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By Andrew Hinchliff

Topics: Employee Benefits

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When it comes to offering pension plans and retirement savings for your employees through their benefits, the 401(k) plan is a popular choice for small business owners.

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However, many small business owners hesitate to offer a retirement program for a variety of reasons. Here are some of the most common challenges employers face when they want to offer 401(k)s to their employees.


1. Matching Is a Good Idea, but It Seems Costly

The major reason most employers feel they can’t offer a 401(k) plan to their employees is that they believe they need to offer contributions to the program. This isn’t true. You don’t need to offer a matching program, although it’s a good idea.

The major challenge of offering contribution matching is cost. Many employers believe they need to offer 100 percent matching. This isn’t true either. You can offer much lower matching. Depending on the structure of your plan, you can offer matching at much lower percentages.


2. The Plans Are More Costly Overall

As a small employer, you realize you can’t access the same economies of scale that large employers can. Employers with more than 500 employees often see cost savings because of the sheer number of accounts they bring with them.

This is another cost barrier to offering a 401(k) plan for most small employers. There are, of course, low-cost 401(k) plans. As noted, certain structures allow you to offer lower contribution matching, and your contributions can make the plan more tax efficient.

This still doesn’t get around the fact that plans offered by small employers can be more expensive. Be sure to shop around and see what options are available to you.


3. Plans Can Be Quite Complex and Difficult to Administer

Another very common challenge for small employers is that many of the plan options available on the market are complex. Certain types of plans require you to use particular formulas and offer less flexibility. Those with more flexibility often have more complex terms and structures.

Since 401(k) plans are federally regulated, they must also comply with certain rules. This can make administering the plan riskier in terms of compliance and more time consuming. Safe harbor plans are often favored by small employers since they mitigate the risks of retroactive contributions or fund top-ups. These plans are also more restrictive, however, so they may not be your best option.

There are other choices, but they don’t come with the same protections or guarantees. Ensuring you’ve picked the right plan for your needs can be quite challenging.


4. Employees May Not Understand the Plan

One of the largest challenges to offering benefits to employees, a 401(k) plan or otherwise, is the fact that your employees may not understand the plan and how it works. Employee education is an absolute must.

Employee education can help you overcome resistance to using the plan as well. Many of your employees may feel they can’t contribute to the plan, even though they may agree saving for retirement is important.

Work with your employees to ensure they understand what they’re being offered and how to use the plan effectively. Offering a 401(k) plan is a great idea, and these challenges are all conquerable. In fact, your payroll provider may be able to help you create and administer your new retirement program with ease.


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Andrew Hinchliff

With over 30 years of experience, Paymedia’s Chief Operating Officer Andrew Hinchliff is a seasoned global business leader and results-driven human capital and workforce strategist who is well-versed in human capital management, workforce management, payroll outsourcing, and benefits administration. He’s passionate about strategy and innovation and is regularly sought out for assignments that create disruptions to current business models and practices. Andrew is actively involved in coaching youth football and is an avid golfer. His strong beliefs in philanthropy have him “giving back” by volunteering for a host of charitable foundations and community-based events.

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