Navigating 401k Plans for Small Businesses | Employee Benefits

Stefanie Sample: 0:13

Hey there, business enthusiasts. I'm your host, steph Sample, and this is the funded podcast, the ultimate guide for small business owners looking to start, grow, operate their business smartly and successfully. Today I'm chatting with Jean, the CEO of Penelope, about offering employees 401k plans. Let's dive in First, jean. what is a 401k anyways?

Jean Smart: 0:37

First of all, thanks for having me, steph, and it's a great question. You can find it in all sorts of places, but essentially, 401k is a type of company-sponsored retirement plan. It allows everyone to use a part of their salary, tax-deferred, to grow over time and, quite frankly, the cornerstone of wealth building for everybody.

Stefanie Sample: 0:57

Awesome. And so when you think about 401ks, just to do some follow-up questions there, give us some background on 401ks. Have they always been around? How do companies think about them? Are there different kinds of 401ks?

Jean Smart: 1:13

Yeah, so there are a couple of different kinds, but it started about 40 years ago. There's a gentleman known as Ted Benna who's sort of the father of the 401k and has been one of the earliest Penelope advisors. He had been in the retirement space and he found a tax loophole a loophole 40 years ago that allowed companies to take sort of a tax credit if you could put a little bit of the employee salary away for savings. And over the past several decades it's grown into this huge, blossoming industry, not just for Wall Street but has provided a huge safety net for most Americans who are just working. And you asked a little bit about what is a 401k. There's essentially seven different types of tax-deferred retirement accounts. Four of them are 401ks, three of them are IRAs independent retirement accounts. So in the 401k you've got a traditional, a safe harbor, a Roth and a solo And what that generally means. They all mean a little bit of different, but it allows you to put money away, it allows companies to match and it's very based on the number of employees you have. The IRA independent retirement accounts are portable so you can take them with you. In a space of a set of simple and IRA individual accounts. They generally have less that you put in. In a 401k. You can put up to 22,500 in 2023. And if you're over 50, you can put 30,000 away tax-deferred. So you can imagine that it's quite a big engine for retirement. So those are the different kinds and there's pros and cons to each one of them. It just depends on how many employees you have and how much you want to put away and how you're thinking about the growth of your business.

Stefanie Sample: 3:04

Okay, cool. So, thinking about our audience here, we're small business owners. We all generally have less than 10 employees, so us, what should we know about? when we think about 401k, what do other small business owners do when it comes to matching? setting them up? Does it cost money all of that?

Jean Smart: 3:26

So, as a small business I'm a small business too You want the least amount of work, the less amount of administration and the simplest format, and you also want to maximize your tax scheme right The tax incentives. So we have a plan and generally the majority of small businesses have what's called a safe harbor 401k plan. So what that means is you're matching, and because you're matching, you're able to avoid a lot of highly compensated employee testing and auditing down the road. They can be an administrative nightmare and they're really prohibitive. So it's very democratic. You're offering all of your employees the same amount of benefit. And now, with Secure 2.0, new federal act that incentivizes and promotes so many small businesses from setting it up whether it's the first plan or matching you can get up to $16,500 for the first three years, so that's $5,500 credit each to offset some of the tax concerns. And if you have less than 50 employees who make under $100,000, you get an additional $1,000 credit. So there's never been a better time to start and make things easy and make sure you're rewarding your best employees.

Stefanie Sample: 4:45

Okay, you just said something that sounds like it's new that we should all know about. I don't even know what you're talking about, So let's take a step back. What is this new government? something that incentivizes as a business owner. How do I make sure I'm taking advantage of it If I am going to offer a 401k Or if I already do?

Jean Smart: 5:06

Yeah. So Secure 2.0 is a tremendous effort in something a lot of folks in the retirement industry have been waiting for and it finally happened, came to pass beginning of this year And it really is sort of a broad scale federal mandate to encourage small businesses to take advantage of these first starter plans. There are a lot of technical requirements around the number of employees, how much the credit is, but I would say net, net. There are a lot of details and we're happy to provide some more and you can Google some of the sort of benefits. But that $16,500 is a big number. That additional $1,000 for employees per employee if you have under 50 folks and waving of all starter funds or set up costs are huge. So I'm happy to share more and more, but I would say this is borne by the fact that essentially, social security is supposed to run out in 10 years. I am not lying. If you go to the Department of Labor website it has 2037, i think. So I personally don't think it's going to go down to zero, but what used to be the biggest safety net for all of us in working is not so safe anymore. So this is a huge mandate to start encouraging businesses to take action. Not that different from healthcare. So I strongly encourage everyone to start, and I would say 16 states to date have past mandates. California was one of the first. So last summer, if you had more than five employees, you had a requirement to set up a qualified retirement plan, and by 2025, they're going to bring it all the way down to one employee. So we're getting to a point where it's just something we're all going to have to brace sooner or later.

Stefanie Sample: 6:55

Wow. So for our listeners, i'm going to put a link to more information on this in our show notes so that we could all learn more, because I want to learn more for sure. So thanks for that. No idea, okay. So back to just basics of 401k. Are there rules around offering a 401k? I kind of feel like that's where I get intimidated. It's almost like, oh, i don't want to touch this because I don't know what I'm doing. There's probably some sort of rules. I'll probably break them, i'll probably do it wrong. So you just touched on one that there's states with mandates where you have to offer them. So that sounds like a rule I'd probably mess up. And then two like if I'm in a state that doesn't have those rules, are there still like things I need to know to not legally to offer a 401k?

Jean Smart: 7:42

That's a great question, because this is what we've been trying to unpeel, because there's so much jargon around it. It is federally regulated. There's a huge tax component and we're not CPAs, we're not financial or sort of tax advisors, but what we've been trying to do is try to dignify all of this. So there are rules, there are guidelines and the 401k basically consists of two things. One is called the plan document And the other one are the investments, the funds that you select. So in many instances, if you want a really complicated plan, you have certain ideas about what investments you want. You have certain ideas about certain employees putting in certain amounts, matching differently. That's complicated And it's probably a good time to talk to an advisor. But if you're like most of us, you just want the experts to create something, just do it for me right, figure it out, let me know what I need to do and what the best investments are, and make it cost effective and super simple. And a big part of making it simple is when it's connected to your payroll, so you're not manually queuing up every two weeks or every month or whenever your payroll is to figure out. Steph is making this much. I gotta make sure this percentage. So one of the things that we've done is create a 401k in a box, which is basically you just have to answer three questions about eligibility, when you wanna start, when you want the matching to vest, and then we actually use target date funds by Vanguard. That just sets the date of your retirement based on your birthday, and we're also integrated with about 150 different payroll providers. So it doesn't matter who you use once you set it up. You can kind of set it and forget it. So you're right about the rules and the guidelines and there are tons of advisors. If you want something bespoke and custom, but again, if you're like most of us and you want something straightforward, something really easy and something your employees can understand, we're happy to help, and there are a couple of other providers that also provide a very streamlined solution.

Stefanie Sample: 9:49

Okay. So it sounds like if you don't use kind of an in the box solution, you can accidentally make this very complicated for yourself. So if you're a small business owner and this isn't like what you want to do in life, probably just go with a provider that makes it super simple is like the basic right?

Jean Smart: 10:08

I think so. You have enough pots on the stove and you have enough stuff going on. It's you kind of want to check the box and move forward and get on with your day.

Stefanie Sample: 10:18

Is it expensive to offer a 401k?

Jean Smart: 10:21

It's one of those things. Again, the more complicated you want with the plan, If you want half of your employees to have XYZ investments, if you want the other half, you can make it as complicated as you want, or you could just make it simple. Simple one, two, three, And so it's really your choice. We talked earlier about the state mandates. There are a lot of sources that tell you, just type the state that you're in, do I have to have a 401k? Or what are the state mandates for Utah or New York or California, And you should pull that up right away. But where? again, our goal is to make it as simple as possible And I would say that matching feature, that Safe Harbor plan that we had mentioned before. The vast majority of small businesses do opt for that because, again, you avoid a lot of the tests, you avoid the extra administrative work and it's the best way to make it cost effective. Another thing that I would caution everyone, depending on the providers and the research you do, is check the fees. Are you paying per usage, per employee? Are you paying to get the investment selected? Are you paying for the record keeping? It's one of those things that can be quite opaque and really add up. So ask your advisor, ask your provider, make sure that on their website they're super clear. One of the things that we've been very focused on is making sure the lowest paid person at every company actually has a shot at retirement. So one of the things that we've removed is the asset-based fee, which basically says the more money you make, the more you put away, the larger your plan, the less you pay. We don't charge, we charge flat fee, So it's just per person that participates, and we think that's a more democratic approach.

Stefanie Sample: 12:06

Okay, and so it sounds actually pretty affordable to have a plan. You're going to pay a fee of some sort, not a fee, but to facilitate this for you. Look at all the fees. Okay, now I'm a business owner filing my taxes. Do I get it like right off my match my fees? Like, is there any tax benefits outside of the current incentive that you just spoke about?

Jean Smart: 12:30

Yeah, there's a. You're probably as a small business, as a corporate tax, as a business tax, a FICA component. That is about 6.5%, i figured about there. So you take the cost of the plan, your match, you can reduce that amount And that is a big impact. Now the Secure Act. There's a pretty complicated code in the DOL website depending on, i think, your state and what your tax situation is, as well as the number of employees. There are a couple different factors But again, that 5,500 plus the additional 1000 per employee making under a hundred K will offset significantly the match to get you started. So it's all variable. It just depends on your average salary, the state, the local taxes, but generally you should be able to cover off and get a write off on a significant amount.

Stefanie Sample: 13:27

Okay, cool. So I know there are so many business owners out there that are solo. They're like consultants, they're their own boss. Can they have 401k plans for themselves?

Jean Smart: 13:39

The solo 401k? yes, they can, absolutely. So. The solo 401k is built specifically for solo printers And they can also have a traditional plan, but it all depends on sort of their wealth building goals. You can put over 70,000 away tax deferred for an individual, which is quite robust So, and you can fluctuate depending on how much you did that year. So if you're a solo printer and you're operating in your own style, maybe some years are better than others. Right, they all vary, but it gives you a lot of optionality and solo 401ks are very cost effective. The fees are almost de minimis and you have access to the same kind of funds that you would in a 401k plan.

Stefanie Sample: 14:24

That's so crazy. I mean, maybe other people out there knew about this, but it always kind of felt like the sentiment in the world is that if you're a solo entrepreneur, like none of these things are available to you, like that, you miss out a lot.

Jean Smart: 14:38

I think it is. when you're a solo printer, like all of us, we're just by ourselves. You're the salesperson, you're the tech, you're the developer, you're the project manager you're doing, you're the finance person. So you're wearing so many different hats. But I would advise most solo printers and all of us we have our own tax advisors for our small business. Most solo printers also do, And those individuals can be extremely helpful in making sure you're setting up your company appropriately and taking advantage of all the tax benefits.

Stefanie Sample: 15:11

Awesome. I'm Jean. I know you're so knowledgeable around this topic, and so I would just love for you to share a little bit about the potential impact on employees to having 401k plans and by offering these two employees, what that could mean for them long term.

Jean Smart: 15:27

It's the difference between having sort of financial freedom when you're in 60s and 70s and 80s or working longer. It's everything I will say. I was fortunate enough to start my 401k plan when I was 21. From my first job And over those decades, the power of compounding which basically just means for every dollar you put in yesterday or a year ago or 10 years ago, 20 years that compounded growth which is tax deferred you haven't paid any taxes on. That is tremendous. It is the primary vehicle in which most Americans are retiring on And the beauty of it is you don't have to be an ultra high net worth person and make hundreds of thousands of dollars and make a lot. You can make 50, 60, 70. And if you can just put 1% away every year over the course of your life, you should be on your way to saving a million dollars for your retirement, which is significant. It's the matter And I had mentioned earlier about us not charging asset based fees, aum fees. Those are significant. That's like the extra dollar, $2 or $3 every week can lead to hundreds of thousands of dollars when you're retiring. So read the fine print first when you set up and just keep doing it, and it is literally put it aside and don't think of it as oh, it's less of a paycheck, think of it as you're paying yourself first. You pay yourself first before you pay the rent, before you buy the groceries, before you do anything else. You're paying yourself and then you move on with the rest.

Stefanie Sample: 17:07

I love that, as we all should. I mean, that's great. It's so hard to get in that mindset but yeah, doing it right away And these small businesses, having these options for employees is so important. So I want to go back to the options. You kind of listed them out earlier, but you know specific to the small business owner that has under 10 employees. You know like we're trying to offer employees a plan. Tell me again, what are those different options and how would I choose which one to go with? Like you mentioned, i think, safe harbor, but what?

Jean Smart: 17:40

do I do here. So it's sort of it's depending on what your budget is, how much you want to contribute and what you want to make available. So the traditional is just a plan that you offer for all of your employees where they can actually select their own contribution, how much they want to put in. So maybe they want to put 1%, maybe 15 or 20%, but there's no additional matching feature. The safe harbor is when an employer wants to incent and reward the employees for participating And that matching component could be as small as 1% or as large as 6 or 7%. I know one large company that contributes 12% to an employer plan. So it really depends on the philosophy of the company. But just know that depending on how you set it up because it's the tax deferred product each company will be on the hook for various compliance tests and auditing. So the more favorable and the more you contribute to encourage your employees to participate, the fewer testing hurdles that you have to go through. So those are the two big ones. And then there's a lot around eligibility Do you want to make it available right away or do you want to make sure employees are there for a certain period of time? And I would say 401ks, like health benefits, our stock options and stock option grants. They're always for all of us in the super competitive time to try to get the best talent, to try to reward them fair and equitably, but for us as business owners, to make sure that we're doing the right thing fiscally and that we're looking at the long haul of the company. So it's a fine balance. It's one of those things that can make a break or change a person's life when they start early. So kudos to all the companies out there that are thinking about it or that have been doing it for a while.

Stefanie Sample: 19:39

Awesome, okay, biggest question here that you'll know the answer to what is Penelope, your company, and how can you help the small business owners listening right now with their 401ks?

Jean Smart: 19:51

Sure. So we are, as I mentioned before, 401k in a box. We've kind of stripped away all the headaches and all of the decisioning. And it's a very personal story for me. My parents were small business owners and I grew up in that. We immigrated from Korea. My parents had a hard time sort of deciphering how to do the taxes, how to hire, how to navigate sort of the supply chain a lot of different components. So even early on, i used to always sort of pitch, hit and help, and so it would be as if my parents immigrated in January 2023 and they were starting a plan like all the things, read our taxes or read this bill, or explain this to me And she said find the best plan. This is the plan I would have created, which is taking the decisions that they don't need to make, making things as automated possible, putting the best plans by the best brands out there and making sure they're not getting nickel and dime on every single fee and making sure the website looks really easy and simple. So that's sort of the idea and the genesis. And, to come full circle, i have a daughter and her name is Penelope and she actually is the direct beneficiary of my 401k, my husband's 401k, and so this is what we mean by we're legacy building. Why do we work? to what end? We have families, we have other people to support. We want comfort for ourselves. So it's a personal journey for me, but I've been in this space for a while and I've seen a lot of large companies, institutional companies, provide this, and it's provided so much security for people at those large companies. But what about the other staff? What about the small business owners? We should all have access to those kind of benefits too. So that's our company.

Stefanie Sample: 21:38

Awesome. I'm so glad you created Penelope. We all need it so bad. Thank you so much for your time today, jean. We loved having you and for everyone listening. thank you for tuning into the funded podcast. We hope you found this episode informative and helpful on your business journey. Don't forget to subscribe to our podcast, follow us on social social media and if you are looking for funding to grow your business, check out our website, getfundedcom for flexible and affordable financing options. And until next time, we'll come back to you with a new topic next week. See you later.