Quick look: 401(k)s are the most popular retirement plans in the U.S., and while their benefits for employees are well known, these plans can also give back to SMBs in various ways. Here, dive into the many potential benefits of 401(k) plans for SMB employers, including improved employee retention rates, more successful recruiting, and decreased tax liability.
When people think of a retirement savings plan, many think of a 401(k). And that makes sense, as 401(k) plans are the most common employer-sponsored defined contribution (DC) plan in the U.S.
401(k)s, which will have an increased maximum contribution limit of $22,500 in 2023, help employees prepare for a comfortable retirement and grow their nest egg faster than if they were to put away funds in a traditional savings account. In fact, according to the Investment Company Institute, most people who own DC accounts believe that they help them “think about the long term, not just my current needs” and that “payroll deduction makes it easier for me to save.” And unlike Roth IRAs, workers can make pre-tax contributions to 401(k)s and lower their taxable income each year.
Who has a 401(k)?
According to the Investment Company Institute source referenced above, at the end of 2021, $11.0 trillion was held in U.S. DC plans, comprising 28% of the nation’s total $39.3 trillion retirement assets. 70% of the funds in DC plans, or $7.7 trillion, were held in 401(k) accounts, amounting to 20% of all U.S. retirement assets.
Additionally, approximately 80% of those with 401(k) plans receive contributions from their employers, and households from all income levels own DC accounts. Specifically, 46% had incomes between $25,000 and $99,999, 51% reported incomes of $100,000 or more, and 3% earned less than $25,000.
What are the benefits of 401(k) plans for employers?
While the perks of 401(k)s for workers are vast, offering a plan to employees also benefits small- and medium-sized business (SMB) employers in the following ways.
1. Boost employee retention
A recent study has confirmed that 401(k) plans are powerful retention tools for SMB employers.
Further, the report found that providing a retirement plan can help SMBs save more than $100,000 in turnover costs each year, a 2x return on the initial cost of offering a 401(k). This makes sense when you consider that recruiting and onboarding a replacement employee costs about $4,000 per hire.
Companies should note that if they don’t include a 401(k) plan in their benefit offerings, many employees will switch to organizations that do. For example, research firm Accenture found that 68% of workers consider their retirement plan to be a critical factor in deciding whether to accept or decline a job offer, and 62% report that these savings plans are a major consideration in remaining with an organization.
2. Recruit talent (especially younger workers)
As the competition for top talent remains high, 401(k) plans can serve as a helpful recruiting tool for SMBs competing with larger organizations. Transamerica Institute’s 22nd annual retirement survey found that 80% of businesses believe offering a retirement savings plan is essential to their recruiting strategies, and another report found that just 13% of workers would accept a job offer with no employer match of their 401(k).
And while they may be further from retirement than their older colleagues, younger employees care about preparing for their golden years and want to receive retirement advice and use savings tools from various sources. In fact, over one-third of 401(k) plan participants are younger than 40, according to the Investment Company Institute.
Charles Schwab explored this trend in a recent report titled, “2022 401(k) Participant Study – Gen Z/Millennial Focus.” The study explores how different generations are preparing for their retirement, with an emphasis on younger workers.
Key findings from the research show that millennials and Gen Z are:
- Very likely to follow human professional financial recommendations: 60% of Gen Z and 62% of millennials are very likely to adhere to advice from professional advisors. These figures are comparable with Gen X (60%) and much higher than baby boomers (39%). Interestingly, younger employees report being more open to working with a financial professional to develop a financial plan and confirm they are on track with their retirement planning.
- Open to receiving computer-generated financial advice: 42% of Gen Z and 40% of millennials are very likely to consider this, compared to just 31% of Gen X and 11% of baby boomers. Similarly, the report found that these generations are more open to online tools to help save for retirement, build an emergency savings fund, and manage debt.
- The most interested in calculating how much money to save for retirement. Their other top interests include receiving help with 401(k) investments, estimating their retirement age, and expense management.
- Confident in their ability to save. 93% of millennials and 94% of Gen Z feel very or somewhat likely to achieve their retirement goals. That’s not to say they aren’t aware of investment risk—their top retirement obstacles include inflation, monthly and unexpected expenses, stock market instability, and children’s education costs.
3. Unlock tax advantages
Another major benefit of SMBs offering employees a 401(k) plan is the potential for tax savings.
The SECURE Act, which was signed into law in December 2019, is designed to make it easier for SMBs to provide less expensive and easy-to-manage “safe harbor” retirement plans to their workers. One way the Act does this is by increasing the business tax credits available to businesses setting up 401(k) plans for the first time.
Before the Act was established, the business tax credit for the first three years of an employee 401(k) plan equaled 50% of qualified startup costs (not exceeding $500). This number has since increased tenfold for SMBs employing between one and 100 workers.
The SECURE Act also states that businesses that match 401(k) contributions for employees may qualify these as tax-deductible business expenses, further reducing their tax liability.
- Enhanced tax credits for SMBs setting up retirement savings for employees (credits could increase to 100% of qualified costs for SMBs with up to 50 employees instead of the current 50%, and the maximum credit potential could jump from $500 to $5,000)
- The opportunity for companies to match contributions to employee retirement savings accounts based on their workers’ student loan payments
- An increase in catch-up contributions for older workers
- Qualification of part-time workers for employer retirement plans
Making the most of your benefits package
401(k) plans have many benefits for employees and employers alike. But that doesn’t mean selecting, administering, and managing these plans is simple. Today’s tight labor market, economic uncertainty, and company culture challenges have stretched many business leaders thin.
Luckily, a professional employer organization (PEO), like ExtensisHR, can help. ExtensisHR’s dedicated employee benefits experts are seasoned in benefits administration and management. And to help SMBs attract and retain employees of all ages, ExtensisHR provides a comprehensive portfolio of multigenerational benefits, including:
- 401(k) retirement plans and financial planning services
- Medical, dental, and vision health insurance with telehealth coverage
- Supplemental insurance (e.g., accident insurance, critical illness insurance, and hospital indemnity insurance)
- Family-building support
- Pet insurance
- And more
The right benefits provide perks to both workers and their employers. Contact the experts at ExtensisHR today to discover how we can help you improve your business and your employees’ livelihoods.