SECURE 2.0 401(k) Startups With tax incentives and state mandates, forecasters are predicting robust growth for plans in the coming years, but what type of retirement plan design will best benefit these startups?
In a post from Employee Fiduciary LLC, which offers 401(k) plans for small businesses, CEO and president Eric Droblyen outlines six key features that small businesses should consider: participant eligibility, compensation, contributions, vesting, distributions and loans. How a plan sponsor addresses these plan elements can mean the difference in “thousands of dollars in plan costs,” Droblyen noted.
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Andy Bush, partner and financial advisor at Horizon Financial Group, says a small business's objectives for setting up a 401(k) should always be the primary driver of the plan design approach.
If the plan sponsor is small and looking for a tax-efficient way to accumulate savings, the setup tends to be more basic. If the plan is aimed at attracting and retaining talent, the sponsor will want to add more options and rely on employer contributions.
“You have to communicate your goals first,” he says, “and then your advisor can decide what type of plan design you should consider.”
Bush, who advises in sectors including healthcare, engineering and law, said the type of participant pool also matters in the design: Employer contributions can be a big incentive for most plans, for example, but contribution amounts and styles can vary by employee.
“They know their people,” Bush said, “who's going to show up and how to get them to show up.”
Efficiency, simplicity
Bush noted that small businesses are typically focused on being “as efficient as possible,” which could lead to simpler plan designs, at least initially.
“Large companies are usually more paternalistic than small businesses,” he says. “Small business owners take big risks to start their companies and want something in return. As the company grows, it may become culturally more paternalistic.”
Chris Horn, vice president of customer success and operations at Human Interest, said that as plan providers work to set up smaller plans, they've learned to focus on one keyword: simplicity.
One result of that focus is the company's “fast-track 401(k)” retirement plan, which it introduced in September 2023 and which Horn said is designed to be “radically simple and efficient.”
“Plan sponsors want simplicity,” he says. “They wonder what the minimum they need to know to start a plan. We ask them if they want matching (yes, no) and give them three safe harbor options: 4%, 5% or 6%. We've eliminated analysis paralysis.”
Horn, who comes to Human Interest from the traditional record-keeping field, compares the Fast Track 401(k)'s 15-minute process to other models in which companies “forget 90 percent of what was said” after a two-hour plan-design call.
Currently, he said, a “significant number” of clients are taking advantage of the fast-track 401(k), while the call center he oversees is seeing relatively few calls with questions compared to the traditional workflow.
“Overall, support calls are pretty infrequent,” he says.When Fast Track 401(k) plan administrators reach out for help, Human Interest prioritizes a quick response, ensuring busy administrators and business owners who “wear a lot of different hats” get the help they need right away, Horn says.
Price Focus
Employee Fiduciary's Droblyen says his firm does plan design studies for a fee at the request of clients, most commonly when a client is considering a profit-sharing plan, because employer contribution costs vary widely depending on the plan design.
However, employers can also tailor their plans to keep fees low while still meeting their business needs in these ways:
- Choose the 3% non-elective contribution if “your plan has a high employee participation rate or you want to maximize owner contributions using the new comparative profit sharing contributions.”
- If your plan has low employee participation, choose the 4% safe harbor or 3.5% qualified automatic contribution contract match.
- Employing a “stretch method” that requires employees to take a high percentage of their company contributions tax-deferred can help non-safe harbor 401(k)s pass the discrimination test.
- Increase the mandatory rollover limit to the statutory maximum to minimize the number of participants.
Horizon Financial's Bush said that ultimately, the goal is for companies to offer retirement plans that work for them and their employees, and that companies that take the best care of their employees will fare best.
“Ultimately, we want our employees to be open to making a plan,” Bush says. “From our observations, we've found that people who take care of their employees tend to be more successful. This isn't just about a retirement plan, it's about embracing your employees and making sure they're excited about working for your company.”
