Starter 401(k): New kid on the retirement block to help small businesses

There’s no question about the importance of retirement savings–it’s the actual saving part that’s hard for most people. More than half (56%) of Americans in the workforce today think they’re behind with retirement savings.

We often hear to “skip our morning coffees” and deposit the money into retirement, among other savings tips, but there’s little talk about employers’ role in retirement savings.

Employer-sponsored retirement plans play a critical role in ensuring that people are saving for their future. For many employees, the availability of a retirement plan is the push they need to start saving because it’s accessible and becomes pretty autonomous after the initial sign-up. The added bonus, in many cases, of employer contributions helps to accelerate employees’ saving ability even further.

And now, because nearly every employer (96%) feels responsible for the financial wellness of their employees, many companies are introducing new plans and expanding benefit options to encourage even more savings.

Despite this growing investment in financial wellness, there are still a substantial amount of companies that don’t offer 401(k) plans. But, for many, it’s not because they don’t want to–it’s because they can’t.

Or, they think that they can’t.

The current state of 401(k) plans for employers

There are a few reasons why some companies don’t offer 401(k) plans–the most common being cost. There are many fees and expenses required to administer these plans, including those associated with compliance testing, which many companies can simply not afford.

Beyond the fees there’s the administrative work that goes into 401(k) plans: managing deductions and employer contributions and staying compliant with ever-evolving regulations, in addition to other time-intensive tasks. This requires the hiring of team members dedicated specifically to employee benefits, which companies may not have the capacity or budget to hire.

These extra costs and resources disproportionately affect smaller companies on their 401(k) journey, but can impact a company of any size.

It’s understandable that under these conditions, companies would think there’s no way they could offer 401(k) plans unless they significantly increase their budget or team. But, they shouldn’t count themselves–or their employees–out.

Here are three ways companies can introduce 401(k) plans to their organization right now, in a way that’s accessible to them:

#1: Offer a Starter 401(k)

The new kid on the retirement block, Starter 401(k) plans began in 2024, as a provision in the new SECURE 2.0 regulation, to give those employers not already offering a retirement plan an alternative option. It’s essentially a simplified version of the traditional 401(k) plan that’s more accessible to employers who may not be able to afford paying for the full administration of a 401(k).

These plans are appealing to employers for a few reasons:

• Lower cost: Employers can administer Starter 401(k) plans at a much lower cost because they do not require IRS testing, like the traditional 401(k). This means the fees to administer the plan are much lower.
• Less admin work: Employees are auto-enrolled for contributions of at least 3% of their salaries and employers cannot contribute to plans, so participation is not as administrative heavy for employers or employees. Employees have the option to opt out should they choose to.
• Empowering employees’ savings: While employers are not allowed to contribute dollars to employees’ retirement, employees have the ability to contribute up to $6,000 per year, tax-free.

While still new, Starter 401(k)s are democratizing retirement for those companies that have not yet been able to provide retirement to their employees.

#2: Automate the 401(k) process

Employers will spend hours and hours administering 401(k) plans, between managing employee deductions, employer contributions, adhering to regulations and testing season and making any updates that employees need in real-time. And most employers are doing this on spreadsheets and with manual documents. This is why companies need to hire a team dedicated to retirement and other benefits–it’s not a simple task that another employee can just pick up.

Automating this process through technology removes the administrative burden on employers and makes traditional 401(k) plans more accessible, especially to smaller companies. They can introduce a 401(k) plan comparable to the scale of large enterprise organizations–but without the extensive resources. And they can launch their plans pretty quickly, with technology that automatically connects them to all the data they need at their fingertips.

#3: Enlist help and do your research

 If offering a 401(k) plan is important to you and your business, don’t stray away from doing so because of the initial shock of cost and resources. There are options for all companies to offer 401(k) plans to employees right now–and these plans are only becoming more accessible.

Related: SECURE 2.0 could help small businesses, but many are still unaware of the incentives

Shop the market, enlist the help of a financial advisor and decide if there’s a plan design that best suits your business and employees. There is no shortage of options from venture-backed 401(k)s targeting the startup market to institutional name brands who can help shepherd your employees into their retirement.

The barrier to 401(k)s is slowly lowering, enabling companies of all kinds to offer employees the ability to save towards their future. We’ll continue to see new options emerge to make retirement plans accessible to all.

Doug Sabella is CEO of Payroll Integrations.