Retirement plans are the most coveted employee benefit besides healthcare. In fact, 81% of employers believe that retirement benefits make up a major portion of the job search process. For employees, offering some type of retirement plans signify trust, engagement, and long-term relationships. The average American wants to retire at 65. However, 63% of people have contributed nothing toward saving for retirement.
With 51% of employers using benefits as a retention tool, retirement plans stand out as a competitive advantage. Businesses that offer competitive retirement benefits stand to capture higher-quality employees during the recruitment process and lose fewer talented individuals to the siren calls of their competitors. As the business ecosystem braces itself for post-crisis employment in a hyper-competitive talent landscape, retirement can be the stalwart that keeps your employees happy, healthy, and engaged.
We all want to retire. It's a fundamental component of the American work culture. Here are 4 things you need to know about all types of retirement plans in 2020.
In 2019, 83% of HR professionals admitted that they were having difficulty finding suitable candidates over the past 12 months. Despite unemployment woes and economic uncertainty, a recent poll in The Economist suggests that four-fifths of CEOs are still worried about securing the right talent — an increase of 50% since 2012.
Despite the pandemic, talent continues to be a serious issue. Of course, the current environment may be the perfect time to land hyper-skilled talent in the open marketplace, but only if you can grab their attention. There's nothing that grabs attention quite like benefits. Over half of workers research a company's benefits packages before replying to a job posting. Those employees are looking keenly at your healthcare benefits and value-added benefits, and they're also paying special attention to retirement. In fact, a recent Accenture report shows that 68% of workers believe that retirement plans are a "critical deciding factor" in whether or not they accept a job.
However, retirement benefits don't just help you lure in high-value talent; they help you keep them around. Companies rated highly on benefits see 56% lower attrition than average. Despite the myths, most employees don't leave for better compensation. In fact, while 89% of employers believe that employees leave for better pay, a mere 12% actually do. But they do leave for benefits. Over 50% of employees have left their jobs simply to secure better benefits. For those that stay loyal, 78% say it's solely because of the benefits their employer offers.
It makes sense, as 72% of employees believe that great work benefits increase their job satisfaction. Some companies try to keep employees interested with ancillary benefits (e.g., wellness, tuition, etc.) or fun perks (e.g., free coffee, bean bags, etc.), but (while those are great!) they simply don't have the stopping power of retirement plans. Research shows that retirement plans are the third greatest driver of employee satisfaction, directly below health coverage and paid overtime.
Setting up a retirement plan isn't necessarily a cost-sink. Outside the benefits (both liquid and intangible) that come from offering amazing benefits to your employees, retirement plans are also eligible for special tax breaks. For small businesses, these tax breaks can be significant. The SECURE Act created Form 8881 "Credit for Small Employer Pension Plan Startup Costs," which allows small businesses to get credited half of the startup costs of initiating a new retirement plan. Any contributions you make to retirement plans are also tax-deductible. There may also be unique tax incentives based on your business situation to consider as well.
These tax breaks can save you $5,000 on your overall startup costs and further money on contributions, which can help offset some of the financial friction that goes into offering new benefits.
Here's a secret: your employees may make more money via their retirement plans than bumps in their actual compensation. To understand just how valuable retirement benefits are, let's do some math.
The average income in the United States is $56,516. Let's say that your business matches up to 4% of their salary put into retirement. So, this employee puts in 4% of their salary or ~$2,260 annually. You would put in another $2,260 (which is tax-deductible). Let's say that this employee is young and wants to retire in 45 years. With an average annual compound interest rate of 7%, that employee would have $1,289,300 in their retirement account by 65. To get there, the employee would only need to put in $101,700 throughout the course of their career. To be fair, that employee would likely receive pay bumps along the way, which would feed more into retirement. Even if we keep this simple, your employee earns over $1 million over those 45 years. That's over $20,000 per year!
There's a reason that benefits are valued over salary by 75% of workers. Benefits pay dividends over the years, and we’re not just talking retirement plans. The average cost of healthcare for a self-paying individual is $456 per month (or over $5,000 per year). Most employees understand the value of benefits, and there's a good chance they're scouring over your compensation on job listings but spending hours pouring over the details of your benefits.
There are a variety of retirement plans that small-to-medium-sized businesses can offer their employees. These include:
These are for extremely small businesses. You don't have to file any government paperwork (though you miss out on some of the tax breaks), and you contribute to employee plans across the board. This isn't a matching strategy. Employees can also save in their own IRA, but it's separate from their SEP-IRA that you contribute to.
This is the "silver standard" retirement plan for small businesses. You can match up to 3% of employee salary (which motivates employees to invest themselves). One advantage of the SIMPLE 401k is that — unlike the IRA — employees can take loans out against their contributions.
You can also set up a defined benefits plan (i.e., pensions). These are the single most popular choice for employees since you bear the bulk of the risk. You're responsible for contributing to the plan, managing the plan, and handling the finer details of the plan. The payoff, of course, is that you can tier the plan to how long employees have been at the company. Ninety-three percent of workers say that pension plans keep with the same company for long careers (89% of them plan to stay until retirement), and 94% of employees with pensions say that pension attracted them to their job.
A variety of Safe Harbor and Non-Safe Harbor plans exist to provide options for retirement savings. For example, Non-Safe Harbor plans require no company contribution and allow employees to participate at their discretion, subject to annual discrimination testing. In Safe Harbor Plans, the employer provides a percentage of funds, for example 3%, to all employees, regardless of whether or not they participate directly themselves. There is also a Safe Harbor Plan where employers match a percentage of funds, however only employees that participate, or make deferrals, get the company matching funds. There is no annual discrimination testing with Safe Harbor Plans.
There are other plans (e.g., Solo 401k, etc.) that you can offer. The type of retirement plan you put together depends on your size, needs, and cost appetite. For employees, these employer-sponsored retirement plans help them generate more retirement capital as well as understand their retirement needs. Of employers that offer these plans, 57% also offer retirement advice.
At the same time, employers gain generous tax breaks (including contributions towards their own retirement plans that are sponsored under the same umbrella). It's a win-win for both parties in almost every situation.
Benefits are the bread-and-butter of the modern recruitment process. As businesses (especially small businesses) continue to feel the pressures of the ongoing talent drought, benefits are a knight in shining armor. They keep your employees happy, engaged, and satisfied. They also prevent your competitors from swallowing the best and brightest talent in your market. Are you ready to create a best-in-class retirement plan that takes advantage of tax breaks, generates prospect interest, and keeps your employees around for a lifetime? Consider partnering with a PEO to help maximize your benefits potential.