No matter the job market temperature, offering retirement savings benefits to employees can help small businesses level the playing field when competing for top-tier talent. Pensions and other traditional retirement vehicles often prove too expensive for smaller operations. However, a 401K plan delivers an ideal way to invest in employees without stretching internal resources too thin.
Recent legislation coupled with cutting-edge technology has expanded available online 401K plan options for small business owners. However, it’s important to know that not every digital retirement savings platform is created alike. With so many available products to choose from, finding the right plan can feel overwhelming. Knowing some of the most critical factors to look for when comparing potential 401K benefits programs can help you make an informed final decision.
Some key considerations when finding the right 401K plan for your small business should include:
401GO simplifies the 401K retirement savings process for business owners, HR professionals, and employees. Contact us today to learn more about our technology and customized solutions.
Modern 401K providers are officially changing the retirement savings game for small business owners, HR specialists, and financial advisors. These cutting-edge providers leverage state-of-the-art technology and app platforms explicitly designed to streamline the process for contributors and significantly reduce the overall risk for businesses and financial advisors.
The latest technology surge of 401K apps improves user experience, leveraging automation to drive cost and time savings efficiency. Most importantly, these industry innovations offer an intuitive resource that bridges the gap between investors and access to professional investment management.
Knowing some of the most significant benefits of an online 401K plan can help you decide if this type of retirement savings program is right for your business.
Some of the biggest advantages offered by a centralized and automated digital retirement planning solution include:
401GO’s customized solutions make retirement savings easy, fun, personalized, and empowering for employees. Contact us today to learn more.
Business owners, financial planners, and HR professionals recognize the savings power of 401K plans for clients and employees. For small business owners, a 401K plan helps their employees secure better futures. It also serves as a recruiting tool and compensation differentiator, helping their organization stand apart from the competition in a candidate-driven job market.
Financial planners at smaller firms also reap the benefits of offering a cohesive retirement savings plan to clients. These advisors recognize that helping clients strategically contribute to a 401K plan allows them to build trust and rapport; these financial professionals initiate the relationship with retirement savings as a way to establish their expertise and work toward other savings vehicles.
While 401K programs offer invaluable employee and client benefits, most smaller business owners quickly realize that many of the available plans are too pricey for their budgets and current operations. They assume options are limited, and these programs are simply too expensive to run with long-term sustainability. As a result, entrepreneurs and advisors may opt to forgo providing a plan altogether, believing that it’s just not worth the expense.
If you’re struggling with the high cost of offering a client or employee retirement plan, you may not want to give up just yet. Understanding some of the factors that drive the expense of retirement savings plans (and how to resolve them) can help identify an affordable 401K program for your business. Some key reasons your employees’ retirement savings plan is too expensive may include:
Reason #1: Using a Traditional Plan for a Modern Small Business
Many small business owners and HR professionals assume that conventional retirement savings plans are the only option available. However, traditional 401K savings vehicles are often inherently designed for larger organizations with an extensive workforce. Unfortunately, these programs are often riddled with fees and hidden costs for participating companies that don’t meet the minimum requirements.
Reason #2: Utilizing Internal Resources to Manage Plans
It’s no secret that traditional 401K programs often require a designated internal resource to manage, well, everything. From enrollment and plan contributions to maintaining compliance and answering questions about overall investment value, there’s a lot that goes into keeping a conventional 401K plan on track. Many small businesses have to appoint (and pay) an internal employee to oversee their plan and documentation. Not only can this increase the expense of the program, but it can also limit that staff member’s ability to work on other, more urgent projects and initiatives.
Reason #3: Partnering With the Wrong Vendor
Pricing structures on traditional employee retirement savings plans are often not transparent. These products may use an outdated pricing structure that makes it difficult to discern just how much you’re paying to your provider, even after assessing the fee disclosure.
The good news? Modern small businesses don’t have to settle for the same restrictive, traditional 401K plans that gave previous generations of business owners a significant case of sticker shock. New innovative digital solutions are specifically designed for smaller companies, eliminating the risks and costs associated with non-compliance or failing to meet minimum requirements.
Additionally, leading providers of online retirement savings plans don’t just provide the software — they also offer quick and easy access to trained professionals who can oversee the program for partners. These digital 401K savings products empower employees and financial clients with everything they need to manage their investments themselves. However, your plan partner will also have resources standing by to coordinate the process and answer questions, eliminating the need for a dedicated additional internal employee.
Finally, and most importantly, the right online retirement savings plan will offer a low flat monthly rate per employee to keep costs as low as possible throughout the partnership — no more guessing games or struggling to identify fee disclosures. You will have the opportunity to identify the right program to suit your needs and assign a flat monthly rate for every participating employee or client for a single, low payment every month.
401GO helps small businesses streamline retirement savings for employees and clients — all at a flat monthly rate per employee. Contact us today to discuss your specific 401K savings needs.
Small business owners recognize that offering employees a 401K savings plan as part of their overall compensation package delivers several significant benefits. Previous generations of workers often planned for their futures using more predictable savings vehicles like traditional pensions. However, many of today’s employees don’t have pension plans. Instead, these workers rely heavily on 401K plans to supplement any social security income they may have once they leave the workforce, making them a highly coveted employer benefit.
As a result, smaller organizations offering retirement plans to staff can use these services as a major differentiator when sourcing top-tier talent. Of course, 401K plans are more than just a valuable recruiting and retention tool. Yes, offering a retirement savings strategy demonstrates an organization’s commitment to investing in its workforce, but a 401K plan also provides potential tax savings opportunities to business owners, which makes these savings vehicles a win/win for both employer and employee.
The bad news? Traditional 401K programs were typically unattainable for startups and smaller organizations. Administrative burden and the threat of non-compliance penalties often made offering a plan to employees too risky and cost-prohibitive for smaller organizations. The good news? Retirement savings options have evolved significantly over the last several years, becoming far more attainable for small business owners who were deemed too small. Online, automated platforms leveraging state-of-the-art technology has redefined available options as part of their compensation plans. Knowing the basics of how these innovative and flexible digital solutions work can help you decide if it’s a good fit for your organization.
The first thing to know about automated retirement savings plans is all small businesses can access and offer a 401K plan for staff members without exorbitant fees and heavy penalty risks. A dynamic online solution delivers far more flexibility than traditional products that have limited features and stock design options. These innovative, automated plans include a wide range of savings features, including Safe Harbor Plans, Roth and Traditional options, and other components that further customize the plan offered to employees. Business owners and HR leaders can curate their selections and are charged one flat monthly fee per employee for an affordable and convenient experience.
Beyond customization options, an online retirement savings model delivers multiple benefits to small business owners who don’t have the time or resources needed to coordinate a retirement savings program manually. A capable provider will offer an automated solution that eliminates the need to input employee and plan data by hand. Additionally, a digital 401K savings plan puts complete control into the hands of employees. Every user can log-in to their specific page to monitor results and make changes as needed. Best of all, an automated 401K savings plan will fully connect with your existing payroll system for seamless integration that accelerates paycheck withdrawals accurately and compliantly.
401GO helps business owners, HR specialists, and financial advisors create customized 401K savings strategies for employees and clients. Contact us today to learn more about our affordable and innovative retirement benefit solutions.
Americans who are having debt-burden on their shoulder, this question whirls up to their mind again and again.
“Whether to pay off the debt first or contribute to 401(k) first?”
With this question, a dilemma runs on an American’s mind: how much of your earnings will you use for debt repayment and how much money will you contribute to your 401(k) account?
There is plenty of advice that you have listened to already and are going to listen to that you can pay off your debt first and then you may think about saving in the 401(k) and to your other retirement savings plans.
Yes! This idea or advice is right. You can follow it but there is a glitch to the plan.
Your age will be the vital factor to decide whether to repay your debt first or to save for retirement first.
If you are still young, it means you have time to save for retirement. You can repay your student loan, multiple credit card debts then you can slow save for retirement. You have time as you are young.
But this plan to pay off your debt first and then save for retirement won’t work for you if you have already crossed 30. Because you don’t have that much time in your hand like the early 20s young Americans.
So, what is the ideal way? The correct way is to pay off your debt and save for retirement; both at the same time.
Look at yourself in the next 2 or 3 years
If you are determined to repay at least your unsecured debts in the next 2 to 3 years, you may be free of debt in the next 3 years but you are going to miss the retirement savings for the next 3 years.
If you have a 401(k) account and if you are not contributing at least your company’s match to pay off your debt first, then you are going to miss the next 3 year’s retirement savings.
Maybe, in the next 3 years, you were successful in repaying a major portion of your debts but you have to start all over again with your retirement planning.
So, to pay off your debt first and then concentrate on saving in the 401(k) along with other retirement savings is not going to work for you.
You have to create a balance between retirement savings in 401(k) and debt repayment.
What is the benefit of contributing to a 401(k) account?
The 401(k) is an employer-sponsored retirement plan. You can lessen your taxable income by accepting the 401(k) offer because your company will deduct your contribution on a pretax basis. It means the 401(k) deduction will reduce your taxable income. You have to pay less income tax as an employee after contributing to your company’s 401(k) plan.
Besides the tax benefits, many companies match a part of its employees’ 401(k) contributions. The match establishes a portion of the employees’ compensation. Most of the time, the contribution by the employer is 3% on an average of the employees’ salary but they can give up contributing to an employee’s 401(k) account if the employee does not contribute his/her portion in the 401(k).
So, in brief, for receiving the benefits of the 401(k) account, you have to contribute to the 401(k) also.
Listen to what personal finance experts are saying
Personal finance veterans who are experiencing such types of problems for years, have chalked out a well-balanced plan for you. Thus, you can pay off your due debts and save money to your 401(k) account at the same time.
Read the 3 Points financial recommendations created for you by the financial veterans.
1. You may start with repaying your high-interest credit card debts and payday loans if you have any payday loan. While making payment to your high-interest credit card debts and trying for a payday loan settlement, you may try to match at least your company’s contribution to 401(k). Thus, you can maintain a monetary contribution to 401(k) as well as paying off your high-interest credit card debts and payday debts.
2. When you’ll make the complete payment of your high-interest credit card debts, concentrate on your relatively low-interest credit card debts or the other debts you have. You may pay more than the minimum amount to your low-interest debts. Along with it, you must continue contributing to your 401(k) account.
You can start an Emergency Fund bank account if you think you may again be compelled to take out high-interest debts. The emergency fund will save you from taking out high-interest debts. So, the dilemma of paying off your debt first or continuing to contribute in 401(k) first, will never emerge in your mind.
3. When you will be able to repay a major portion of your low-interest debts, then pay your full attention to increase your retirement savings that include the 401(k).
If you adopt this plan of 3 Simple points, your debt payment will be over and you can maintain your contribution to the 401(k) and other retirement savings accounts.
You can take the expert’s help also to get a permanent solution to your dilemma
If the article is not able to solve your confusion then there will be no harm if you accept the expert’s advice to get a permanent solution to your dilemma.
According to David Blanchett, Head of CFP, CPA, Retirement of Morningstar, 40% of Americans who have accepted the expert’s advice, get a perfect and correct solution to their paying off debt versus contribution to 401(k) first problem.
The survey says the Americans who have not consulted any professionals, are still struggling with both paying off debt and contributing to the 401(k) problem.
Your consulting expert can help you to create a plan to get out of your debts, making appropriate contributions to your 401(k) account, and how to maximize your other retirement savings.
So, you can ask a financial expert if you have any dilemma regarding how to find a permanent solution to your financial problem.
Overall, you need to maintain a balance between your debt payment and contributing to the 401(k). For example, you need to pay off your high-interest credit card debts and the payday loans first but there is no need to show any hurry to repay your mortgage loan as it has a low-interest rate. So, the better idea is to take care of your debt payment as well as concentrate on your future savings also.
Author Bio: Catherine Burke is a financial writer for online payday loan consolidation. She provides information on successful cash loans and payday loan consolidation to help people get over a difficult patch. She lives in Kansas and has earned a frame in the matter of payday loans.
When it comes to selecting a 401(k) plan, you may not know where to start. You may also be confused by the options that are presented to you, and in many respects do not know what questions to ask even when the opportunity is given.
I want to help everyone understand why you should add what is called a “Safe Harbor” provision to your 401(k) plan. There are a couple things to look over before this option makes total sense.
Let’s first look at one thing that is actually a pretty big deal when it comes to offering a 401(k) Plan. That’s the nondiscrimination testing and how it affects you and your retirement benefit.
Quite simply, every year, every 401(k) plan must go through the nondiscrimination testing. There are multiple tests within this that we don’t necessarily need to unpack, but two of these tests in particular are important to know.
The two prominent nondiscrimination tests are the following:
I’ll only provide a short summary here for these tests to give you perspective.
ADP/ACP – Average Employee Deferrals/Employer Contributions
The ADP/ACP looks at all those highly compensated employees (anyone that earned over $125,000 in 2019 would be considered highly compensated) and/or has over 5% ownership in the company. This test then compares the average contribution by these highly paid individuals to those that don’t fit that criteria (we’ll refer to those as “staff employees”). This test happens every year. If the participation from the highly compensated employees exceeds a certain percentage of those staff employees, we’ll say by 2%, this test will fail.
The result? There would need to be a refund of some (perhaps all) contributions made by those highly compensated employees (this includes owners regardless of pay). OR you can make an employer contribution to all employees that are not highly compensated. It isn’t exactly this cut-and-dry, but I think you should know that possible refund or mandatory contribution is required if this test is failed.
Top Heavy Testing
The Top Heavy test looks at those “key” employees, which are your executives and owners. If at the end of the year the total 401(k) plan balance (everyone) has over 60% from these key employees (executives, owners, etc.), then the plan fails the Top Heavy test and would have to make a contribution up to 3% to all non-key employees (this could even include some of those highly compensated employees) in any year afterward that those key employees make contributions.
More info can be found in this article HERE.
Now that we have the confusing testing portion out of the way, let’s look at the Safe Harbor option and why they are great for a small business.
A Safe Harbor 401(k) Plan is one in which you, as the employer, agree to using a certain formula to match or provide contributions to your employees that participate in the plan. The biggest perk to having this Safe Harbor provision is that it gives you an exemption from the tests previously mentioned. Yes, that’s right, EXEMPTION. So, if you fail any or both of those tests, you’re exempt from the results if you are Safe Harbor.
What are your options for Safe Harbor?
Here are the different Safe Harbor options by name:
Let’s go through each one of these so you can understand how they work and more fully know the options and costs.
Basic Safe Harbor
This is the lowest cost Safe Harbor if you don’t add an auto-enrollment. Essentially, you only match what is deferred into the 401(k) plan by employees participating.
Formula – Match 100% up to 3% of employee deferred pay and 50% after up to 5%. Total expense is 4% if an employee puts in 5% or more.
E.g. – An employee is paid $1,000 on a pay check and wants to put in 5% of pay. This is a total of $50. As an employer using this Safe Harbor you would match 4% (max), and it would be $40 in this example.
Any employer matching contribution is 100% vested. That means, once it goes into the employee’s 401(k) account, it is theirs.
Enhanced Safe Harbor
This is considered a very rich employer match for your employees.
Formula – Match 100% up to 4% OR 5% OR 6% of employee deferred pay. You would have to pick one of these formulas, you couldn’t switch between them.
E.g. If you selected Enhanced Safe Harbor 4%, an employee paid $1,000 and wanting to contribute 4% of pay, which is $40, would receive a match of $40. Again, 4% is the maximum employer match.
Any employer matching contribution is 100% vested.
Qualified Automatic Contribution Arrangement (QACA)
This is typically referred to as a “Safe Harbor Auto-Enrollment.” That is because it combines the component of auto-enrollment (if your employees don’t “opt-out” from being enrolled into the plan, then they will be automatically enrolled).
Formula – Match 100% up to 1% and 50% after up to 6%. Total expense to the employer is 3.5% if the employee puts in 6%. (Please note, although the total expense is lower and the employee has to defer more of their pay in order to receive more match, the auto-enrollment part of this shouldn’t be overlooked. It will pull more employees into the 401(k) plan through inertia.)
E.g. If you selected a QACA Plan, an employee paid $1,000 and wanting to contribute 6% of pay, which is $60, would receive a match of 3.5% or $35. The maximum is 3.5% employer match. So, even if an employee put in 20% of pay, the employer would only be putting in 3.5%.
You can choose between a few vesting options. You could select a 2-year cliff (1 year – 0%; 2 year 100%), a 50-50 split (1 year – 50%; 2 year – 100%) or 100% vested immediately.
Safe Harbor Non-Elective
This is a Safe Harbor profit-sharing. It can be up to 6% of employee pay, but is typically at 3% of annual pay. You would have to make that decision annually, and cannot reduce 6% down to 3%, for example.
Formula – Employer non-elective (not related to employee deferral contributions) is 3% of eligible employee’s gross pay (required annually). Eligible pay is $285,000 in 2020 (so if someone has over that amount it would cap there and would be 3% of the $285,000).
E.g. If you have 5 eligible employees and their gross pay $300,000, then your required Safe Harbor Non-Elective contribution would be $9,000 (3% of pay respectively).
This is 100% vested.
Now, why would you choose Safe Harbor if you have to provide for an employer contribution and follow a specific set formula? The two main reasons are the exemption from the nondiscrimination testing and the reduction in business taxes from that employer contribution. Employer contributions into a 401(k) plan go in pre-tax. So, figure your total tax liability and consider your pre-tax contributions.
It’s always recommended to talk with a tax professional for more details on the tax benefits, but in general, if you could give a benefit to your employees instead of paying that amount in taxes, would you do it?
At 401GO we have many different plan design options, including all the Safe Harbor plans mentioned in this article. Plus you can get set up in under 15 minutes. It’s easy to use, and handles all aspects of the required annual administration. Talk to us today to more fully understand these options.
When it comes to the 401(k) retirement benefit, it’s important to make it easy-to-use and flexible. In fact that is why technology can do so much in the ways of simplifying and improving how saving for the future is viewed and implemented. When you combine the use of technology with organizations, such as a chamber of commerce (chamber), you’ll find a very powerful and unique relationship.
In an effort to build out a network and expand a retirement offering like the 401(k) plan, you could simply leverage an already established network found within a chamber. This is easier said than done, but the reciprocal benefit found from a chamber aligned with what 401GO offers, referred to as a 401(k) Syndicate, opens up a completely new and exciting opportunity.
To give a little history, the traditional offering for a retirement benefit plan with a large group of employers, such as those members within a chamber is to create or sponsor a multiple employer plan or MEP. However, I have to say that the MEP is simply the wrong fit for this type of organization.
For a number of reasons an MEP doesn’t work for a chamber. Here are the top three:
As states ramp up Secure Choice retirement plan alternatives, it would be timely to look at how a chamber can be a player in providing an option to their members. Additionally, there are many opportunities that come up with the SECURE Act with regard to costs and grouping retirement benefits (you can find more information about this here). Moreover, a group 401(k) plan gives flexibility to the chamber in terms of providing a resource to their members, instead of sponsoring something that puts them in a bit of a pickle with those members that are trying to provide similar or the same services. That is why the 401(k) Syndicate meets and matches most of the criteria previously mentioned.
A 401(k) Syndicate:
Keep in mind, there are a lot of options out there, but when it comes to the benefit in the retirement space for 401(k) plans, automation is king. Not only does it open options such as the 401(k) Syndicate, but it also creates efficiencies that only improve features and reduce cost.
At 401GO we think a partnership with a chamber is the ideal combination to leverage the network of members and power of automation. For more information on partnering with 401GO, please visit our partner site here or schedule a meeting here.
Additional resource pertaining to this article:
Everyone deserving the option to retire is a noble philosophy that modern U.S. society has embraced. Paying for this, on the other hand, has been a mixed bag. Social Security provides a bare minimum of benefits which leaves us with personal savings such as 401(k)s, 403(b)s and IRAs and for a dwindling fortunate few, defined benefit pension plans. Many states (and some large) cities have taken action to thwart the looming social costs of supporting millions of elderly who won’t have sufficient personal retirement savings.
These states have put into place Secure Choice programs where employees will have access to a workplace retirement account. Most states such as CA, OR, IL, MD, NJ, CT and NM are making it mandatory for employers (based on a minimum number of employees) to participate in Secure Choice OR have their own qualified employer-sponsored retirement plan such as a 401(k) plan, SEP IRA, SIMPLE, 403(b) plan, or defined benefit pension plan. Secure Choice programs have thus far withstood numerous court challenges (specifically, California) and opposition from the federal government (since 2017).
Some other states such as NY, VT, WA and MA have voluntary programs (not a mandate) such as open Multiple Employer Plans (MEPs) or state facilitated marketplace programs. Many states are actively filing legislation to develop Secure Choice programs or study them in more detail.
Secure Choice may be a great fit for many employers and their employees. However, between the required work placed on the employer and the costs to employees, there are other options available. The purpose of this guide is to help you as a trusted partner for your clients to help them make the right choice.
What do the Secure Choice Programs look like?
(based on IL, CA and OR thus far)
For CA and OR the 1st $1,000 for each employee goes into a Capital Preservation fund (money market fund) unless the employee opts otherwise. Account balances over $1,000 are then defaulted into an age-appropriate target date fund. IL has a 90 day period where contributions are held in a cash fund and then moved to an age-appropriate target date fund.
Employers (or their designees) must add and update employee rosters, send payroll deductions and make changes to employee deductions as directed by the Secure Choice program administrator. As of this writing, there is no automation with payroll providers to facilitate this however, Ascensus (the program administrator for all 3 states currently in operation) is developing it. File Transfer Protocol (FTP) file transmission is available too. Some programs hold the employer responsible for providing enrollment materials to employees or providing the program administrator their email address.
The employer is expected to be unbiased and have no role in helping employees to decide to participate or how to invest. This is intended to protect the employer from ERISA fiduciary liability. That said, the current federal government doesn’t share this view and there is the potential for additional litigation.
Ascensus, the program administrator, handles employee service, withdrawals, beneficiary designations, etc. They also provide the employer portals and tools for employers to perform most of their administrative responsibilities under the Secure Choice Programs.
Enforcement of employer responsibilities is handled by the States and not Ascensus.
Even if you have a client that already has a workplace retirement plan, each state with a Secure Choice mandate does require each employer to register their exemption with the program to avoid future notifications regarding compliance. There are no direct penalties thus far about complying with this requirement, just the implied harassment factor.
Here is a summary of the 3 states that have mandatory Secure Choice programs and 4 key considerations for each state’s respective program.
|State/ Program||When Effective/Required Employers||When must employees be added (from their hire date)?||Employer Fines for Non compliance||Employee Fees (annually)|
|NOW in effect! 25 or more employees and 2 years in operation||60 days||Up to $500 per Employee annually||0.75%|
|NOW in effect! Employers with 5 or more employees
Employers with 4 or fewer employees: by January 15, 2021
|60 days||$100 per eligible employee, up to a maximum penalty of $5,000 per year||~1.0%|
|Open now |
>100 employees by September 30, 2020
>50 employees by June 30, 2021
5 or more employees by June 30, 2022
|30 days||Up to $750 per Employee||0.825% to 0.95%|
States with Secure Choice Programs in Development
|State/ Program||Latest Progress/ When expected?||Required Employers||Other|
|MarylandSaves||April 30, 2002 Deadline for provider RFPs||10 or more employees that work 30 hours/week||Plans to have a managed payout fund (retirement income)
Offering $300 credit for each employer
|New Jersey||Expected, March 28, 2021. Can be pushed back by 1 year.
To be rolled out in phases, with large employers going first.
|25 or more employees (2 years of operation)||$500 per employee fine for failing to timely enroll employees with potential increasing penalties for multiple violations.
Employers that fail to deposit any portion of contributions will be subject to a penalty of $2,500 for a first offense and a penalty of $5,000 for the second and each subsequent offense.
|Connecticut||April 2020, selected Sumday, a subsidiary of BNY Mellon, as the administrator||More than five employees that are at least 19 years old and making at least $5,000 annually|
|New Mexico||Signed into law Feb. 2020|
Top 10 Types of Employers That Should Use a 401(k) Plan Instead of Secure Choice.
Please note, there are options other than 401(k) plans an employer can adopt that exempt mandatory participation in Secure Choice.
1. Does the employer have a lot of employee turnover and/or a lot of part time employees?
Many employers such as ones in retail, food service, agriculture and temporary labor often experience high rates of employee turnover especially within the first 3-6 months of employment. Secure Choice essentially requires all W2 employees (age 18 or over) to be added to the employer’s roster through Ascensus within 30-60 days of hire. This can be quite an administrative burden for most employers. Plus, there is the risk of fines for non-compliance.
A 401(k) plan can limit eligibility to employees who work 1,000 or more hours in a year and/or have 1 year of tenure. With the recently passed SECURE Act, part time employees are allowed to participate in a 401k after achieving 500 hours of service each year for three consecutive years.
2. Would automatic enrollment cause confusion for their employees?
As effective as automatic enrollment has been to help nudge better individual savings behaviors, it has had the unintended consequence of creating employee HR communications problems for employers. Employees may not see or understand communications and may realize what is happening after they notice a change in their take home pay. They will typically inquire with their employer’s HR /payroll function about what is happening. Even then, the employee must then contact Ascensus to stop or change the deductions, risking more confusion and delays.
3. Are there a lot of highly paid employees or employees that already have personal IRAs?
Keep in mind Secure Choice programs are basically Roth IRAs subject to IRA contribution limits that fall on the individual employee to monitor. This is made especially more challenging for employees automatically enrolled (as mentioned in #2) who may not be paying attention. Roth IRAs are also subject to annual income limits up to $124- $139K for single filers & $196K- $206K for joint filers as to how much can be contributed. This table breaks it down in more detail.
|Feature||SecureChoice Roth IRA||401(k) Plan||Retail Roth IRA|
|Provider||Ascensus only||Many options||Many options|
|Investment options||State Board selects
Employer has no say.
Very limited: Target Date funds, Capital Preservation fund and 1-3 Index funds.
No advice or management available.
|Employer can select
Usually more options available plus advice and management options.
|Employee can select
Most options available plus advice and management options.
|Employee Contribution limits||Roth post tax only up to $6,500 annually ($ 8,000 for age 50+) subject to income limits||$19,500 Pre Tax and Roth ($26K for Age 50+) Key & highly compensated employees potentially limited||Roth post tax only up to $6,500 annually ($ 8,000 for age 50+) subject to income limits|
|Ease of withdrawing funds||Easy, any time and reason) Tax impacts though.
More exemptions to early w/d penalty
Typically charges a fee.
|Easy, any time and reason) Tax impacts though
More exemptions to early w/d penalty
|Employer Contributions (ie Company Match)||No||Allowed, optional||No|
|Automatic Enrollment||Mandatory||Optional (depending on provider)||Not applicable, Individual chooses|
Employee- (0.75-1.00%) of account balance
|Employer- Varies (some are 0)
Employee- Varies (some are 0)
Average Total cost is 2.23% per 401k Averages Book
Employee- Varies (many are free)
4. Does the employer have employees in multiple states especially in states with mandatory Secure Choice programs?
If so, this can be an administrative nightmare and can create an unfair balance of benefits in employees varying by their state of employment. It would likely be much easier to have a 401(k) plan for ease of administration and consistency with employee benefits.
5. Could the employer and employees be subjected to Ascensus’ marketing and sales?
Ascensus is a large, well known provider of retirement and savings products and is well regarded in the industry. Vanguard entrusts its small plan 401(k) plans to Ascensus. Thus far, IL, OR and CA have selected Ascensus as their sole Secure Choice provider. Ascensus provides its own suite of retirement plans and other employee benefits. States may have limitations in their contracts with Ascensus regarding direct marketing of their products. Even so, employees and employers will have a relationship with Ascensus through Secure Choice. Entering the Secure Choice business is certainly an entrepreneurial endeavor for Ascensus who is taking the risk that it will eventually be profitable. That said, Ascensus has had its fair share of setbacks between private equity firms exchanging ownership stakes, a botched IPO plan and a recent acquisition binge.
6. Is the employer sensitive about sharing private data with a provider they have not vetted themselves?
Employee data such as Social Security Numbers (SSNs), e-mail and mailing addresses and other personal information as well as the employer’s Tax ID number and bank information must be shared with the program administrator, Ascensus. By all accounts, Ascensus has the requisite cyber security bonafides, but what if there is a breach?
7. Is the Employer technology-challenged/overwhelmed?
The employers’ responsibilities under Secure Choice require the employer (or its designee) to regularly add/update employee records, remit payroll deductions and other tasks by logging into an online employer portal and coordinating with their payroll vendor. As mentioned previously, there is no automated payroll integration with Ascensus, currently. This may be too much for some employers to bear where 401(k) plan administration can be handled by full-service providers (some high touch/low tech or vice versa) and payroll integration is widely available.
8. Where a flat % payroll deduction can be problematic.
When an employee’s payroll deduction is percentage-based it often results in unintended fluctuations in take home pay. This is especially true for many hourly and variable compensation (such as commision-based) employees who would prefer a dollar-based election like $20 per week. The current Secure Choice programs allow only a percentage based election. 401(k) plans will often allow more flexibility that allows payroll deductions to be dollar-based, percentage-based or both.
9. Can the employer afford to pay?
Even if they can afford a little bit there are many low cost 401k options available and some are zero cost to the employer. Also, with the federal start-up 401k plan tax credits this can make it even more palatable.
10. Is the employer comfortable being a fiduciary?
The sponsor of a 401(k) plan always has some fiduciary responsibility (for the DOL’s expectations for plan fiduciaries see here). An employer can enlist co-fiduciary professional specialists to handle administration such as a 3(16) fiduciary and/or an investment professional (such as an advisor) to act as a 3(21) or 3(38) fiduciary to minimize their fiduciary obligations.
Which Employers Should Consider Secure Choice over 401(k) and other plans?
Many Secure Choice programs are offering employee materials and support in a variety of languages that typically aren’t available with other retirement plan options at a comparable cost.
If an employer mishandled a prior ERISA plan such as a SEP-IRA, 401k plan or even a non-retirement benefit plan, they may be prohibited from sponsoring another ERISA plan by the IRS, DOL or other authority. Similarly, maybe they ran afoul of rules and voluntarily terminated a plan but will be under tighter regulator scrutiny should they sponsor another plan or should just completely avoid this responsibility entirely. In these cases, Secure Choice with its non-ERISA status (at least how the States interpret ERISA) would be preferable.
Limiting and eliminating fiduciary liability is a real concern for many employers. 401(k)s and other plans have ways to limit this liability, but Secure Choice programs were deliberately designed to be exempt from ERISA fiduciary obligations by the states that created them.
Ways to help Employers
Help them weigh the costs. Even though there is no fee for Employers, they incur costs for handling payroll and employee data through Secure Choice. There is no payroll integration automation currently. For example:
Also, they should consider these potential costs:
If the Employer already has an eligible retirement plan:
If the Employer is already subject to the mandate (i.e their deadline has passed), ask if they are participating
– If they are, inquire how it is going and f they are having trouble with it
– If not, inform them of the requirement and potential fines. Help them with their options.
If the employer has their Deadline coming up:
Opportunities to help Employees impacted by Secure Choice
Employees have limited investment options in the Secure Choice Roth IRA programs and no advice or management of their accounts is available either. Investment professionals can offer a lot of help to employees who need guidance. Also, some employees may be better served with a Roth IRA through another provider, a Traditional IRA or other individual accounts because of their specific situations or income considerations.
Many Americans tend to think that a 401(k) plan is an auxiliary benefit, much like taking vitamins to stay healthy, but when it comes to actual “serious” benefits it’s lower on the list of absolute necessity. This might be attributed to the converging views of cost versus value—and if you add in the ingredient of complexity and time along with that overall cost the value decreases even more. That same group of Americans may hear the noise of other investment opportunities that provide for far better returns. The perspective could also come from dissenting voices within the retirement industry itself after having been “behind enemy lines” and seen the amount of waste, cost, complexity, inefficiency, and nay we say it, greed.
Regardless, the stigma of superfluous or unnecessary exists and is very much attached to what would appear to be the primary retirement vehicle in the United States today. How did we get here? The “Father of the 401(k) Plan,” Ted Benna, has long been outspoken about what has happened to the 401(k) plan since its emergence in the 80s. He said: “I’ve been quoted saying I would wipe out the whole thing. Really, what I was referring to was the investment structure, not the 401(k) entirely. I’ve documented the history of these and how participants have been impacted, and it’s not a pretty picture. It went from all fees being paid by the employer to everything getting bundled and dumped on employees.” Essentially, the investment options have gone out of control with way too many choices for the sake of diversification, and then the costs have been historically shifted from employer-paid to employee-paid.
The primary goal of a 401(k) plan is to save for retirement (whatever that may look like differs by individual but the purpose is the same), and instead of that plan and path being straightforward and clear, it has been riddled with obstacles, exceptions, and distractions. Obstacles such as cost and lack of technology create roadblocks, as well as other “more important” benefits taking the focus away from a business keeping retirement and a 401(k) plan on the essential benefit list. However, even when you get past those things, you then face the biggest hurdle, the amount of time. Those gearing up to start on such a metaphorical and also literal journey may not realize how much they will need to pack for the trip. Like the traveling King Arthur in Monty Python and the Holy Grail in search of a crew and crusade, never realized that he’s been the butt of the joke to the viewers, the employer taking steps to sponsor a 401(k) plan may indeed feel the inadequacy of navigating that quest. Imagine if the journey was in a straight line with plenty of signs and alerts along the way, no detours or “side quests,” how much more appealing would the 401(k) plan be? This is where technology comes in and this is where things change. Technology will be the savior of the 401(k) plan, and the results will be quite evident.
Technology changes an industry, and in a very real way normalizes simplicity. When have you ever heard someone say, “You know, I used this tool to make things harder and more complex?” Never. Unless of course it’s for a workout, then it would still be providing for desired results from the user (better physical shape). Technology is the “king of the hill” in every fight for the top. It just may take a little longer for it to make it up there for some of these battles. The change that technology provides takes longer because of a couple reasons: fear of change and cost. The “If I pay that much doesn’t that mean it’s better quality?” or “I’ve done it this way a 1,000 times, why would I change it?” questions also pop up.
There are many examples of how technology has upended an industry and created an uncomfortable disturbance, but in most cases it is for the benefit of the consumer and longevity of that industry.
Let’s take, for example, buying a car. How has that industry changed? There are so many different services and apps available to us to buy a car. You can see all of the options clearly and do side-by-side comparisons, as well as pull up reviews and comments from the millions of others doing the same thing. You can order a car and have it delivered to you! No more of the sitting at a dealership with the back-and-forth negotiation on price and options. Technology has made it simple so you can see what you’re getting and knowing what it costs. Transparency and efficiency.
That same principle should be applied to a 401(k) plan.
The amount of time that goes into the creation of a 401(k) plan can be sluggish and somewhat archaic if you compare it to any other industry in which they’ve accepted the transition to new technology. Checklists and manual reviews of forms and documents to determine what a company wants for a 401(k) plan just shows how far we’ve strayed from the Ted Benna vision. How much paperwork do you have to go through before the plan has officially started?
It’s imperative that you incorporate automation to the retirement industry and more specifically 401(k) plans. If this is going to be prevalent, affordable—which it should be—it is only through technological advances and methods to get there.
Let’s automate the plan design options for immediate setup of the 401(k) plan. Let’s automate the enrollment process so the manual hours used to set it up and sit down and go back and forth is eliminated. Let’s automate the nondiscrimination testing, the annual notices, and lastly the tax filing. Automation is the time saver and in the end the equalizer for pricing and accessibility.
With automation in place it leaves much more time for the important elements that shouldn’t be snuffed out. Connecting with people and reinforcing the importance of saving and setting goals. Let the other “complicated” stuff turn and move like the cogs in a watch. Keep the time, serve its purpose, but not be a distracting contraption strapped to your wrist.
It is said that the multiple employer plan (MEP) was created to help small businesses. This type of arrangement is designed so you can group many employers under one 401(k) plan managed by experts. This would hopefully take the burden off the small business with fiduciary responsibilities assisted and costs being aggregated in one place.
There is a closed MEP and an open MEP (which will eventually change January 1, 2021).
The closed MEP can be sponsored by many types of organizations, more specifically associations, professional employer organizations (PEOs), chambers of commerce, and other type of employer groups. In other words there has to be a level of commonality connecting these type of employers under a closed MEP. The purpose of an MEP is to provide a one-size fits all solution for those businesses joining it. Not to mention the single Form 5500 filing.
One simplifying example of an MEP is buying products in bulk. You buy multiple items to get a discounted price. That discounted price should then carry into the overall cost. Therefore, an MEP should have better investment options, lower cost, and overall level of services rendered. At least, that is how they are advertised and promoted.
An open MEP does not have the commonality component to join employers together. There is still a plan document for each employer, and separate tax filings with the Form 5500. The idea is to have enough employers grouped together to demand pricing (see bulk buying example above) that is lower and additional have better access to high quality investments.
The next option, which is a version of an open MEP, is an Exchange Plan. Typically you have a third-party administrator that manages the Exchange for the administration and tax filing purposes, but all the employers are separate other than assets grouped together on one record-keeper. These are simply the precursor to a pooled employer plan.
These types of plans do, however, give a false sense of separation for the employer to the MEP in regard to fiduciary responsibility and costs—I would even say investments as well. All of the service providers in place come with a certain cost to managing the MEP, and it should be examined how these type of setups can ostracize businesses of a certain size. Furthermore, if the goal is to display the 401(k) as a benefit that should be simple and available to all, it’s not doing a good job of that in terms of leveraging technology over bulk pricing.
Think of it this way, if you can produce something without having to expend a lot of manual labor and the process is automated, it will be more affordable without the need to buy bulk. Another good example of this comes from the automobile industry again. The technology behind the assembly line and the ability to more easily make the automobile is what led to affordability.
So, what changes have happened in the retirement industry to allow for technology to dramatically reduce cost and raise saving potential?
The last couple decades we have seen an increase in contribution limits, auto-enrollment, and more recently with the SECURE Act the re-birth of what will be lovingly referred to as the “PEP” or Pooled Employer Plan.
The PEP is not new, but will certainly be in a new “form,” effective January 1, 2021 and will give opportunities for anyone to sponsor an MEP. No more commonality requirement, increased size for the MEP without a required audit (if none of the employers are over 120 participants), and a benefit group that can be established by financial organizations and business groups instead of just the expected PEOs, chambers of commerce, associations, and other employer groups.
These changes, however, do not again resolve the massive gap of Americans not saving for retirement or having a saving mindset at all. More than anything it does create a clamor of 401(k) industry professionals looking forward to how they can focus and bolster their own business by accommodating a new version of an MEP.
The traditional or legacy 401(k) providers would offer a multiple employer plan (MEP) or pooled employer plan (PEP) to solve the problem of affordable options for the small businesses, even though they know that that offering is certainly not on par for cost and efficiency.
Why buy in bulk for services that in comparison are going to cost your business less if you buy direct?
In most cases, the MEP option can be overkill for a small business. Overkill on price, overkill on services, and overkill on what is needed. So, the original statement about an MEP being made for the small business isn’t exactly true if you look at the prior examples of what technology does. Is it what a small business needs? In my opinion, no. The technology is out there to produce a competitively priced and meaningful 401(k) plan without the buying in bulk option.
Keep in mind, it will be the same organizations of service providers looking for the opportunity to promote an MEP that have been doing it for years. The PEP will be a new face and may help close the retirement gap by a very small percentage.
Now there have been a roll out over the years of Fintech companies offering “simplified” solutions for the 401(k), each having a different approach whether on pricing or what their technology can do. Make no mistake, these companies are trailblazers. They have made the path much easier to travel, but we are still left with a real dilemma on market saturation. There are still millions of Americans not saving for retirement and businesses not making the step to sponsor a 401(k) plan.
The old verses new tug-of-war is happening. Those most to benefit in this exchange, however, is the small business. The new Fintech wave of 401(k) providers is gathering to come crashing down (in a good way) on the small business, and the small business doesn’t even realize it. Also, it may seem odd as previously the small business was the least pursued by industry providers for the less than blatant reason of expense and time it takes to manage these smaller-sized plans and the ultimate payout for them.
But what if you could have a 401(k) group, a syndication, that allows all business sizes in with pricing and options that larger organizations command? A 401(k) Syndicate is a group of employers (mostly small businesses) that create a 401(k) plan on a Fintech solution, such as the platform 401GO offers. This platform is the perfect stage for every type of organization, including the financial advisors, PEOs, chambers of commerce, associations, medical groups, manufacturing groups, CPAs, payroll companies, etc.
The 401(k) Syndicate is a simplified version of the MEP. Think, MEP Lite. For example, imagine an association having a 401(k) offering, branded with their group, an automated structure in regard to administration, testing, notices, and annual filing, and the association holds no fiduciary burden nor a required expertise to offer such benefit. The automation makes plan setup fast, administration simple, integration with the flip of a switch, and most importantly, costs so low that the old or legacy service providers can’t fathom how something like that can be offered and remain in business.
This is what technology does. It simplifies, and it makes any industry adjust the baseline costs of an offering. Everyone can be ready for retirement; everyone can have access to a 401(k) plan. Instead of sponsoring an MEP or PEP as is predictably advertised, organizations should think about creating a 401(k) Syndicate. There now becomes the freedom of choice instead of the lack thereof.
A financial advisor can establish his or her own 3(38) investment lineup and provide their own models for a guided portfolio Robo-Advisor for their very own co-branded 401(k) Syndicate, and feel comfortable knowing these things are in place for businesses of all sizes to join.
The other more miraculous feature of a 401(k) Syndicate is that it can be set up in hours and not months. Also, there isn’t the locked-in mechanism that is so discretely masked with sponsoring an MEP. Furthermore, it can be a game changer for groups looking to provide a 401(k) benefit to member businesses—especially the small business!
In addition to the speed and efficiency of setting up this type of plan group is the transparent pricing. For 401GO the employer fees of $9 per participating employee a month (PEPM) are affordable for even the smallest business. Why charge a setup fee or a document fee when automation handles it? The manual steps, the data input, the process has all been simplified. As it should be! From the plan setup to the annual administration, the funnel into a 401(k) Syndicate is consistent and co-branded for the employer to have the look and feel of an MEP, but not all the extra expense.
Ultimately, there is no “release date” for a 401(k) Syndicate because it’s available now. No waiting until a legislative session. The technology is currently in place at 401GO, and more importantly will only make things easier, more affordable, and commonplace for a small business to have a 401(k) plan.
Come join us at 401GO to spread the vision of everyone ready for retirement, and 401(k) plans being simple and affordable for all.
A “401(k)” generally has a stigma of being too expensive and too time-consuming for small businesses in particular. The reality is that it doesn’t have to be. It can be simplified and it can be affordable. It’s that perspective that we hope to change at 401GO. Simple and affordable 401(k) plans shouldn’t be out of reach or a byword for complicated.
If a company hasn’t thought about sponsoring a 401(k) plan or some retirement plan for its employees, we would encourage a switch in thought. Saving for retirement and preparing for the future may seem a distant goal, but it would be even farther out of reach if there is no plan in place. The first step is to decide to have a 401(k) plan. I would suggest that this is something that is included in your discussion of other benefits, and not tossed in at the last second as an “add-on” for employees. Look at it as a crucial benefit that you wouldn’t want your employees to go without.
Why? Because it is every bit as important as any other benefits offered.
401(k) plans can be simplified and made easy through technology and automation. We cut out the difficult portion through the plan design offering to make it easy and understandable. Now, if you can simplify a 401(k) plan, what do you do about cost?
Well, the reality is that if you have 10 employees or less, you can essentially sponsor a 401(k) plan for free. Free? Yes, free! “Free.99.”
Here is how it works:
Win. Win. Win.
For more information on the free 401(k) plan, please reach out to firstname.lastname@example.org. We’ll help answer any questions you may have.
© 2020 401GO, Inc