Every business owner spends time thinking about how to keep costs down. It’s only natural — the less money you have going out, the more you can keep in your pocket. But each decision you make has a cost, and you must decide whether this cost is worth it. Today, we’re going to talk about why we think the cost of offering your employees matching 401(k) contributions is definitely worth it.
The Costs of Doing Business
When you first opened your business, you may have had to do without a lot of things you wish you could have had. These may have included better or larger quarters, the ability to offer more or better goods or services, and more employees to spread out the workload.
Let’s imagine you have an accounting firm. Maybe you passed your CPA exam and joined a large, busy firm where you worked long hours for little pay — helping rich people get richer. Perhaps you longed for a bigger slice of the pie, so after you got a few years of experience under your belt, you struck out on your own. Your business may have been just you, working in your garage with your mom’s help answering the phone. But after a period of time during which your clientele grew through word of mouth about your top-notch services, you were able to hire a full-time administrative assistant and some junior-level accountants.
At that point, offering benefits like health insurance and a 401(k) plan may still have been a dream to you. Your priorities at the time likely included a clean, nicely furnished and well-kept office, because it’s important to make a good impression on your clients. Additionally, you probably interviewed your employees carefully, choosing only the ones who were the most capable and worked well with your clients. You had to decide how much compensation to offer your employees. Too much, and it eats into your bottom line; too little, and they’ll leave to work for a competitor.
It’s the same process when you’re deciding what other benefits to provide. If other accounting firms offer 401(k)s and PTO and you don’t, you won’t get the best employees. You’ll get the leftovers.
Who Offers Matching 401(k) Contributions?
According to a study done by Plan Sponsor Council of America, a nonprofit trade association that supports employers that offer retirement plans, 98% of employers who sponsor 401(k) plans offer some type of matching contributions. The average matching contribution percentage is 100% up to between 4% and 6%, although some newbies may start at 50%.
You may think you can’t afford that, but if you think about it, you really can’t afford not to offer it. Why?
1. If 98% of businesses offer 401(k) matching contributions and you don’t, this will make you look stingy at best and financially unsound at worst. Potential employees may worry that a business that can’t afford matching contributions may not be around much longer.
2. Not only does offering a 401(k) program attract better talent to your small business, it also encourages your employees to remain loyal to your company. That’s because employer matches are usually tied to a vesting schedule, often between two and five years. If your employee leaves before they are fully vested, they lose some of the money that you contributed to their 401(k). So employer matches and a reasonable vestment schedule help to encourage employee retention.
3. Another reason employers want to offer matching 401(k) funds is that these contributions are tax deductible. How much your business is eligible to deduct is based on a number of factors outlined by the IRS. You can’t help but feel good knowing that the IRS deems your matching contributions tax deductible — plus, you’ll improve your reputation in the community and save money at the same time.
4. Down the road, you may want to consider that as the company’s owner, you and any highly compensated employees you have would not be able to save as much in their 401(k) as they could with matching contributions in place. And that’s not just because the matching funds would otherwise be absent — it’s due to federal rules regarding how much owners and highly compensated employees are allowed to contribute in relation to other employees. Offering matching contributions up to a certain percentage provides an incentive for employees to save more — so you can save more too.
The good part about deciding to offer matching contributions to your employees’ 401(k) accounts is that you can start small and grow with your business. Maybe at first, you will opt to match 50% up to 3%. As your company gains more financial flexibility, you may be able to offer 100% up to 6%. Don’t make the mistake of thinking workers and competitors will not know which company offers what — topics like this are always popular for discussion, and not just at happy hour after work, but on social media as well.
For more information on how easy it is to start and manage a 401(k) plan at your company, contact 401GO today.