401(k) plans shouldn’t intimidate small businesses

BY Joel Johnson

Joel Johnson
As most are aware, Fortune 500 companies and other larger businesses tend to offer 401(k) retirement plans, or something similar, to their employees.

They recognize it as a valuable tool to invest in and retain the best possible talent in the workforce and usually have the means to afford such an investment.

But what about small businesses, many of which don't understand the complexity and liability of offering such plans to their employees? Is a 401(k) retirement plan something that should be offered?

In the Hartford marketplace, where employers often find it difficult to keep workers from relocating to other, more vibrant areas, the answer is a resounding "yes." In fact it's an understatement to call it simply a good idea. It is practically a must.

A 401(k) is a plan that allows employees to save pre-taxable money through payroll deduction, to ultimately be used for their retirement. Employees receive a tax break to make such a contribution today, and the money grows tax-deferred until it is withdrawn, particularly for retirement.

One hidden advantage of a 401(k) plan is that by having it come directly out of the employee's paycheck, it is a regular, automatic occurrence. That is significant — when it's done for the employee on an automatic basis (much like taxes taken from a paycheck or healthcare benefits), they don't ever really feel a strain.

Mechanically, a 401(k) can have up to three basic components — what the employee puts in, some level of match from the employer, and a discretionary profit-sharing contribution that the employer can decide on each year (extra money over and above the match). The latter two are optional.

But from professional services industries to more "grey-collar" jobs in manufacturing and machinery to sales to technology-based companies, 401(k) plans or similar employer-offered retirement plans are very important. Why? Three reasons:

1. It helps to attract the best employees.

2. It helps to retain the best employees.

3. It is simply the right thing to do, giving employees the opportunity to save for retirement one day.

So if it's such a no-brainer, why are so many small employers still hesitant to offer 401(k) plans? The simple answer is lack of appropriate information about what offering these plans actually entails, and some of the misconceptions that have grown up around them over the years.

One of the most common misconceptions is employers have to match contributions made by employees on a regular basis to their retirement accounts. While employers certainly can offer some level of matching funds, they by no means have to do it. They could institute a 401(k) plan just to allow employees to save their own money on a tax-advantage basis.

Adding to the benefits of a 401(k) plan is they are relatively simple to set up and administer; for smaller businesses most 401(k) providers also have internal administrators, so employers only have to deal with one person. There is a cost associated with having that outside administrator establish the plan, but that is a manageable challenge.

As with many offerings that are familiar to large businesses but foreign to smaller ones, the key is not to be intimidated by the idea of offering employees 401(k) retirement plans. The truth is there is nothing difficult about it.

Not only do such plans come with built-in advice and resources on how to manage them, but having them as part of a benefits portfolio will go a long way towards not just recruiting the best workers, but retaining them for the long term.

Joel Johnson is the managing partner at Wethersfield-based Johnson Brunetti, a retirement-planning firm.