As CEO of a small tech startup, Tyler King looked around and saw many of his employees were — or already had — started families, and that many hires were young, recent college grads.
The exact type of people who should be saving for their future and retirement, King thought.
"As a small, growing business, setting up a 401(k) was a worthwhile and affordable investment," said King, CEO of software firm Less Annoying CRM. "It was important to us that our company could offer our employees the option and flexibility to save for retirement outside of their own IRAs, and even if someone doesn't use the 401(k), it's nice knowing that it's still an option for them."
Although the most recent numbers from the U.S. Government Accountability Office show just 14% of small businesses offer 401(k) plans to employees, small business owners, as well as benefits experts, say such plans are getting easier and easier to offer, while also becoming more important in the competitive recruitment landscape.
"While small business owners generally consider healthcare to be a top priority for their benefits package, we're now seeing a trend in the small business market where workplace retirement is evolving from a perk to a staple," said Chris Jasinski, who manages new business development for Ubiquity Retirement + Savings, a benefits provider that works with more than 7,500 small businesses nationwide. "This shift will likely accelerate now that a number of state legislatures are considering — and implementing — retirement plan mandates for small businesses."
Jasinski said it's a common misconception to hear it's too difficult for many small businesses to offer a 401(k).
"While it used to be the case that a 401(k) plan was too expensive and complicated for a small business, technology and fee transparency has allowed the 401k to become a more realistic benefit and employee retention tool for businesses of all sizes," Jasinski added.
Legislative changes over the last decade, forcing plan vendors to become much more transparent with fee reporting has helped make 401k plans available to small businesses, said Wayne Bland, a retirement plan consultant with Metro Retirement Plan Advisors in Charlotte, N.C.
"It has become much easier for small businesses to sponsor and administer quality 401(k) plans," Bland said. "The deluge in recent lawsuits continues to put pressure on the industry to lower fees, offer better investment choices and eliminate conflicts of interest. We are now in a more participant friendly environment that offers more low cost, high quality turnkey automated and custom retirement plan options."
"These changes make it easier for even the smallest businesses to offer plans that rival even their biggest competitors," he added.
While some things — like technology — have made it easier and cheaper for small businesses to sponsor 401(k) plans, there still are some legal and logistical barriers that make hosting 401k plans a tricky proposition for many business owners, said Evan Powers, a senior financial planner at MyFinancialAnswers.com.
"Notably, the IRS has a number of non-discrimination tests that are designed to ensure that retirement plans aren't set up to disproportionately benefit highly-compensated employees at the expense of the rank-and-file," Powers said. "Meeting these tests can sometimes be onerous, and while a 'safe harbor' option does exist that can exempt small businesses from the testing, the safe harbor plans can often be expensive for employers to sponsor."
Powers said for business owners, it isn't just the direct plan-related fees that need to be considered, and for some a 401(k) plan might be a poor option. However, another option like a simple IRA might better suit their needs, he added.
Nevertheless, Warren Cohn just started offering 401(k) plans through online human resources service Gusto to a small number of employees at his small digital marketing and public relations firm Herald Strategies.
"Being able to offer these plans to our staff without the insane plans that we would get elsewhere is nice to know and allowing us to offer 401k and other benefits even as a small business," Cohn said. "I believe that it will be a good recruiting tool moving forward and I also believe that it's a good tool for keeping people in place.
"In the past there weren't tools available to small businesses and I had to recommend that employees set up IRAs for themselves like I did," he added.