Why SMBs should strongly consider offering 401(k) plans

The pandemic and resulting “Great Resignation” has prompted more small and medium-sized businesses to begin offering their employees retirement plans, according to Guideline’s report, “The State of Retirement Planning for Small Businesses.”

Kevin Busque, CEO of the Austin, Texas firm, shares why SMBs should strongly consider implementing workplace 401(k) plans, which might be more meaningful in the increasingly competitive “War for Talent” than “cool” perks such as daily pints of ice cream, massages and yoga.

Katie Kuehner-Hebert: How have the past few years prompted more SMBs to offer workplace retirement plans?

Kevin Busque: Our report reveals the resilience of our small business clients and the financial savvy of their employees. Despite the obstacles brought on for many businesses in the last two years, SMBs are searching for new ways to grow and support their employees in the current economic conditions.

Many of our new clients are businesses offering 401(k) plans to their employees for the very first time. In fact, 96 percent of all signed plans in 2021 were new, first-time plans, while the same was true for 89 percent in 2019. This continued growth in benefits adoption for small businesses will help them become more resilient and give them a competitive edge in the war for talent.

Our data on participant contribution behaviors shows the fears that plagued retirement savings during the 2008 recession haven’t manifested in any major hesitation to save during the pandemic. The average employee participation rate has increased to 82 percent while the average contribution amount has consistently risen since 2019, indicating a push for long-term stability despite the unpredictable nature of the last two years.

The younger generations in particular have made up for lost time during the pandemic, indicating more financial savvy than their reputations give them credit for. Gen Z is increasing at the steadiest rate of all generations: their average monthly 401(k) contribution was $346 in 2021, up from $230 in 2019. Millennials – despite their haunted financial past – are closer to Gen X and baby boomers than you’d expect, contributing a monthly average of $725 to their 401(k) plans just behind baby boomers’ $872.

What is your advice for HR leaders of SMBs who are considering offering retirement benefits to their workers?

Job candidates and employees now have more leverage when negotiating their salary and benefits. It’s imperative that employers are offering meaningful benefits like retirement planning alongside health insurance and PTO in order to remain competitive in their hunt for talent.

Businesses struggling in the chaotic hiring market are likely finding that the people they aim to hire or retain are prioritizing benefits that offer stability rather than the “cool” factor of years past. The data shows that if given the opportunity to use these benefits, employees are not only responding with high participation rates, they are also increasing the amount they contribute to their 401(k) plans.

My second piece of advice for HR teams would be to offer 401(k) plans that don’t pass on expenses like AUM fees to employees. These fees, usually a small percentage of the account balance, can seem trivial, but over the long haul they really add up.

A 1.63 percent AUM fee, which is the industry average for small 401(k) plans, can end up costing participants hundreds of thousands of dollars over the span of a career, adding financial strain that you don’t want for your employees.

According to your earlier research, 90 percent of small businesses still don’t offer their employees a 401(k) plan. Why is this so?

Small businesses have historically been at a disadvantage when it comes to offering their employees a retirement plan. Legacy 401(k) providers avoid small businesses because they’re too difficult to turn a profit on, either refusing to take on new clients under a certain size or charging them prohibitively high fees.

According to our research from 2016, of the 5.8 million small businesses in the US, 90 percent of those businesses don’t offer their employees a 401(k). Of the 42 million people who work at those small businesses, 75 percent of them don’t have access to a retirement plan at all.

Our clients are the proof in the demand to close this gap, even in pandemic conditions: New client growth rate for signed plans hit 34 percent in 2020 and 58 percent in 2021. And those businesses’ employees have continued to participate as well, growing their average monthly contribution from $646 in 2019 to $783 in 2021.

What else would you like HR leaders at SMBs to consider?

Encourage your employees to consider participating in their retirement planning as early and aggressively as their budgets and financial situations will allow, and as is appropriate for their age and expected time to retirement. When it comes to a 401(k), time to retirement might allow one to downplay the sensational predictions in the news and the gamification of day trading in order to focus on the long-term. If you stay the course and maintain a diverse portfolio, you can help to equalize your risk over time. Any market downturn is painful, but if you look at our country’s GDP growth, the expansions are much bigger and more common than the recessions.

The information above is provided for educational purposes only and should not be construed as personal investment advice or a guarantee of performance. All investments involve risk and your investments could lose value. You are advised to consult a qualified financial adviser or tax professional before relying on the information provided herein.