Every Wednesday, the nVest Advisors blog is devoted to helping your small business succeed and grow. Whether you are a sole proprietor, LLC or partnership, a family company, or a multi-site corporation with 500 employees, and whether you’re making cakes, building the latest in tech, or drilling for oil, helping your business reach its organizational and financial goals is a large part of what we do here at nVest. With over 25 years of small business experience (including being a small business ourselves), we know firsthand how hard you work and how much is at stake for you and your team, and the families who depend on your success. We’re excited to come along side your business and be the financial and, benefits and investment partner you can trust and rely on.
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Your employees want and need a retirement plan: here’s how
Earlier this year, 401k company Sharebuilder401k, conducted a survey of 500 small businesses across the United States, to ask about the current benefits offered to employees.
The results were surprising: a whopping 74% of all small businesses still did not offer any sort of retirement plan to their employees. This puts a small company at a significant disadvantage when trying to recruit and retain talented employees and managers, as benefits packages are heavily preferred by employees and a significant majority of job offers are accepted based on benefits in addition to salary.
The primary reasons small business owners gave for not providing a workplace retirement plan were:
- 58% didn’t think their company was big enough to sponsor one.
- 32% said they didn’t believe the company could afford to match employee contributions.
- 24% believed a workplace retirement plan was too expensive to set up and manage.
Yet when asked, only 16% of employers believe their employees are on any kind of realistic path to retirement.
The significant disconnect between the need for a plan, and the lack of one for most employees in the small business space, is a challenge each of us as small business owners must face and overcome. Inaction puts our recruitment and retention efforts at risk, but it also opens the door for additional, often unwanted, government oversight into parts of our business that weren’t there before. For instance, this year, nVest Advisor’s home state of Colorado became the sixteenth state to start a state-mandated IRA plan, forcing employees to contribute to a state-managed IRA account if their employers did not offer a qualifying plan. Those contributions must be deducted from payroll and remitted to the state on the employee’s behalf. So even if you never wanted to deal with payroll deductions and remittances for a retirement plan before, if you’re a company in Colorado or fifteen other states (and counting) you are now required to do so.
That kind of government solution solves a small problem of an employee having a place to save for retirement (if by decree), but it does nothing to solve the greater problem of motivating the employee to plan for their future, help them understand the various risks and benefits of investing, set and work toward secondary goals like college savings and debt management, or manage their emotions during downturns in the investment market. It does not provide them with a sufficient selection of investments to choose from to meet their investment objectives, regular opportunities to learn about personal finance and goals-based investing, or give them the ability or skill to manage those assets as they grow.
If you and your employees could be compelled to contribute to a retirement plan anyway, why not make it a plan that offers genuine benefits and personalized services to assist you and your team along the way?
As small business owners, we already have a lot of work to do each day, and for most of us, managing a company retirement plan is not something we want to add to that list. Thankfully, like many other parts of the financial industry, solutions are becoming far more democratized than in the past. There are now a large number of retirement plan types and service providers (ourselves included) that not only assist but specialize in the small business space, and our goal is to make retirement plans accessible and affordable for even the youngest startup. Modern retirement plans are tech-savvy, inexpensive, loaded with additional services and benefits, and far less expensive than in the past. Depending on the plan types your company qualifies for and plan advisor you work with, you can offer a quality retirement plan to your employees that literally costs you nothing to offer, match or maintain.
And even better for you: plan advisors like nVest also assume a vast majority of the fiduciary responsibilities you have as the plan sponsor. In partnering with a legal plan fiduciary like nVest Advisors, your regulatory and civil risk is vastly diminished. (We will have more to say about plan fiduciary responsibilities in coming articles.)
There is a solution that is right for your business.
This blog post would quickly become a full book if we attempted to give every detail and nuance of retirement plans available to your company, but we can provide some basic information to help you get the discussion started, and we urge you to subscribe to our business-only blog updates, because we will be looking at each of these plans individually in the coming weeks.
But your company doesn’t have to wait for that. If you are ready to either start a new plan, or need to review and revise your current one, we’re very happy to come alongside your company’s leadership team to help parse through the various costs and benefits, legal and operational requirements, help you perform due diligence on available plan custodians, and help you implement and roll out your new retirement plan. And as the plan advisor, we’ll work directly with you and your team to make sure it’s successfully implemented for many years to come.
The biggest thing you need to remember as the plan sponsor is to choose a plan type your company can easily administer, meets the needs of your team (both now and in the next few years), and that the company can afford. Some plan types cost your company literally nothing to offer to your employees, while others have required matches or nonelective employer contributions and some recordkeeping costs (many custodians now supply those services for free if you establish your plan with them). Some plans require additional tax and DOL paperwork each year, others require nothing additional to be produced. Some plans place a greater burden on you as the plan sponsor to be a fiduciary for your employees (which you can pass on to companies like nVest), whereas others have no fiduciary burden at all.
You also need to think about the features and benefits your employees might want. Do they want significant discretion as to how they invest their funds, or should you limit their options to 15 or 20? Should your plan offer them ROTH (after-tax) contributions? What contribution limits do your employees need? Do they need the ability to borrow against their account balances while they work for you, or should they just be forced to take withdrawals (often with additional tax burdens)? Do you want your employees to establish individual relationships with the plan advisor and receive additional financial planning assistance, or do you want the plan to be a basic investment vehicle only?
A key feature of all employer-sponsored retirement plans that you must first keep in mind is, the government wants to make sure they are fairly implemented and that all qualified employees (you can determine to some extent which employees will qualify to participate) must have at least free and fair access to the plan and its benefits and at least an annual opportunity to start participating. Whatever the employer sets up for him or herself needs to be available to qualified employees, which is why choosing the correct plan is crucial.
Let’s give you just a brief glimpse at the most commonly used plan types for different business situations today, and then we’ll go into detail on each one of these in coming articles. And remember, you don’t have to wait to discuss this with us. Feel free to schedule a completely risk-free consultation with us today to get professional help in selecting your plan and its options.
The simplest and least expensive workplace retirement plan
Payroll-Deducted IRA
Far and away the simplest and least expensive way to add a retirement plan to your company’s benefits is to offer a payroll-deducted IRA. In this plan, the employees themselves open up an IRA account (usually all at the same custodian for ease of making their contributions), set up their own investment strategy, and tell you how much from their paychecks they want to contribute. Your only obligation as the employer is to send their contribution to their IRA account directly from payroll.
Payroll-Deducted IRAs are self-directed (at nVest Advisors, we establish an individual relationship with each employee), and the costs of the IRA are deducted from the IRA in most cases. This means the employer has no cost or reporting requirement at all to offer this plan. Employer matches are not allowed.
Just like regular IRAs, contributions are limited to $6,500 per year under age 50, and $7,500 age 50 and older. There are no loan features with this IRA plan, so employees would have to take withdrawals with possible tax consequences.
Plans for one-person and family companies
SEP IRA
Short for Simplified Employee Pension IRA, the SEP IRA is an ideal and very easy plan to implement for single-person business, a married couple working together, a family business, or another small company of very key employees working closely with the company owner.
Employers can contribute anything from 0% in a year to up to 25% of the employee’s pay or $60,000 (whichever is less), but employees themselves cannot make contributions, which is why this is considered a pension fund. The investment selection in a SEP IRA is limited only by what’s available at the custodian where the SEP IRA is held.
There are no reporting requirements and plan costs come directly from the SEP IRA account balances. nVest Advisors manages many SEP IRA plans for small businesses and the custodians we recommend for this plan typically have no additional fees.
Owner-Only (or Solo) 401k
The Owner-Only 401K (sometimes called a “Solo” or “Individual” 401k) is just what it sounds like: a 401k plan designed just for one person (or perhaps a married couple in some instances). This is ideal for a company structure in which the owner is listed as an employee (like an S-corp).
Both employee and company can make contributions, reducing the payroll tax burden on both sides of the equation: employees can contribute up to 100% of their salary or $23,500 in 2023, and employers can contribute a profit share of up to 25% of the employee’s compensation each year. Employees over age 50 can add an additional $6,500 per year in catch-up contributions.
Total yearly contributions from both employer and employee cannot exceed $66,000 (if over age 50, $73,500).
Because there are no other employees, there is no reason for additional paperwork filings with the IRS or DOL to prove the plan was fairly implemented until the plan’s assets reach $250,000 (and then it’s an E-Z form), so this is a very simple and easy plan for a single-person company to provide to its owner and sole employee. The year a solo-401k plan terminates, a one-time Form 5500-EZ is required.
As with the SEP IRA, withdrawals can be taken but tax consequences are similar to IRA withdrawals. Some Owner-Only 401ks offer ROTH contribution options, and a few offer a loan feature similar to a more typical 401k.
SIMPLE IRA
The SIMPLE IRA (short for Savings Incentive Match PLan for Employees IRA) is the first significant step toward a 401k for a small company. Still very easy to start and maintain, the SIMPLE IRA is a definite step up from the Payroll-Deducted IRA while still giving the employees the duty to establish an account and determine their own investing strategy.
The contributions limits for participants are higher than the Payroll-Deducted IRA (up to $13,500 per year), and the employer has the option of two ways to provide the match: either a 1% – 3% of pay elective match based on what the employee contributes (this can fluctuate to some degree each year), or a 2% of pay non-elective contribution for every employee, whether they contribute or not.
The employee manages their own account (at nVest Advisors, we partner with the employee to provide ongoing investment management on their behalf as fiduciaries), and there are no filing requirements for a SIMPLE IRA. There generally are no ROTH contributions available in this plan, and because it’s an employee’s own account, there are no loan features built into these plans.
401k Plans
Now we come to the plans most people are familiar with and many small companies feel they cannot afford or have the personnel to manage: the 401k. Far and away the most common retirement plan in most major companies, the 401k is a useful and powerful recruitment and retention benefit because of its enormous flexibility, breadth of possible features, and as time goes by, easier and less expensive implementation.
The 401k plans of today are not the same things as even 10 years ago. They are far less expensive and easier to start and implement for you, have many features and benefits added to benefit your employees, and can be tailored significantly to meet the needs of your particular team.
All 401k plans have certain things in common: contribution limits, selective criteria to make an employee eligible, loan features, a set selection of investment options (this is one of the services we undertake for you as your 401k plan advisor), reporting and recordkeeping requirements, and more. Nearly all 401ks today allow for both pre-tax and after-tax (ROTH) contributions.
Contribution limits for 401ks in 2023 are $22,500 per year under age 50 with the additional $7,500 catch-up contribution for employees age 50 and over. Most 401k plans allow for pre-tax and after-tax (ROTH) contributions. Because there are strict limits on when withdrawals can be taken while the employee is still at the company, all 401k plans offer loans to participants based on their account balances.
Employer matches are also a feature and can be highly customized, as well as the time it takes for the employee to be vested in those matches. Companies can also add profit-share and other “add on” features to the 401k, as needed. Some features such as age-weighting or cash-purchase strategies can be added if you have an older management team or the managers are compensated significantly higher than the average employee.
But the key to a successful 401k plan is that it is fairly offered to all eligible employees (you aren’t allowed to set up a plan and then only tell certain select employees). You must also be aware that offering a 401k plan places you as the employer in the role of a fiduciary for the assets in that plan. You must make sure the investment options themselves are of sufficient quality and performing at least comparable to their peers, are not too expensive and give the employees sufficient flexibility to meet various investment objectives. You must make sure there are default investments that will perform adequately if the employee doesn’t take control of their own strategy, etc. Every few years, you should assess whether the plan is still competitive and its costs are fair by performing due diligence on your plan and a handful of available replacements.
Ensuring that employee fairness and plan oversight are happening is what the government is looking to verify with annual reports the 401k plan must file, which is why most small companies offering a 401k hire two additional professionals to help them fulfill their fiduciary duties: a plan advisor, and a plan administrator.
Very briefly, a plan administrator takes over the responsibilities of daily recordkeeping, approving and administrating employee loans, payroll contributions, rollovers, and other employee-related tasks that would typically burden a small corporate HR or payroll department. A best practice is to make sure your plan administrator also takes on their duties as a legal fiduciary for the plan (called a Section 3(16) fiduciary), which means they legally assume the responsibility to make sure their part of the plan administration is compliant with applicable law. 3(16) fiduciary administrators also typically complete all of the annual review and government paperwork filing on your behalf. Their cost is typically much less expensive than if the company hired its own employee to perform these tasks.
A plan advisor (this is us) acts as both the company’s representative and fiduciary for many of the decisions most small businesses don’t feel capable of doing, or for legal reasons, don’t want to do. Plan advisors help create the plan itself and make sure the available features and options are correctly added to the plan, recommend (or directly manage on an ongoing basis) the investment options in the plan, perform the due diligence of the plan and custodians on your behalf, and ensure employees get financial and investment training and have a resource to reach out to if they have questions or need help. Participants in plans that we manage, for instance, are offered free or very low-cost personal financial planning, ongoing investment education, and other services like debt optimization, help selecting and monitoring their investment performance, etc.
Plan advisors can assume two different levels of responsibility for your company 401k: they can act largely in a supportive role, providing guidance and options but always leaving the final decisions up to you (this is called a Section 3(21) fiduciary), or they can take an active role in managing those aspects of the plan directly for the benefit of the company and the employees, including locating and hiring a 401k custodian and a 3(16) administrator (this is called a Section 3(38) fiduciary).
nVest Advisors works with company 401ks in either capacity, as a 3(21) plan advisor (basically making recommendations only) or as a 3(38) plan manager (making and implementing the plan as a fiduciary to the company), depending on which role the company prefers. Most plan sponsors hire us as full 3(38) fiduciaries, for obvious reasons.
This all may sound expensive but it’s actually pretty reasonable. Plan Administrators typically charge an annual fee of a few thousand dollars depending on the number of participants, a small cost per employee, or some combination of the two. Plan advisors like nVest Advisors typically assess an annual fee that is a percentage of the total assets in the plan and our level of fiduciary responsibility, and that annualized fee is deducted either monthly or quarterly. (In our case the smallest start-up 401k plans might see an annualized fee of 1.4% per year, and the largest will be something like 0.25% per year. As the plan assets grow, the actual fee percentage we charge drops, as we use what is called a tiered fee schedule). Please ask us for details on these costs in a complimentary Q&A meeting by scheduling it here.
The costs of a 401k plan can be paid for in different ways. Many employers offer the plan and fully pay the plan’s administrative costs out of their own budget, but many others have the plan itself absorb the costs by dividing up the plan fees and having the participants share the costs from their 401k accounts.
One easier option: the SAFE HARBOR 401k
For employers who want to offer a 401k but want to reduce their administrative costs, the SAFE HARBOR 401k is a viable option. Whereas a standard 401k has many ways to implement the features and benefits (and doing so inappropriately may make the plan run afoul of fairness, matching, and other requirements), a SAFE HARBOR 401k is a plan with nearly all of the features pre-set to ensure the fairness and administrative criteria the IRS and DOL are looking for is already built into the plan. This provides some peace of mind for the employer that the plan will remain in compliance automatically, but limits your ability to determine certain criteria (like when an employee is eligible).
For non-profit or governmental organizations
There are different options for non-profit and governmental organizations (such as hospitals and school districts) that nVest Advisors also helps create and manage such as 457, 401(a) and 403(b), but we’ll save those for a later article.
Have additional questions? Want to explore your company’s options, or need to review your current plan?
nVest Advisors stands ready and eager to provide information, resources, and support. We’d also love to give you a competitive bid to become your company’s new plan advisor if you’re ready. But that process takes time to do it right. We need to learn much about your current company, its growth prospects in the coming years, the makeup of your team, the features and benefits the company wants to commit to, and much more.
Something like a SEP IRA or Solo-401k can be established in just two or three meetings, but a full-featured 401k plan implementation (or a competitive replacement of an existing plan) can take six months or more to complete. We’ll do as much of the work for you as we can, but we’ll need several meetings with your key employees before full implementation is successful. We’ll also need at least one annual review meeting with your key employees to continue to refine and review the plan to maximize its impact for your team.
The first step is the easiest but it’s often the one you’ll be most hesitant to do: let’s just talk first. If we’re a good fit for your company’s needs, and our bid is competitive, we can take it from there. If not, you’ll definitely know which direction you want to go after that initial visit.
Feel free to schedule a completely confidential and risk-free Company Plan Initial Audit and Q&Awith us using the calendar below:
