Why your employees need a 401(k) and how to get it right

According to the Economic Policy Institute (EPI), close to half of all American families don’t have any retirement savings. This uncertain future presents your business with the opportunity to build a stronger relationship with your employees by offering retirement benefits that put them on a better path.
In fact, a 2017 study by the Employee Benefit Research Institute found that almost 6 in 10 workers who are extremely satisfied with their benefits are also extremely satisfied with their jobs.

If you want to support your employees, keep them happy, and give them a big reason to stick around, a good 401(k) can be a great place to start. Here’s a closer look at the latest research on what employees want in a retirement plan, and how to offer a plan that helps them reach their goals.

What your employees really want

When employees start saving late (or don’t save at all), the prospects for retirement aren’t too rosy. Along with uncovering that only half of American families have any retirement savings, the EPI also found that the median savings for families who are approaching retirement is only $17,000.

This bleak outlook helps explain why good benefits mean so much to employees. Alongside health insurance and paid time off, retirement-related benefits make up three of the five most important employee benefits per a 2016 Glassdoor study:

Source: Glassdoor.

Despite the appeal of retirement plans with employees, only 45 percent of businesses with less than 100 employees offer a plan, according to research by the Bureau of Labor Statistics (BLS).

How to give them a great 401(k)

While offering a 401(k) is a first step to helping your employees plan for the future, they’ll only benefit from your plan if they participate in it. Your employees also need a 401(k) that will help them save, not a fee-ridden plan that gets in the way of their goals.

The bottom line? Picking a good plan is essential to making sure the benefits you offer make a meaningful impact. Here are two things you can do to help make sure the 401(k) you pick is successful for both your business and your employees:

Keep fees low

What makes a 401(k) worthy of your employees? It all starts with low fees. In a 401(k) with less than 100 participants, the average employee loses 1.25 percent of their investment to fees each year. On the flip side, combined participant fees for 401(k) plans and the funds within those plans can be 0.06 percent or lower. If everything else remains equal, an employee who pays lower fees can save a lot more for retirement over the course of their career:

The graph above is hypothetical and does not represent actual performance results of Guideline’s portfolios. It is provided for illustrative purposes only and is not intended to constitute investment advice nor an assurance or guarantee of future performance. Investing involves risk of substantial loss as investments may lose value.
The returns presented in the graph above are based on the historical performance of the S&P 500 index, and represent returns for time periods that preceded Guideline’s existence. As such, they may not reflect the impact that material economic and market factors might have had on Guideline’s decision-making if Guideline was managing portfolios during such time periods. The returns presented represent the hypothetical returns achieved by two funds achieving the same underlying performance, net of management fees of 1.14% and 0.06%.
* $2581 represents the average annual contributions made to defined contribution plans by US employees in 2016, based on deferral data from 2017 T. Rowe Price “Reference Point” benchmarks and median income data from the US Census Bureau. 40 years represents the length of a career that begins after college and ends with social security eligibility. 7.6% annual returns are based on the historical performance of the S&P 500 and its predecessor indices from December 31, 1928 to December 29, 2017. 1.14% represents the average assets under management (AUM) fees of 401(k) providers with $1 million to $10 million in AUM based on a 2018 Brightscope/ICI study of 401(k) plans. 0.06% represents the the blended AUM fees for index funds in Guideline’s managed portfolios.

Fees employees must pay:
Most 401(k) plans use mutual funds or ETFs as primary investment vehicles. The investment companies that manage these funds charge investors an annual fee. There’s no way around it: These fees are something your employees will be on the hook for (although they won’t have to pay anything out of pocket — fees are quietly deducted from each fund’s returns).

While you can’t avoid these fees completely, you can look for a 401(k) that offers low-fee funds. For example, index funds are often inexpensive. Consisting of a number of stocks and bonds meant to represent an entire market or industry, index funds have been shown to outperform more actively managed funds with higher fees.

Noted investor Warren Buffet even thinks index funds are a good idea: "The best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of professionals."

Picking a 401(k) plan that offers low-cost index funds can keep fees to a small fraction of the burden most employees are currently forced to bear.

Employee fees that can be avoided:
A lot of little steps go into offering a 401(k): You (or any providers you work with) will have to withhold money from employees’ paychecks, keep track of everything for tax records, and make sure the 401(k) is compliant, among other responsibilities. To take on some of these burdens, many providers like to charge employees extra fees.

The Wall Street Journal called out the following culprits in their analysis of why 401(k) plan fees are so high:

Recurring plan and participant fees
Recurring investment advisor fees
Administrative service fees
Recordkeeping fees

For the average employee of a small businesses, these fees bring the cost of their 401(k) up to 1.25 percent annually.

So when you look for a plan, make sure you ask about all the fees both you and employees will be charged. It’s easy for employers to only consider their own costs when choosing a plan, but exploring how much your plan will cost employees should be part of your research, too. Otherwise, the benefit you’re planning to offer employees may not benefit them much at all.

Get everyone to participate

A 401(k) only works if your employees contribute. Part of choosing the right plan means going with a provider that can help you get everyone on board.

Why does this matter so much? Well, the sooner an employee starts contributing to a plan, the more likely they are to have the assets they need for retirement. For example, an employee who starts saving for retirement at the beginning of his or her career might see a nest egg that’s much bigger than someone who waits 10 or 20 years:

The graph above is hypothetical and does not represent actual performance results of Guideline’s portfolios. It is provided for illustrative purposes only and is not intended to constitute investment advice nor an assurance or guarantee of future performance. Investing involves risk of substantial loss as investments may lose value.
The returns presented in the graph above are based on the historical performance of the S&P 500 index, and represent returns for time periods that preceded Guideline’s existence. As such, they may not reflect the impact that material economic and market factors might have had on Guideline’s decision-making if Guideline was managing portfolios during such time periods.

* $2581 represents the average annual contributions made to defined benefit plans by US employees in 2016, based on deferral data from 2017 T. Rowe Price “Reference Point” benchmarks and median income data from the US Census Bureau. 7.6% annual returns are based on the historical performance of the S&P 500 and its predecessor indices from December 31, 1928 to December 29, 2017. 0.06% represents the the blended AUM fees for index funds in Guideline’s managed portfolios.

Despite the upside of saving early, the BLS study found that only 72 percent of small business employees who are eligible wind up enrolling in the retirement plans they’re offered.

So how can you help employees get into the habit of saving? There are a few ways:

Educate employees: If you offer a 401(k), make sure employees know about it and that they understand how participating can help them save for retirement. In research about IRAs, a type of retirement savings account with similar tax benefits to a 401(k), TIAA found that 43 percent of employees who don’t contribute would be more likely to do so if they understood the tax advantages. Here’s a good guide to bring employees up to speed.
Auto-enrollment: Some 401(k) plans automatically enroll employees. This approach makes it easier for them to get started (while allowing them to opt out at any time). Setting up auto enrollment has been shown to increase participation rates by almost 50%.
Offer 401(k) matching: Matching employees’ contributions gives them another reason to contribute and does even more to make employees happy.
Promote your plan: Remind employees about your plan when they’re likely to be making other financial and benefits-related decisions. The beginning of the year, tax time, and open enrollment are opportunities to get employees thinking about their 401(k). Also make sure any new employees get an overview during the onboarding process.

Where to get help

This article offers a lot of tips and resources. Follow the links above to dive deeper into any of these issues.

But if you really want to see how to offer your employees the 401(k) they deserve, you should talk to us. We think charging employees to save for retirement is wrong, so we don’t charge them anything to participate.

We ask employers to cover the administrative and compliance costs through one simple fee based on the number of participating employees, and that’s it.