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About 48% of the American workforce, around 56.5 million people, currently do not have access to a retirement savings plan at their workplace. But that number is likely to decrease in the coming years as more companies face pressure to offer retirement benefits in order to attract top talent, and more states mandate private-sector retirement programs.
Why the push for better retirement benefits? Because hundreds of thousands of workers aren’t fully prepared for retirement.
The 2020 census revealed a number of new and valuable insights into how Americans are preparing for retirement. According to that data, only 34.6% of working-age individuals (those who are between 15 and 64 years old) have a 401(k) or similar retirement account, while another nearly 30% of working adults own an IRA or other type of savings account.
While over 58% of workers aged 56-64 own some kind of retirement account, the census revealed that just under half (49.5%) of millennial workers aged 24-39 own a retirement account. Considering the average adult needs $540,000 in savings to retire at 65, it’s clear that the majority of young working adults are unprepared for the high cost of retirement.
State-mandated retirement plans aim to combat the growing retirement savings crisis.
California, Illinois and Oregon now require private-sector employers to either set up a retirement plan option for their employees, or allow their employees to access state-sponsored plans. In these states, employees that work at private companies will be automatically enrolled into the available retirement program, but can choose to opt out or adjust their savings rate at any time.
This push for easier access to retirement savings plans is meant to address concerns about how the next generation of retirees will afford to live comfortably as they age. But it also presents a unique opportunity for the small businesses that are able to take advantage of it.
These initiatives are making it more affordable — and more advantageous — to give your employees what they need.
California, Illinois and Oregon have joined seven other states in requiring retirement plans or offering state-funded options. As a result, in California alone, the number of new 401(k)-type plans available to workers jumped 16%. And more states are likely to follow suit soon.
What’s boosting this adoption rate? More retirement savings plan options available for employers to choose from, and helpful tax credits in 2019 and 2022 that make retirement plans more affordable for the small businesses that offer them.
Today, three tax credits are available to small businesses that set up a 401(k)-type plan for their employees:
A startup costs credit to help cover the costs associated with launching and administering a new plan.
An employer contribution credit that converts some of your deductible contributions into refundable tax credits.
And an auto-enrollment tax credit for businesses that auto-add new employees into a 401(k) plan.
Together, these credits and incentives can add up to tens of thousands of dollars in tax savings for eligible small businesses.
Even for employers who can’t afford to purchase their own retirement plans for their employees, the state-sponsored programs available in several states make it easy to offer the benefit. Many of these programs don’t charge administrative fees (which can make private 401(k) plans cost-prohibitive) and some don’t even require employer contributions or matching.
For many employers, the retirement plan mandate comes with more benefits than drawbacks.
There are two appealing benefits to offering a 401(k)-type plan:
1. Increased tax savings. In addition to the tax credits shared above, your small businesses’ contributions to your 401(k) plan can be deductible on your federal income tax return. For small businesses with many employees, that can add up to serious savings!
2. Better hiring and talent retention. According to one survey, a full 88% of workers say a 401(k) plan is a significant benefit that impacts their decision on where to work — or not work. As competition for top talent continues to increase, small businesses that offer strong retirement benefits will have an advantage over businesses that offer no retirement plans, or only provide state-sponsored retirement plans.
If you’ve been considering offering a retirement plan, now may be the best time to launch it.
In the coming years, more states are likely to require private companies to support the retirement plans of their employees. That means the employers who launch their plan early have the opportunity to stand out, and retain and attract top talent — before the mandate goes into effect.
If you’re unsure of how to choose a retirement plan or set up workplace benefits, outsourcing this essential HR task can be a simple way to improve your benefits structure without overleveraging your internal team.
In short, don’t wait for the mandate to take the competitive edge out of your benefits package. The sooner you offer your employees the opportunity to earn for today while saving for tomorrow, the better talent you can attract — and keep.
Want more? Escalon has helped thousands of small businesses maximize their potential with efficient back-office solutions for accounting, HR, payroll, insurance, and recruiting and taxes — and we can help yours too. Talk to an expert today.
This material has been prepared for informational purposes only. Escalon and its affiliates are not providing tax, legal or accounting advice in this article. If you would like to engage with Escalon, please contact ushere.
As a professional copywriter in the finance and B2B space, Grace Townsley offers small business leaders big insights—one precisely chosen word at a time. Let's connect!