Get your 401(k) tuned up in 2022
As a business owner, you definitely want to make sure you are funding for your own future and offer competitive benefits so you can attract new hires.
In the tight labor market, using your 401(k) plan as a recruitment tool can help distinguish you as a desirable employer. Here are some things to consider:
1. Employees want financial security.
If you are looking to hire someone, offering a 401(k) will make you more desirable. Budget part of your employment cost to include a matching contribution. A match creates an incentive. A 401(k) can also reduce turnover when it can be designed to reward long-term service.
2. How much match should you offer?
The typical employer offers a match of 50% of the first 6% that an employee contributes - or about 3% of wages. You can exclude part-time employees. As a business owner, if you want to fund as much as possible for key employees, consider a "safe harbor" plan. You can also add a discretionary match - or profit-sharing contribution if your business reaches certain goals.
3. Is your 401(k) offering a Roth contribution?
The big advantage of the Roth is that it grows tax free. Younger employers tend to prefer the Roth option as they believe tax rates will increase in the future. If you are hiring new employees, the Roth option can be an attractive variable to stand out in the pack.
4. Are your 401(k) investment options up to date?
Two trends right now ESG (Environmental, Social, Governance) Funds, and brokerage options. Your employees may prefer a firm that offers a fund with a socially desirable objective or mission. Younger employees who are hip to Robin Hood may want to choose any fund or stock they want, then you may want to add a brokerage option.
Making these decisions is tricky and creates liability. Some businesses have delegated the decision-making on a 401(k) Plan to a "338 Investment Advisor." These advisers take on the fiduciary liability of the investments offerings.
There has been a surge in lawsuits over investment offerings in 401(k)s. You can protect yourself from this (as you are likely the person taking the risk now). The 338 coverage is inexpensive. Ask your adviser if they are a 338 adviser, and if they are not, ask if your plan can add one. Most 401(k)s today offer this option.
5. Are your fund fees and plan expenses competitive?
Best practice every three to five years, you should do a market review or competitive bid for your plan. You have to validate that your plan fees are not excessive. Ask your 401(k) provider if your fees are the lowest cost share class or expense ratio available to your plan. Your adviser may perform this for you. It is a time-intensive project but typically yields a return on your time in lower fees or more plan options.
6. What happens if we have a bad year? Can I stop contributions to the plan?
As a general rule, you can only make changes for a future date and employees have to be given proper notice. With this tight labor market, I would encourage you to keep your matching contributions in line with your competitors.
• Karin Rettger is an Accredited Investment Fiduciary, and the founder of My Financial Advisor, A division of Principal Resource Group, specializing in wealth creation and management.