Stumbling Blocks for 401(k) Startups

Art by Miriam Martincic

There is no shortage of relatively cheap, easy-to-implement options for small employers to offer retirement plans to employees. Options range from Savings Incentive Match Plan for Employees IRAs for businesses with 100 or fewer employees to digital 401(k) plans with all types of customization and pooled employer plans that leverage scale.

In addition, the SECURE 2.0 Act of 2022 has improved incentives for starting a retirement plan, offering businesses with 50 employees or fewer a credit of up to 100% of plan expenses, not exceeding $5,000 annually, as well as an employer match credit of up to $1,000 per employee per year. That all comes before mentioning states that mandate and offer plans, which, although mostly new, are starting to take hold.

These options and nudges show industry leaders trying to move a needle that, according to Fidelity Investments’ latest research, shows that only 34% of small businesses currently offer a workplace savings plan.

“We’re not lacking options. In my opinion, I don’t think we need more options,” says Chantel Sheaks, vice president of retirement policy at the business advocacy group U.S. Chamber of Commerce. “But then the question is: Why aren’t employers [implementing] saving on their own?”Researchers and industry participants often cite similar stumbling blocks for businesses looking to start up retirement plans: costs the businesses feel are better put elsewhere; limited administrative resources; lack of awareness; and lack of employee interest.

Sheak, whose position at the Chamber of Commerce gives her a national view of the market, notes that many small businesses in the country are simply not focused on adding a retirement plan because they are trying to get their business off the ground.

“If I’m just now starting a business, when a lot of small businesses are going out of business between one and three years, [a retirement plan] is a big commitment to your employees, on top of running a business,” Sheaks notes.

Intimidation Factor

Many business owners may want to offer a plan, but feel they are too small and that the benefit is beyond their capabilities, says Eric Droblyen, president and CEO of Employee Fiduciary.

“One thing that we’ve found is that a lot of people are intimidated and think it will take a lot more time [to start up a plan] than it will,” he says. “That’s a bigger obstacle to adopting a plan than things like pricing.”

Droblyen, who writes for business owners on his “The Frugal Fiduciary Small Business 401(k) Blog,” encourages breaking down a startup plan into discrete tasks so “it’s not this nebulous blob of responsibility.”

While tax incentives and state mandates are intended to drive plan creation, they can also create further complexity and intimidation, Droblyen says. To try and simplify things, he created a tax credit calculator that incorporates the SECURE 2.0 startup incentives, auto-enrollment paybacks and employer contribution tax credits, based on business size.

“A lot of people don’t know about these incentives,” Droblyen says. “But when you see the math, you can see that they are pretty generous.”

Even with strong incentives, Sheaks says, many businesses find they need to focus their capital on the basics, like business operations and paying their employees. Furthermore, there is often a mismatch between what small business employees want and what their employers think they want.

“Some of the research shows that employees do want retirement plans, but if I [as an employer] have to go down my hierarchy, probably which ones I’m going to do first, it probably would be a health plan,” she says. “I think it’s once the employer gets established, then you start seeing them really starting to look at what could a solution be for retirement plans.”

From Health to Wealth

Sandy Kenslow, a vice president and director of small group benefits at digital insurer Mylo, sees small businesses looking to offer health benefits to employees on a daily basis. Very often, she says, they come to her for health benefits, but as that conversation progresses, they ask about the possibility of adding a 401(k)—if tentatively.

“These are clients that are turning to us typically the first time out of the gate because they need business insurance and liability or cybersecurity [insurance],” Kenslow says. “As they get more employees, they need benefits, and typically after they get a benefits program going from a health insurance perspective, then we’ll start getting questions about whether we do 401(k)s.”

Kenslow says many small businesses are not aware of the development and possibilities for workplace plans. They rarely know the tax incentives on offer or the reality of state mandates that require they offer plans.

“We are always trying to connect our small businesses with resources, because they really don’t have any, and they can’t afford to pay for an entire HR department,” she says.

For many years, Mylo would pass on 401(k) startup referrals to providers such as digital 401(k) company Ubiquity Retirement + Savings. Eventually, the firm decided to formalize the relationship with Ubiquity, and now they are the preferred small plan provider for businesses with which Mylo works.

With that relationship, Kenslow says, her team can turn employers over to small plan experts to explain the space, offer flat-fee plan subscriptions and customize plans, depending on the need. The motivation for Mylo to provide these services beyond its own core business, she says, is so the firm can be there when small plans grow and increase services, as well as scale.

Initially, however, one key way to get a business owner interested in a workplace retirement plan is to engage them in discussion of their own retirement savings, according to adviser Droblyen.

“In the small plan market, the business owner is also probably going to be the biggest beneficiary of the plan,” he notes. “They are going to have the largest account balance and may benefit the most from a high quality plan.”

Droblyen says that when he can explain the “win-win” for a business owner, both for themand for their employees, a signing may soon follow.

“We try to take a consultative approach without overwhelming someone,” he says. “Business owners have lots of options. We try to do a really good job of making those options known in a way that isn’t overly complex or scary.”