Why Small Businesses Are Upping Their Retirement Plan Offerings

2021 was a fantastic year for small business growth, and in its 2021 New Business Insights, Intuit QuickBooks predicted as many as 17 million new small businesses would form in 2022. It marks an increment of 2.5 percent from the previous year and grows to 9.8 percent in four years, from 2017 to 2021.

While it was a great year for starting businesses, it was a not-so-great year for staffing them. According to the Bureau of Labor Statistics, in 2021, more than 47 million Americans left their jobs willingly. This represents an unrivaled workforce mass exit, driven by the pandemic, now known generally as the Great Resignation.

In an effort to attract and retain employees, The Great Resignation has further caused small businesses to offer new or better retirement plans to workers. Many small businesses have realized how difficult it is to captivate talents, and the benefits of keeping them whenever possible. Thus, small business owners need to enlist their bonus offerings to attract and retain employees.

According to Glassdoor, 52% of job applicants reveal benefits and bonuses are one of their highest considerations before taking a job offer. Also, almost 80% of workers would rather choose new or extra benefits than a pay increase. Financial security becomes more vital as workers approach their retirement. They need investment in their retirement, such as a retirement plan contribution match.

Offering a match or contribution to a retirement plan like the 401(k) shows an employer is investing in their worker’s long-term financial achievement. That alone can be a compelling attraction and retention tool. State-mandated retirement plans and the development of pooled employer plans are also making retirement benefits easier for small businesses to provide.

Auto I.R.A.s and state mandated retirement plans

Some states now have laws in place requiring small businesses to provide their employees with retirement benefits. State-mandated retirement plans were created to meet this legal demand. Generally, businesses could choose from one of two ways to abide by these laws.

The first option would be to enroll their workers in a state-sponsored retirement program. Otherwise, they can sponsor their plan through the private market. Eight states have already launched auto-IRA programs. Oregon, Illinois, and California have automatic I.R.A. programs running, while Connecticut recently launched. Retirement plan mandates are now a fact for New Jersey, New York, Maryland, Virginia, Maine, Washington, and Colorado. Small businesses that cannot offer their plans can benefit from a basic, no-cost savings plan for their employees.

More attractive retirement plan options are now available

A pooled employer plan (P.E.P.) is a new retirement savings alternative. They were created to enable retirement plans to become more cost-effective and supportive for small businesses and workers. For specific business owners, a P.E.P. could be the perfect choice in helping them and their workforce attain retirement security and meet their business needs.

P.E.P. has a new model to enable smaller employers to reach economies of executive scale. It does that by limiting several of the hurdles businesses typically experience when they want to offer a plan, such as limiting fiduciary liability, offering 3(21) or 3(38) investment advisory services, and offloading many of the time-consuming administrative tasks by including a 3(16) administrative fiduciary. Some P.E.P. providers even offer 360 integration with major payroll platforms, which eliminates the need to manually upload payment information. Also, it gives small businesses access to benefits of scale while making it easier for them to join or offer a retirement plan.

Market private providers are seeing the increase in interest and are becoming more creative in developing platforms and products such as the I.R.A. and 401(k) to market to employees in those states. Initially, those states that saw it as a competitive threat, but now, they see it as a valuable business opportunity. Small businesses were the biggest embracers of P.E.P.s in 2021, which is likely to increase in 2022 as the labor market toughens and new states enact mandates for business retirement plans.

Big advantages for small businesses

Offering a retirement plan is an advantage for businesses and prevents non-compliance penalties. Small businesses may find it demanding to abide by these mandates. Thus, it’s better to seek help from an advisor to enable you to make good decisions on your business needs.

Whether you’re opting for a state-mandated program, P.E.P., or other private market plans, an advisor will help you determine the incentives and benefits suitable to attract and retain talents.

As more state mandates come into effect and more P.E.P. providers are entering the scene, retirement plans are not only becoming more accessible for small businesses, they are also becoming a necessity.

Brian Menickella is a founder and managing partner at Beacon Financial Services a broad-based financial advisory firm based in King of Prussia, PA.

Securities and Advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice.

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