Small Business Plan Design in Practice

401(k) startup tax incentives from SECURE 2.0 and state mandates have prognosticators forecasting robust plan growth in coming years. But what kind of retirement plan design will most benefit these starts ups?

In a post by Employee Fiduciary LLC, which offers 401(k) plans for small businesses, CEO and President Eric Droblyen lays out six key features that small businesses should consider: participant eligibility, compensation, contributions, vesting, distributions and loans. How the plan sponsor addresses these plan elements could be the difference in “thousands of dollars in plan expenses,” Droblyen notes.

The objectives a small business has for setting up a 401(k) should always be the key driver of a plan design approach, says Andy Bush, partner and financial adviser with Horizon Financial group.

If a plan sponsor is small and looking for a tax shelter for savings, that will influence the setup toward being more basic. If the plan is a talent attraction and retention play, they’ll want to add more options and lean into an employer match.

“They need to first communicate what the objective is,” he says. “Then an adviser can decide from there what type of plan design to consider.”

Bush, whose practice advises in areas including health care, engineering and law firms, says the type of participant pool matters as well for design. The employer match, for instance, can be a major incentive for most plans, but the amount and style of match may vary depending on the workforce.

“They know their people,” Bush says. “They know who is going to participate and how to incentivize them to do so.”

Efficiency, Simplicity

Bush notes that, generally, small businesses are often focused on being “as efficient as possible,” so plan designs may veer toward the simplistic at least to start.

“The mega companies are usually more paternalistic than the smaller companies,” he says. The small business owner that “took a lot of risk to start the company wants to be rewarded for that; as they grow, they may become more culturally paternalistic.”

Chris Horne, vice president of customer success and operations at Human Interest, says the plan provider learned from working on small plan setup to focus on one key word: “simplicity.”

One result of that focus is its Fast Track 401(k), a retirement plan setup the firm rolled out in September of 2023 and that Horne says is designed to be “radically simple and efficient.”

“Plan sponsors are asking for simplicity,” he says. “They’re wondering what the minimum they need to know is to start a plan. We ask them if they want a match—yes or no—and give three types of safe harbor options at 4%, 5%, or 6% …. we’ve taken the analysis paralysis out of it.”

Horne, who came to Human Interest from the legacy recordkeeping space, compares the 15-minute process with Fast Track 401(k) to the other model of having a 2-hour plan design call, after which businesses “forget 90%” of what is said.

Today, he says, a “significant” number of customers go through Fast Track 401(k). Meanwhile, the call center—which Horne oversees—gets relatively few calls for questions compared to the legacy workflow, he says.

“In the grand scheme of things, support calls are fairly rare,” he says. When Fast Track 401(k) plan administrators do call for support, Human Interest prioritizes quick response so busy administrators and business owners who “wear many different hats,” can get the support they need immediately, Horne says.

Fee Focus

Droblyen of Employee Fiduciary says his firm does plan design studies for clients on request for a fee—most commonly when they are considering a profit-sharing plan, as employer contribution expenses can vary widely depending on the plan design. 

Meanwhile, an employer might adjust the plan in other ways to keep fees low while meeting business needs, with methods such as:

• Choosing a 3% nonelective contribution if a “plan has high employee participation or a new comparability profit sharing contribution will be used to maximize owner contributions”;
• Choosing a 4% safe harbor or 3.5% qualified automatic contribution arrangement match if a plan has low employee participation;
• Using a “stretch formula” requiring employees to defer at a high rate to earn the full company match, which can also help a non-safe harbor 401(k) pass discrimination testing; and
• Raising the involuntary rollover limit to the legal maximum to keep participant headcount to a minimum.

Bush of Horizon Financial says that, in the end, the goal is for businesses to provide retirement plans that work for them and their employees—with the best results coming to those who treat their employees as best as they can.

“Ultimately we want people to embrace putting a plan together,” Bush says. “We’ve seen from observation that people that treat their employees well tend to thrive. It’s not just a retirement plan, but about embracing your people and getting them excited to be there.”