Right before the pandemic overtook the world last year, a new law went into effect that greatly enhanced the benefits of 401(k) plans for small businesses.
Called the SECURE (Setting Every Community Up for Retirement Enhancement) Act, the legislation, which passed in 2019 and became law on Jan. 1, 2020, raises the minimum distribution age for retirement accounts to 72 years old, up from 70½. It allowed long-term, part-time workers (those who worked between 500 and 999 hours in each of the past three consecutive years) to participate in a 401(k) defined contribution plan and permitted parents to withdraw up to $5,000 from their retirement accounts penalty-free for adoption, among other provisions.
For small businesses with fewer than 100 employees, the SECURE Act provides up to $5,000 for starting a 401(k) (or similar) defined contribution plan and even gives owners with an existing retirement plan a $500 tax credit if they include an automatic enrollment feature (employees can still opt out). Also, the law makes it easier for small businesses to join multiemployer plans to gain the benefits of lower administrative fees.
Next up is the SECURE Act 2.0 (called the Securing a Strong Retirement Act), an upgrade to the existing bill that’s currently making its way through the House with bipartisan support. The new bill would require employers to automatically enroll employees in their plan (they can still opt out). It provides enhanced tax credits for employees that contribute to a 401(k) plan and offers extra assistance to student loan borrowers. It would also expand existing tax credits and ease administrative requirements for small businesses.
Why the push? Because people aren’t saving enough for retirement.
According to Boston College’s Center for Retirement Research, households approaching retirement had average savings of just $144,000 in 2019, an amount that would give a couple only $570 per month in retirement. The center also found that about half of workers — at any moment in time — participate in a defined benefit plan or a 401(k) plan, a percentage that has remained constant for decades.
“Many Americans are not adequately prepared for retirement,” says Morgan Dumont of Exude, Inc., an employee benefits consulting firm in Philadelphia. “This can lead to stress, absenteeism, and distraction among employees, which in turn affects their job performance. Offering a 401(k) plan provides a convenient and easy way for employees to prepare for retirement by making contributions to the plan through payroll.”
There are other reasons why a 401(k) plan is beneficial for small businesses.
“It is important to have a 401(k) plan because it is a key benefit for employees, and it helps with recruiting and retaining employees,” says Bradley Shaps, a vice president of benefits consulting at the Alera Group. in Villanova. “Many employers want to take care of their employees by helping them be able to retire. A 401(k) plan or retirement plan is a critical element.”
For small businesses looking to take advantage of the SECURE Act and start a new 401(k) plan, both Dumont and Shaps recommend setting goals for the plan such as the number of employees expected to participate and the average contributions to be made. Other factors should be considered such as their workforce demographics, employee interest, the need for auto-enrollment, and a communication plan. All of this should be coordinated with a service team that would include a financial adviser and a record keeper, and possibly a third-party administrator or ERISA attorney.
“When you have experts on your team, you can be more confident that your plan is running properly and benefiting your employees,” Dumont says.
A good financial advisory team will help navigate costs and the best advisers will benchmark the plan each year to determine if the costs are in-line with the market and with plans of the same size and industry. The cost to set up a plan, Shaps said, can range from $500 to $2,500, but remember that the SECURE Act provides a tax credit that can help offset these expenses.
Thanks to the SECURE Act and its potential successor, it’s now easier and more affordable than ever for a small business to set up a 401(k) plan. But doing so doesn’t relieve you of your fiduciary responsibilities over the plan. It’s still your job to act solely in the interest of your participants and their beneficiaries, carry out your duties with care, and follow the plan documents.
“It is important for a small-business owner to have a thorough understanding of their fiduciary responsibilities should they decide to establish a 401(k) plan,” says Dumont. “The retirement plan industry is highly regulated to protect plan participants so there are many rules when it comes to plan administration. A business owner should avoid the mistake of not understanding these rules and their responsibilities. This will help save them from plan errors and issues down the road.”
Gene Marks is a certified public accountant and the owner of the Marks Group, a technology and financial management consulting firm in Bala Cynwyd.
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