A 401(k) retirement plan is a plan sponsored by employers that requires employees to allocate a percentage of their salaries to an investment account for use when they retire. This plan was first introduced in the 1980s.
A startup 401(k) plan can be arranged for any startup with a minimum of one full-time employee (besides the founder).
For this policy, there are two choices:
- A traditional 401(k) policy makes use of pre-tax capital (gross earnings) to fund itself. Before federal, state, local, and other taxes are deducted, funds for the 401(k) are deducted from employees’ paychecks. When employees make a withdrawal, taxes are deducted.
- With a Roth 401(k) policy, contributions are excluded from employees' net wages after taxes have already been deducted. Because taxes are deducted when donations are made, money isn't taxed when it is withdrawn.
Including a product like Human Interest 401(k) in your startup's compensation package is a low-cost way to attract top talent, stimulate team loyalty and satisfaction, and subsequently boost employee productivity. Furthermore, for a startup with 10 people, a 401(k) is considerably less expensive than health insurance.
Cost to Set up a 401k for Startups
A 10-person startup's cost breakdown is as follows:
- A PPO single coverage health insurance package costs $62,222 every year on average.
- A Human Interest 401(k) requires around $1,920 per year in comparison.
401(k) Plan Costs to Employers
While many startups would like to offer this benefit to attract and retain great employees, financial considerations frequently prevent them from doing so. Those worries aren't entirely without merit.
401(k) plans used to be geared toward — and priced for — big companies with a large number of employees. These days, 401(k) providers such as Human Interest have created internet-based, low-cost, and simple-to-manage 401(k) plans for startups / small businesses. These new plans allow founders to offer their employees (and themselves) an inexpensive way to prepare for retirement.
Startups can take advantage of a tax deduction by providing a 401(k), which helps to lower the net cost of the retirement savings plan. Keeping the latest options in mind, it's generally a smart idea for startups and medium-sized companies to re-evaluate the fees, compare them to other available 401(k) plans, and consider if your current 401(k) plan is suitable for your long-term business model.
401(k) premiums do not necessarily have to be cost-prohibitive for a startup.
Here's a short rundown of some of the costs your startup might face:
Plans with less than $1 million in assets could cost $5,000-$10,000 per year, including $800-$1,000 in administrative costs, $15-$40/participant per quarter, and a $500-$3,000 initiation fee.
Simple 401(k)s: administrative fees of $500-$1,000 a year, $20-$50 per participant, and potential hourly management service fees.
Miscellaneous fees are charged to ensure ERISA compliance (Employee Retirement Income Security Act), such as:
- Rollover asset expenses
- Investment advisory and consultancy fees
- Anti-discrimination evaluation fees
Although 401(k) setup fees are a one-time expense, they could have a significant impact on your decision.
What Should Startups Look for When Choosing 401(k) Providers?
The most important factors to consider when choosing a new 401(k) provider are:
- Ease of use (filing and managing)
- The standard of investment choices
- Expenses paid by both the employer and staff members
- Setup costs that you (the founder) will have to bear
Returns on investment
For instance, an employee who contributed $1,000 per month to their 401(k) for 30 years will have a portfolio worth $1,468,000 (assuming an average annual return of 8 percent). If the annual return was 8.5 percent (after subtracting the additional 0.5 percent in fees), the portfolio's final value would be $1,617,000, a difference of almost $150,000!
Even if a fund has low costs, it might not be a successful investment if it doesn't have a solid track record -- also recognized as "excess return." Be wary of funds that are significantly less than normal.
You can see the one-year, three-year, and five-year average returns for each fund option. Try comparing these to indexes such as the Dow Jones Industrial Average or the S&P 500 to see how well those funds have performed in comparison.
Easy to Integrate Product into Payroll
The question is:
Is your 401(k) plan linked to your payroll service by the provider?
If yes, then contributions can be made automatically at the same time that participants are paid, reducing manual work and errors.
What is the service provider policy on assistance inquiries and how long does it take to get a response from them? You'll have a sense of security in situations where there's a question or something goes wrong if the client support response time is quick.
Can the 401(k) provider handle adjustments that employees make to the plan including savings rates, rebalancing, eligibility status, and so on? How easy is it to make changes? 401(k) firms that can automate certain plan changes make the process go more smoothly.
Investment Options for the Employee
Instead of only a few investment choices, look for a 401(k) plan that offers a range of investment options.
In fact, one of the most important components to look for in a startup or small business strategy is what type of investment opportunities would be open to employees. It should be wide-ranging in the context that it must include:
- Large and medium stocks
- Different sorts of securities
- Some broad-based global exposure
- Emerging economies
That’s not all ...
Consider including options in the 401(k) plan that change investment allocations automatically based on an employee's age. These changes improve productivity and offer startup founders and managers the peace of mind that they are providing sufficient support to their employees.
Top 5 401(k) providers for startups in 2021
Human Interest
Description: Flexible and customizable provider that makes it easy and affordable to help your employees save for retirement. Also good for thorough risk analysis.
Best for: Small & medium sized startups and businesses
Cost: Starts at $120/mo. + $4 / employee/mo.
Pay on Retirement: Anyone who withdraws from their 401(k) before they reach 59 ½ years of age will have to pay a 10 percent penalty as well as their regular income tax. However, employees can withdraw their savings without a penalty at age 55 and above in some circumstances (including resignation, termination, and layoffs).
Payroll Integration: Collects and processes data from over 50+ payroll providers
Investment Options:
- Diversified portfolios
- Asset allocation
- Automated investment advising component
Fidelity Investments
Description: Most common and well-regarded 401(k) providers in the business
Best for: Small startups and businesses
Cost: Some startups pay as little as 0.53 percent, while others pay over 1 percent of assets. Most plan sponsors should be able to have costs under 0.75% on the Fidelity platform. Fidelity offers $0 trading commissions, $0 per stock or options trade plus $0.65 per contract on options.
Pay on Retirement:
- Fidelity's rule of thumb: Aim to save at least 1x salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67.
- Factors that will impact an employee's personal savings goal include the age they plan to retire at and the kind of lifestyle that they hope to have in retirement.
Payroll Integration:
- Provides an integrated experience to help manage a suite of startup benefits that include payroll services
Investment options:
- Stocks.
- Fixed Income
- Bonds & Convertible Debts
- Health Savings Account
- Trading
Charles Schwab
Description: Offers many of the same investment choices and products that larger-sized customers receive, but at a much lower price
Best for: Startups with only a handful of employees
Cost:
- Schwab IRA (includes Traditional, Rollover, Roth, and Roth Conversion accounts) and Education Savings Account: Minimum Deposit Fee = $0
- SEP-IRA, SARSEP-IRA, SIMPLE IRA, Qualified Retirement Plan, Keogh, Company Retirement Account, Pension Trust, Individual 401(k), and 403(b)(7) Accounts: Minimum Deposit Fee = $0
- Schwab One Organization Account: Require a minimum deposit to open. Please contact Schwab for details.
Pay on Retirement:
Payroll Integration: Integrated with various payroll providers
Investment Options:
Mutual Funds, Exchange-Traded Funds (ETFs), Money Market Funds, Stocks, Bonds, and Fixed Income Products, Insurance, Annuities.
Guideline
Description: Guideline automates plan administration, compliance testing, reporting and disclosures, and investment management, and they integrate with some of the most popular payroll providers.
Best for: Small businesses
Payment after Retirement: For an individual with $25,000 in their 401(k), a 0.5% investment management fee adds up to an additional $125 a year.
Monthly pricing: $39 base fee/mo. + $8 per participating employee/mo.
Payroll Integration: Synced with over 360 popular payroll providers
Investment Options:
- Guideline offers 40+ index funds from Vanguard (and other low-cost providers) and it helps participants choose a managed portfolio with blended average fund fees under 0.07 percent.
Betterment for Business
Description: Users have their investment funds automatically allocated to appropriate funds based on a questionnaire. Betterment also offers reasonably priced 401(k) plans.
Best for: Organizations with under 200 employees
Cost:
- Employer fees: $6 dropping to $4 per employee per month, plus a $1,500 yearly TPA fee
- Employee fees: 0.25 percent per year of assets plus approximately 0.10% per year in fund fees
Payment after Retirement:
- The low cost of a Betterment 401(k) plan includes access to their easy-to-use platform and comprehensive investment advice for your employees.
- Betterment has an average annual investment return of just under 8.8 percent.
Payroll Integration:
Integrated with a lot of payroll providers like Ascentis, Ceridian, Rippling, etc.
Investment Options:
Socially Responsible Investing Portfolio, Goldman Sachs Smart Beta, BlackRock Target Income Portfolio, Betterment Flexible Portfolio.
We can help!
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Citations
- How Does a 401k Plan Work
- 401(k) Plans
- Retirement Basics: What Is A 401(k) Plan?
- 10 best retirement plans in 2021