Welcome to the fifth and final part in my series about creating the best 401(k) any potential employee has ever seen. If you haven't already done so please read part 1, part 2, part 3, and part 4. While you can skim these you're going to have a much better understanding of concepts by reading those first. In this final part there's going to be discussion of what to look out for, what to prioritize, and how to build the ultimate 401(k).
Before deciding on any 401(k) provider it's important to discuss benefits providers. Many benefits providers are going to try and sell employers some sort of all in one package in the favor of ease. They'll talk about incorporating payroll, health insurance, and 401(k) all in one. Be extremely wary of any sort of provider options like this. They're usually getting paid by these companies and while employers have a fiduciary duty to the employees these providers do not. Any company involved with organizations like Blackrock, Transamerica, etc. should be avoided.
When looking at funds employers should focus on those that are not actively managed. Actively managed funds are a scam (high fees in the range of 0.5% which adds up) and even when they outperform the market (rare) their fees are very high. Employers should look primarily at companies providing index funds or target date funds supplied by large investment firms such as Fidelity (FSKAX, FZROX, FZILX, etc.) or Vanguard (VTSAX, VTIAX, VFIAX, etc.) which both provide excellent funds that track the market while having low fees in the 0.10% to 0.00% range. Both Fidelity and Vanguard funds are great choices and good providers will make one or the other available. If Vanguard and Fidelity don't make up the majority of the available funds those providers should be excluded.
Setting up a 401(k) outside of a benefits provider is really easy and the best companies will integrate with your payroll systems resulting in a nearly seamless process minus employees having a second login which is good for security any way.
Now that funds and fees have been discussed it's time to talk about what makes an incredible 401(k):
- Having a 401(k) at all is a massive benefit for employees and it should be obvious this is first on the list, it's the minimal requirement and a huge red flag if your company doesn't have one.
- A 401(k) that has excellent funds available as discussed above.
- A 401(k) that is easy to contribute a direct dollar value to. It may seem silly but there are providers that only allow a paycheck percentage which is annoying for employees and creates unnecessary management.
- 401(k) matching. Remember that this is a tax write-off at the end of the year, if you're offering a 401(k) there's no reason you shouldn't be offering a match even if your company isn't profitable. The only reason you should not be providing one is if you can't afford it on the payroll.
- A safe harbor 401(k). This is the natural extension of 401(k) matching and every company with a 401(k) and matching should be using a safe harbor 401(k).
- 401(k) matching that goes above the minimum safe harbor nonelective requirement of 3%. If your company can afford this it's free money and there is no reason you shouldn't be offering 5%. If you really want your company to shine start offering 10% or more. There is no reason not to do this unless you can't afford it because of the tax write off at the end of the year. It's a major benefit for employees that will contribute positively to job satisfaction while costing nothing on a yearly scale.
- A best in class true-up. A true-up at the end of the year is the bare minimum requirement, true-up on every paycheck whether the employee contributes or not, and true-up earlier in the year when your employee maxes their share if you can afford it.
Now let's look at a few cost scenarios. Most of the 401(k) start up companies have moved to SaaS style offerings, so employers will be paying a flat fee of between $40 and $150 a month, and then $6-$8 per employee. In this sort of scenario a start up with 50 employees would be paying between $480 and $1,800 per year in flat fees, and then between $3,600 and $4,800 per year for their employee cost, so somewhere between $4,200 on the low end, and $6,600 on the high end. This is the cost for the entire year for every employee at the company and it's ridiculously cheap.
Obviously these costs don't include the matching but that's strictly a payroll related problem for month to month versus end of the year since all of the matched money an employer pays (up to the limits previously discussed) will come back to them at tax time. If the people in charge of HR, recruitment, and finance aren't getting on board with a great 401(k) option now is the time. It's easier than ever before to not only provide this benefit to employees but make it better than almost every other 401(k) out there.
Do your fiduciary duty as an employer and make sure your employees have the best possible options when it comes to a 401(k). Make it something you can brag about to potential employees and grab their interest with your attention to detail in this regard.
This is the final part of a 5 part series talking about making a 401(k) so good employees won't believe that it's real and employers won't believe how cheap it is to implement.