A 401(k) Is More Than a Benefit: What Business Owners Need to Understand Now

For many business owners, a 401(k) plan sits in the category of things they know they should probably consider but expect to be expensive, complicated, and administratively burdensome.

That perception may be keeping businesses from taking advantage of a tool that can support recruiting, retention, tax planning, and the long-term financial health of both employees and owners.

In this episode of Ask the CFO, I spoke with Stan Francom of Human Interestabout how the retirement plan landscape is changing, what business owners should understand before selecting a provider, and why a 401(k) may be more accessible than many owners assume.

The 401(k) conversation has changed

There was a time when offering a 401(k) helped a company distinguish itself from other employers. Today, it is increasingly becoming something job candidates expect.

Stan described a retirement plan as the second most sought-after employee benefit. In a competitive hiring environment, not offering one may cause prospective employees to question whether a company is prepared to support them over the long term.

This is especially important for privately held and family-owned businesses. An owner may say, “Our employees have been here for years. We don’t lose many people.” That may be true, but retention is only part of the issue. Recruiting the next employee can be much harder than retaining the current one, and some qualified candidates may never seriously consider an offer that does not include retirement benefits.

A 401(k) also sends a broader message. It tells employees that the company is thinking beyond this week’s payroll and this year’s results. It demonstrates a willingness to help people build financial stability over time.

The cost may not be what you expect

One of the biggest barriers is the assumption that offering a 401(k) will be prohibitively expensive.

Before dismissing the idea, business owners should understand the tax credits that may be available for starting a qualifying plan. Depending on the company’s size, eligibility, plan structure, and contributions, federal credits may offset a meaningful portion of startup and employer contribution costs.

For eligible businesses with 50 or fewer employees, the credit for qualifying employer contributions can be as much as $1,000 per eligible employee during the plan’s early years, with the applicable percentage gradually declining over five years. Separate credits may also be available for eligible startup expenses and adding automatic enrollment. The rules and limitations matter, so this is a conversation to have with your tax and retirement plan advisors rather than relying on a general estimate. The IRS provides an overview of the available retirement plan startup credits.

The larger point is that a business owner should not evaluate a retirement plan based only on its quoted administrative fee or the amount of a potential match. You need to look at the complete financial picture:

• What tax credits could the business qualify for?

• Are employer contributions deductible?

• How could the plan benefit the owner?

• What value could it provide in recruiting and retention?

• How much internal administrative time would the plan require?

• What risks and responsibilities would remain with the company?

When those questions are considered together, the economics can look very different.

A 401(k) can also be valuable to the owner

Business owners sometimes view a retirement plan primarily as an employee expense. That is only half of the equation.

A properly designed plan may allow owners and highly compensated employees to save substantially for retirement while receiving the same tax-advantaged framework available to the rest of the organization. Depending on the plan and the individual’s circumstances, contributions may be made on a traditional pre-tax basis, as Roth contributions, or through a combination of the two.

The distinction matters.

Traditional contributions can reduce taxable income today, with taxes generally due when funds are withdrawn. Roth contributions are made with after-tax dollars, but qualifying distributions may be tax-free. Neither is automatically better for every person. The right balance depends on current income, anticipated retirement income, tax expectations, and the rest of the individual’s financial plan.

Doug Doering, who joined our live discussion, made an important observation: many people approaching retirement see the balance in their 401(k), but they have not fully considered the taxes they may owe when withdrawing it.

That is why employee education should go beyond telling people how to enroll. Participants need enough information to understand the choices in front of them and to know when they should seek individualized financial or tax advice.

Safe Harbor plans can solve a real business problem

We also spent time discussing Safe Harbor 401(k) plans.

Traditional 401(k) plans generally must undergo annual nondiscrimination testing intended to ensure the plan does not disproportionately benefit owners and highly compensated employees. When participation among other employees is too low, highly compensated employees may be limited in how much they can contribute or may receive a corrective distribution.

Anyone who has had a contribution returned after the end of the year knows how frustrating that can be.

A properly structured Safe Harbor plan can satisfy certain testing requirements automatically. In exchange, the employer agrees to make qualifying contributions under one of the permitted formulas.

The options discussed during the session included:

• A 3% nonelective contribution for eligible employees, whether or not they contribute themselves

• A qualifying matching formula that can produce a maximum employer match of 4%

• A Qualified Automatic Contribution Arrangement, commonly called a QACA, with a qualifying match that may include a vesting schedule

Safe Harbor plans are not necessarily the right answer for every company, but they can provide more predictability and make it easier for owners and highly compensated employees to maximize their contributions. The IRS explains that qualifying Safe Harbor plans can avoid certain annual testing requirements.

Plan design matters. The matching formula, eligibility rules, vesting schedule, automatic enrollment provisions, and employee demographics should all be considered before making a decision.

Administration is where businesses often get into trouble

The investment options in a retirement plan receive a lot of attention, but many of the most common problems occur on the administrative side.

When payroll is maintained in one system and the 401(k) is administered in another, someone inside the company may be responsible for moving information between them. That creates opportunities for contribution changes to be missed, employees to be enrolled late, funds to be transmitted incorrectly, or required notices and filings to fall through the cracks.

Stan explained that Human Interest integrates with hundreds of payroll providers, allowing many of those processes to be automated. Eligibility tracking, enrollment, employee contribution changes, and payroll deductions can move between systems without requiring someone to re-enter the information manually.

Automation does not eliminate the employer’s responsibility to oversee its plan, but it can reduce routine work and the risk of avoidable mistakes.

That is particularly valuable for smaller businesses. A company with five or ten employees may not have a benefits department or a retirement plan specialist on staff. The person responsible for the plan may also be managing payroll, human resources, accounting, and several other functions.

If a provider can remove a substantial portion of that administrative burden, it changes the practicality of offering a plan.

Do you know who holds the fiduciary responsibility?

This was one of the most important parts of our conversation.

Business owners often assume their financial advisor, recordkeeper, or retirement plan provider is accepting fiduciary responsibility for the plan. That is not always the case.

A company can work with a well-known provider and still retain more responsibility and liability than the owner realizes.

Stan explained two roles that business owners should understand:

• A 3(16) fiduciary handles specified administrative and compliance responsibilities. Depending on the agreement, this can include required notices, distributions, loans, annual filings, and other plan administration.

• A 3(38) investment fiduciary accepts responsibility for selecting, monitoring, and replacing the investment options available through the plan.

A provider’s services can vary significantly, so the important question is not simply, “Do we have someone helping with the plan?” The better questions are:

• Which responsibilities has the provider contractually accepted?

• Which decisions remain with the business owner or plan sponsor?

• Who is responsible for monitoring investments?

• Who prepares and files the Form 5500?

• Who handles required participant notices?

• Who approves and processes loans, withdrawals, and distributions?

• What documentation demonstrates that these responsibilities are being fulfilled?

Do not assume. Ask, and then confirm that the answers match the service agreement.

Employee participation requires more than access

Offering a 401(k) does not automatically mean employees will use it effectively.

People may hesitate because they do not understand the investments, are worried about reducing their take-home pay, or simply never complete the enrollment process. If participation depends on employees receiving a long packet of information and figuring everything out alone, many will do nothing.

That is why automatic enrollment, automatic escalation, education, and ease of use matter.

Stan described a process that combines employee education meetings with a simplified online enrollment experience. Employees can see how a chosen contribution percentage affects each paycheck, receive general guidance through an investment advisory tool, and complete enrollment without navigating a stack of forms.

For years, I was somewhat uncomfortable with automatic enrollment because it felt too paternalistic. I have changed my view. Inertia is powerful. If the default is to do nothing, many employees will save nothing. If the default is to begin saving while retaining the ability to change the amount or opt out, more people at least get started.

The goal is not to make financial decisions for employees. It is to remove unnecessary obstacles and help them understand the long-term consequences of the choices they are making.

What business owners should ask next

A 401(k) will not be the right answer for every company, and the same plan design will not work for every workforce. But “it is probably too expensive” or “it sounds too complicated” is not enough analysis to make that decision.

If you do not currently offer a retirement plan, start by asking:

1. What would a plan actually cost after available tax credits?

2. What employer contribution options are available?

3. How could the plan benefit both employees and owners?

4. Would a Safe Harbor structure make sense?

5. How much administration could be automated?

6. Which fiduciary responsibilities would the provider accept?

7. What education and support would employees receive?

8. How well would the plan integrate with your existing payroll system?

If you already have a 401(k), review it with the same level of care you would give any other important financial or operational system. Look at participation rates, fees, investment options, employee support, payroll integration, service responsiveness, and fiduciary coverage.

The fact that a plan has been in place for years does not necessarily mean it is still the right plan for the business.

A retirement plan should not simply exist. It should work—for the employees, for the owner, and for the company responsible for administering it.

Watch the complete conversation on YouTube, or listen to and follow Ask the CFO on Spotify or Apple Podcasts.

Ask the CFO will continue as an interactive live discussion where participants can ask questions and contribute their own experience. We are also expanding the series into a podcast so you can watch or listen on your own schedule. New conversations will be published as they are released, and older episodes will be added over time.

Visit www.impactcfo.net/ask to learn more and see upcoming sessions.

This article is for general educational purposes and does not constitute tax, legal, investment, or retirement plan advice. Plan rules, contribution limits, and tax incentives can change. Consult qualified advisors regarding your specific circumstances.