. Forty-six percent of small businesses do not offer a workplace retirement plan according to a study conducted in 2013 by Guardian Retirement Solutions. This makes it more difficult for small businesses to attract and retain the talented employees who are vital to making them competitive in their industries. It also does not help close the savings gap for the average U.S. citizen. In order to help more Americans save, small business owners should consider offering or improving their workplace retirement plan. Even though more than half of all small businesses would like to make retirement plans available to employees, they face challenges that prevent them from offering these plans.

Small Plan Sponsors Need Help Navigating the Fiduciary Thicket 

While the majority of small business employers are interested in offering retirement plans, the underlying fees and expenses, including the potential cost of a match, are cited as major concerns when offering these plans at the workplace. Additional concerns include the staff and executive time required to manage the plan, along with the need to educate employees to manage their investments.

Small plan sponsors who offer a workplace retirement plan need help deciphering and understanding their fiduciary responsibilities. Many plan sponsors are not even aware that they are the plan fiduciary. An employer may benefit from education and assistance from a financial professional who can help them understand their role and responsibility as a plan fiduciary and how service providers can help assist in meeting their obligations.

According to study, plan sponsors who work with financial professionals are more knowledgeable about plan requirements, including their fiduciary responsibilities, and generally offer plans that are better designed and include more advanced features, such as an employer match, target date funds, and a managed account option.

Additionally, 61% of plan sponsors who work with a financial professional are very satisfied with their 401(k) plan, compared to only 40% of sponsors who are very satisfied with their plan and do not use a financial professional. There is a wide gap in plan satisfaction between those sponsors who work with financial professionals and those who choose to go it alone.

Non-Sponsors are Paralyzed by the Complexity of Retirement Plans

There are huge opportunities for financial professionals in the small-plan market. Fifty-eight percent are interested in setting up a plan within the next three years. But, nearly 30% of business owners don’t know which type of plan is best for their company.

These small business owners may feel intimidated, uninformed and uncertain about how to begin the process, but for many non-sponsors the appeal of a 401(k) plan runs deep. This creates an opportunity for financial professionals to showcase their expertise and help guide the decision making process. Financial professionals can coordinate service delivery and help small business owners provide new financial tools to their employees in addition to providing them with the fiduciary education and fiduciary support solutions they seek.

Do Small Business Employees Need 401(k)s?

The study reveals that nine in 10 plan sponsors consider their 401(k) successful when it comes to helping them recruit and retain good employees. Offering this benefit keeps small businesses competitive and secures an adequate retirement income for their employees. Based on the study results, employers also say that their plans work for their employees. Approximately nine in 10 employers say their 401(k) is successful in making retirement savings easier, providing planning tools, encouraging systematic savings and helping employees fund a secure retirement.

With fewer companies offering traditional pension plans, the average worker needs help to secure their retirement. Nothing in history has helped promote retirement savings more than workplace defined contribution plans.

Advisors Increase Plan Satisfaction 

Virtually every aspect of 401(k) sponsorship is more successful if a financial professional is involved. Financial professionals are in a key position to provide education and guidance to sponsors and participants. In fact, the majority of small business owners who work with financial professionals say they are very satisfied with every aspect of their 401(k), partly because plans working with financial professionals tend to have more features and better plan design. While most plan sponsors are satisfied, there are still areas where employers and employees need help. Small-plan sponsors are increasingly realizing the value of working with third-party support services and financial professionals for outsourced solutions that help save time and mitigate fiduciary risks. The fact that many non-sponsors are extremely confused by their options in the 401(k) market reinforces that there are more and ample opportunities for financial professionals in the small-plan retirement market than ever before.

Adding a workplace retirement plan is a win-win for small business owners and employees. The offering makes the business more competitive when seeking talent, and employees access a proven and convenient way to save for retirement.

Here are five tips for implementing a successful workplace retirement plan:

1. Work with a competent financial professional. Business owners who work with a financial professional when offering a 401(k) plan were much more satisfied (61%) with their  plan than those who did not work with a financial professional (40%), according to study.

2. Understand your role – as the plan sponsor, you are the plan fiduciary. This means that you have taken responsibility for the plan and you must act in the plan’s best interest. Among other duties, this includes acting prudently and in the best interest of the plan participants, selecting and monitoring the service providers who help administer the plan, providing education for participants and employees, selecting and monitoring the plan investment options, and ensuring the plan is paying reasonable fees for the necessary services required to administer the plan.
It is critical to educate yourself on these responsibilities, and talk to your legal adviser to understand your obligations as a plan fiduciary. Additionally, your financial professional can work with you to help find service providers who can assist with these responsibilities to ensure you’re doing what’s needed for the plan, minimizing your fiduciary risk and ensuring the plan is operating optimally.

3. Find the right help for you and your plan. Look for a record keeper and other retirement plan service providers who are focused on the needs of small business owners to ensure your needs are met. Services can include: customized and flexible solutions for your business, fiduciary support services, investment flexibility (target date funds, managed accounts, multiple fund choices), access to customer service teams, enrollment and on-going education and support. Small companies do not have the same access to staff and resources that larger companies do. Working with providers who understand and cater to the small business market and who offer these value-added services will help you reduce your administrative burdens.

4. Find the right plan design for you. Talk to your third-party administrator (TPA) about a plan design that makes sense for you and your employees. There are many ways to setup a workplace retirement plan, not just a 401(k) (i.e. defined benefit plan, cash balance plan, profit-sharing only plan, etc.). In order to maximize company and employee tax savings and meet other plan and business owner objectives, you want to be sure the plan has the necessary features to help you attract and retain employees.

5. Educate your employees. Look to work with service providers who can provide your employees with robust enrollment and on-going educational tools and the support to help them plan, save and invest for retirement. At the end of the day, you want to make sure you can help your employees achieve the retirement they desire.

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Douglas Dubitsky is vice president of Guardian Retirement Solutions.