Breaking Down a 401(k) Plan and What You Need to Know

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Here's a riddle: what type of benefit do 81% of employees say makes up the majority of their job search, and 72% of employers consider "essential" for recruiting and retaining top talent? It's not health insurance, and it's not PTO. The answer is a 401(k), and creating an effective, competitive, and sustainable 401(k) program can fuel your employee happiness, productivity, and retention. A 401(k) is a retirement plan that allows employees to pay towards their retirement with tax deference. Better yet, 401(k) plans can provide employer matching, which allows employers to match a percentage (usually up to 1 - 4% of total salary) of the money that employees contribute to their 401(k). 

The value of a 401(k) runs deep. It helps employees save for retirement, generates tax savings for your business, and lures in top talent with promises of stable, future-driven employment goals. These benefits are magnets for business leaders. 

However, small businesses are 11x less likely to offer 401(k) plans than large organizations, leaving a mere 40% of small and mid-market businesses with 401(k) benefits. Small businesses already struggle to secure viable employees in the talent marketplace, and failing to offer critical benefits puts your company at a serious disadvantage that can drain profits, create revenue leakage, and disrupt your acquisition strategies.

Two Ways to Participate

To help demystify the complex ecosystem of 401(k) benefits, let's break down the two primary ways that small businesses can participate in 401(k) plans with their Professional Employer Organization (PEO).

1. Multi-employer Plan or MEP

Unlike single-employer plans (which we'll cover next), multi-employer plans (MEP) are 401(k) plans shared across two (or more) employers. Generally, small businesses utilize MEPs to reduce the administrative burdens associated with establishing 401(k) plans. 

If your business works with a PEO, MEPs allow you to share your PEO's 401(k) plan — which they will also share with other businesses. This means you get access to their benefits master plan negotiated at scale by experts. There are plenty of benefits to leveraging MEPs, including:

  • Economies-of-scale: PEOs can secure a better solution at a lower price. This may unlock new layers of retirement benefits — such as certain fund options like Admiral shares — that may otherwise be unavailable to you.
  • Reduced administrative burdens: Your entire administrative burden will belong to someone else. That means no middle-men (e.g., advisors, TPAs, brokers, etc.) and no costly and time-consuming administrative burdens.
  • Reduced liability: Your PEO will bear the fiduciary responsibility for your plan, which significantly reduces your overall liability.

In addition, there are some secondary and tertiary benefits like eliminated audit costs and better communication that come along with MEPs.

2. Single-employer Plan or SEP

MEPs spread responsibility across a network of businesses. Single-employer plans (SEPs) force you to sponsor the 401(k) plan alone. Your PEO can still help you by handling payroll deductions and tracking taxes. But, you will have more responsibility, more risk, and be forced to handle additional complexities that you wouldn't have to tackle using an MEP.

There is a benefit to SEPs. You handle your entire plan solo. So, you have more control over the specifics and implementation. However, beyond this specific benefit, SEPs are generally more of a headache for small businesses. Recent research shows that 66% of small businesses that don't offer 401(k) plans are considering MEPs.

Types of 401(k) Plans

When you set up an SEP, you will have multiple options at your fingertips. There are a variety of different funds, terms, partners, and other factors that vary between 401(k) plans. We'll quickly cover a few of the most common plans, but this is far from an exhaustive list:

  • Traditional 401(k) Plans: These are the most flexible plans with the highest administrative burdens. There are a variety of tests (e.g., Top-Heavy, ACP, ADP, etc.) and regulatory requirements surrounding traditional 401(k) plans. They're difficult to set up and difficult to maintain.
  • SIMPLE: SIMPLE plans (401k or IRA) offer reduced regulatory needs and a simpler structure than traditional plans at the cost of flexibility and options.
  • Safe Harbor Plans: Traditional 401(k) plans don't have any required contribution matching level. They're highly flexible. Safe Harbor Plans require 3% matching, but they also reduce the need for ACP, ADP, or Top-Heavy compliance tests — which can be incredibly costly to follow.

Again, there are a variety of other plans. Still, most small businesses tend to either draw up complicated traditional 401(k) plans or stick with SIMPLE and Safe Harbor Plans to avoid compliance and administrative burdens.

How Do You Set Up a 401(k)?

It depends. If you don't work with a PEO, setting up a 401(k) can be a complicated headache. You have to research plans, establish procedures, communicate with agents and brokers, create internal administrative guidelines and workflows, and deal with record keeping, testing, compliance, management, and the other critical components of retirement plans.

With a PEO, things are much more straightforward. You pick your plan — usually with guidance and support from your PEO — and then your PEO handles the rest. This includes:

  • Plan administration
  • Investment management
  • Record keeping
  • Reporting
  • Support
  • Fiduciary services
  • Compliance
  • Audits

These are all buckets you would typically have to handle alone, so PEOs significantly reduce your administrative burdens while also offering you access to world-class MEPs.

401(k) Plans Are a Critical Business Tool

Top talent craves retirement benefits. It's a surefire way to express the value, commitment, and longevity of your brand to potential employees. At the same time, 401(k) plans help boost happiness, productivity, and retirement awareness — which can help your employees live smarter and more future-driven lives. Unfortunately, setting up 401(k) plans can be draining. 

The right PEO can reduce your administrative burdens, handle your compliance and payroll needs, and grant you access to economies-of-scale benefits typically reserved for Fortune 500 companies.

To learn more about retirement benefits, visit our blog.

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