As of March 2018, there are approximately 126 million American workers. According to the Investment Company Institute, in 2015, about 54 million American workers were active 401(k) participants, and there were nearly 550,000 401(k) plans. With over 11 million business with employees in the U.S., according to the NAICS Association, there are still a large number of U.S. business that are not offering their employees access to any retirement plan.
The most common type of retirement account is the individual retirement account (IRA). As of 2018, there are believed to be over 50 million IRAs with a total value of over $9 trillion dollars. As the name suggests, an IRA can be generally opened by any U.S. worker who has earned income. Earned income essentially means compensation for services and not passive income, such as capital gains, interest, or social security. Therefore, irrespective of whether your employer offers you access to an employer retirement plan, such as a 401(k) plan, SEP IRA, or SIMPLE IRA, every American worker should be able to make contributions to an IRA. The 2018 IRA contributions limits are $5500 or $6500, if over the age of 50. However, in 2018, employer plans, such as the 401(k) plan, allow employees to make contributions of up to $18,500 or $24,500, if over 50, a significant increase over the IRA.
It is well established that offering employees with retirement plan benefits is a helpful of retaining employee. Many employees view an employer-sponsored retirement plan as part of an overall benefits package, thus attracting high quality employees. The question then becomes – why do more employers not offer retirement plan benefits to their employees?
Like most things in life, the answer generally comes down to money. For a small business with five employees, the annual cost of maintaining a 401(k) plan averages around $7000. There are two main costs associated with having an employer 401(k) plan. The first is the annual 401(k) administration costs for the filing the IRS Form 5500 which falls on the shoulders of the employer and not a bank or custodian, like an IRA. That cost generally can run between $800-$2500 annually and is placed on the employer. The second is the cost of making employee safe harbor contributions, which are typically a minimum of 3% of the employee’s salary.
In order to avoid having to perform cumbersome annual testing for 401(k) qualified retirement plans, including the complicated and uncertain ADP (deferral) and ACP(contributions) testing rules, the 401(k) plan safe harbor rules were established in 1999. The safe harbor rules essentially offer the owners of the business the ability to max out their employee deferral 401(k) plan contribution without having to worry about the complex ADP or ACP testing requirements, which could potentially limit their ability to make contributions based off the amount contributed by the employees. The only requirement is that the employer makes a minimum 3% contribution based off the eligible employees’ salary. The safe harbor contribution is tax deductible, but it still creates a cash flow burden for the employer. The safe harbor rules have somewhat simplified the 401(k) plan testing requirements, but it has also placed an increase cost on the employer who is required to making safe harbor contributions for all eligible employees.
So, what are some ways that should encourage more employers to offer 401(k) plan retirement benefits to their employees:
- Remove the requirement for employers to do any testing or make safe harbor contributions on behalf of their employees. Employees can be automatically enrolled in the plan and can be provided with education about the benefits of contributing to a retirement plan, but the employer should not be required to do complex calculations (ADP or ACP) or make safe harbor contributions on the employees’ behalf in order to be able to contribute the maximum to the plan.
- Move the reporting requirements from the employer to the bank or financial institution. Just like IRAs, which puts the responsibility of IRS reporting (i.e. IRS Form 5408, 1099-R, etc.) on the bank or custodian that holds the IRA, why should businesses, both small or large, be burdened with the responsibility of absorbing the annual costs of filing the IRS form 5500 or 5500-SF, where costs can run as high a few thousand dollars a year. The bank or financial institution that is holding the 401(k) plan assets is profiting from the assets held in the 401(k) plan and has the infrastructure to handle the annual plan administration filing requirements.
- Provide a tax credit for employer’s who establish 401(K) plan and offer automatic enrollment
- Allow for rollover flexibility, including Roth IRAs
I believe that if employers are not burdened with the costs and administrative headaches of establishing and administering a 401(k) plan, many more employers’ will be interested in offering 401(k) plan benefits to their employees. The main issues are costs and administrative burdens and I do believe that the suggestions presented above will help alleviate much of those concern for employers and, thereby, increase the amount employers establishing 401(k) plans for their employees.
IRA Financial Group is the market’s leading provider of self-directed retirement plans. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate, cryptocurrency, and private business investments.
Adam Bergman, IRA Financial Group partner is a frequent contributor to Forbes on the topic of self-directed retirement plans and has written seven books the topic of self-directed retirement plans, including, “How to use Retirement Funds to Purchase Cryptocurrencies, “The Checkbook IRA”, “Going Solo,” Turning Retirement Funds into Start-Up Dreams, Solo 401(k) Plan in a Nutshell, Self-Directed IRA in a Nutshell, and in God We Trust in Roth We Prosper.