SECURE 2.0’s 401(k) startup tax incentives and state mandates have forecasters predicting strong growth for the plan in the coming years. But what type of retirement plan design will benefit these startups the most?
in a post by Employee Fiduciary LLC, which offers 401(k) plans for small businesses, CEO and President Eric Droblyen lays out six key characteristics that small businesses should consider: participant eligibility, compensation, contributions, vesting, distributions, and loans. How the plan sponsor addresses these plan elements could make the difference in “thousands of dollars in plan expenses,” Droblyen notes.
A small business’s goals for establishing a 401(k) should always be the key factor in the plan’s design approach, says Andy Bush, partner and financial advisor at Horizon Financial Group.
If a plan sponsor is small and looking for a tax shelter for their savings, that will influence the setup to be more basic. If the plan is a talent attraction and retention strategy, they will want to add more options and lean toward a mix of employers.
“First they must communicate what the objective is,” he says. “Then an advisor can decide from there what type of plan design to consider.”
Bush, whose practice advises in areas including healthcare, engineering and law firms, says the type of participant group is also important to the design. The employer match, for example, can be an important incentive for most plans, but the amount and style of the match can vary by 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, in general, small businesses tend to focus on being “as efficient as possible,” so plan designs can veer toward the simplistic, at least at first.
“Mega companies tend to be more paternalistic than smaller ones,” he says. The small business owner who “risked a lot to start the business wants to be rewarded for it; As they grow older, they may become more culturally paternalistic.”
Chris Horne, vice president of operations and customer success at Human Interest, says the plan provider learned in working on setting up small plans to focus on one key word: “simplicity.”
One result of that approach is its Fast Track 401(k), a retirement plan the company launched in September 2023 that Horne said is designed to be “radically simple and efficient.”
“Plan sponsors are asking for simplicity,” he says. “They wonder what is the minimum they need to know to start a plan. We ask them if they want a match (yes or no) and give them three types of safe harbor options: 4%, 5% or 6%…. “We have removed the paralysis of analysis.”
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 the Companies “forget 90%” of what is said.
Today, he says, a “significant” number of clients go through Fast Track 401(k). Meanwhile, the call center, which Horne oversees, receives relatively few calls with questions compared to the traditional workflow, she says.
“In general, tech support calls are pretty rare,” he says. When Fast Track 401(k) plan administrators ask for help, Human Interest prioritizes quick response so that busy administrators and business owners who “wear many different hats” can get the support they need right away, Horne says.
Rate focus
Employee Fiduciary’s Droblyen says his firm conducts plan design studies for clients who request them for a fee, most commonly when they are considering a profit-sharing plan, since employer contribution expenses can vary widely depending on the design of the plan.
Meanwhile, an employer could adjust the plan in other ways to keep rates low while still meeting business needs, with methods such as:
- Choose a 3% non-elective contribution if a “plan has high employee participation or a new comparative profit-sharing contribution will be used to maximize owner contributions”;
- Choose a 4% protection agreement or a 3.5% qualified automatic contribution agreement if a plan has low employee participation;
- Using a “stretch formula” that requires employees to defer at a high rate to earn the full company match, which can also help an unsecured 401(k) pass discrimination tests; and
- Raise the involuntary rollover limit to the legal maximum to keep the number of participants to a minimum.
Horizon Financial’s Bush says that in the end, the goal is for companies to provide retirement plans that work for them and their employees, and for the best results to come to those who treat their employees the best they can.
“Ultimately, we want people to agree to come up with a plan,” Bush says. “We have seen from observation that people who treat their employees well tend to prosper. “It’s not just about a retirement plan, it’s about welcoming your people and making them excited to be there.”