Why 401(k) is a Smart Choice for Small Business - Mission to Grow: A Small Business Guide to Cash, Compliance, and the War for Talent - Episode # 93
Richard Tatum: it's really looking at that holistic picture on how do we meet employees and workers where they're at and make it easier for them to save? How do we make it, uh, more tax advantageous for them to save? And that should lead over into a less stressed, happier, more productive employee for small businesses.
Mike Vannoy: What small businesses need to know about 401k. Hi, I'm Mike Vanoy, host of Mission to Grow. And this is a topic that I think so many small business owners just don't realize is, is accessible to them. I think for, for a lot of really good reasons, and we'll kind of get into that today, um, Because of technology and complexity and affordability, most small business owners have just stayed away from offering 401k plans to, to their employees.
But in a world where the, this labor shortage is here to stay, it's not because of a pandemic, it's not inflation, it's not presidential politics. This is based on birth rates 20 and 30 and 40 years ago. We are in a labor shortage that is, that is here to stay. Unemployment rates have hit the roof. You know, 3.
7 percent for going on 2 years. This is the 1st time since the Nixon administration. We have to be able to address this and recruit and retain employees. Small businesses need the same set of tools previous to this. Only the big companies had. So I want to introduce my guest, a great, great person for this topic.
He started his career in the 401k industry more than 20 years ago, brings extensive experience in plan design, administration, and payroll integration. He's currently immersed in his firm's ecosystem of partners to influence the design and deployment of world class servicing. His knowledge and expertise in retirement plan administration, payroll integration, and business innovation serve as a tremendous asset to his firm and the companies they serve.
He's the President of Workforce Savings at Vestwell. Uh, please welcome to the call, Richard Tatum.
Richard Tatum: Well, thank you, Mike. I appreciate you having me on today. I'm excited to spend some time with you. You're talking about, you know, what I've done for my entire career and that's helped small business owners set up 401k plans. Um, so looking forward to today.
Mike Vannoy: We're going to fill an hour for sure, Richard. Lots of things that I want to explore here. But for somebody who is, who can maybe only join you for just for a minute, what's the number one thing that business owners, especially small business owners, need to understand about 401k?
Richard Tatum: Yeah, great question. I think that what's really changed over the years in my career is that, um, 401k has become its own brand and, um, where it used to be a perk for employees, according to our survey last year, 85 percent of workers want a 401k plan. It's a prerequisite for them when looking at a potential employer.
So I think it's really become a table stakes item for employees. Um, and so that really helps small businesses with attracting and retaining. their employees, which I know is important to all small business owners.
Mike Vannoy: Say more about that, that evolution. Cause like, I mean, I, I, I grew up in an entrepreneurial home. I remember as a young entrepreneur, myself being involved in businesses, exploring 401k in, uh, for the first couple of businesses I was involved in. I mean, candidly, I think I was just intimidated out of it.
Right. Uh, I knew it was something that. Uh, employees asked about, I wouldn't say they demanded, um, but probably the employers had more leverage than they, then than they do now. Um, but it was, but it's always been something that was interesting, but I think so many small businesses are just, they have been afraid of it.
There's a handful of reasons, but, but I want to hear your thoughts.
Richard Tatum: Yeah. So 401ks can be complex if they're not set up correctly. And I think what you've seen in the evolution of our industry is that, uh, you have more, Uh, firms that specialize in 401k now and can really handhold small business owners through setting that up, you know, I was a small business owner for many years myself.
And you've got so many different things on your plate, trying to run your business, trying to Make sure that you grow your business. You've got all these different benefits like health insurance and other things. So the 401k could be intimidating because of the complexity, but I know that a lot of businesses maybe even had a bad experience at some point and shut their plan down.
And so now, it's easier and more cost effective than ever to set up a 401k plan. And a lot of the legislation has made it more manageable. And service providers out there have made it more of a turnkey solution where it's easy for an SMB to say, hey, okay, I want to start this plan and make that a really simple process.
So, it's a combination of evolving legislation in the industry, just trying to make it as easy as possible for small business owners.
Mike Vannoy: Uh, Richard, what specifically, what, uh, without getting too wonky, what specific legislation changed to make this thing more, more accessible to small businesses?
Richard Tatum: Yeah, you really saw a trend starting back in 01. There was a big tax, um, plan that that raised the amounts that employees could contribute. You saw the Pension Protection Act in 06, and then recently you've seen the SECURE Act and SECURE 2. 0. And what those acts really did was make it more cost effective for small business owners to start plans and look at certain things like automatic enrollment, which we can talk about in more detail, and how do you get employees who may be intimidated by the enrollment process.
You know, I'm in the 401k business and one of the last things I want to do at night is go home and make. Decisions about my retirement savings and retirement readiness. And so a lot of people in our industry have adopted automatic enrollment programs. When I say people, I mean, small business owners, financial advisors, payroll companies.
And so those automatic enrollment programs help get people off the sidelines, help get them saving and workers are so much more likely to save. Um, and an employer sponsored plan. So it's just become a lot easier, a lot more cost effective and, and the industry helps small businesses avoid some of the pitfalls that would have been big pain points, you know, 20 years ago.
Mike Vannoy: am I thinking about this right to almost put it into three, three buckets of complexity? Um, until somewhat recent, there's a technological complexity that, uh, just how do I create the technology and make it accessible for me to administer my employees to access, make choices, integrate to payroll, et cetera.
So there's a tech component. There's a legislative component. Um, uh, maybe not just legislative, but an administrative component, like, uh, scary words like plan sponsor. What the heck is a plan sponsor? And what does it mean for me and what kind of liabilities I now have? Uh, and then there's the actual funds themselves.
I mean, shoot, forget wrapped in a 401k, just all the options out there. There, there are to invest, uh, pick stocks, mutual funds, indexes. There, there's just so many choices that if you're not a. A savvy investor that, that that's intimidating in and of itself. It, it, it, am I fair putting it in those three buckets?
Richard Tatum: Yeah.
I think so. Um, you know, a funny trip down memory lane when I first got into the business in the late nineties, a lot of plans would offer 50, 70 different mutual fund options. And back then the stock market was going gangbusters. So everybody was. Making great returns every year. And as you know, we've, we've been through a couple of bear markets and, and that was scary for workers who were putting in their, their hard earned dollars into these plans and seeing those account balances go down.
So you saw the industry really evolve with things like, uh, risk based allocation funds, lifestyle funds, they're sometimes referred to as. You saw the next evolution with target date funds where, um, you know, once again, that yellow brick road to, to making it easy for employees to save. They could look at, um, how old they were and when they plan to retire and pick a fund that aligned to that target.
And what you're seeing now is the evolution of managed accounts where employees can once again look at their time horizon for when they want to retire. And then they can look at their risk tolerance and, and, and they don't have to get into the minutia of picking different funds and their classes and, and things like that.
So it really becomes more of a decision around how much do I need to be saving to be successful and less about the investments and, and what they need to be choosing there. in your other buckets there, you know, you mentioned administration being difficult. You've seen the industry respond to that as well.
And there was a big ask on small business owners when the industry really started growing. And what you've seen is technology has improved. Most payroll companies are integrating with different record keepers. And how that makes it easy on the small business owner is they don't have to touch the 401k plan every pay date.
Those those pieces of information are sent over automatically and it's managed for them in real time. So Plans are staying in compliance and the data is up to date, which helps with outcomes, you know, for the workers and things of that nature. Um, but you're also seeing the evolution of, you know, the industry's really bad about using anacronyms that maybe small business owners can't relate to, but there's fiduciary services involved now where service providers can take over some of that responsibility and liability that used to sit on small business owner's shoulders.
And now they can hire a professional firm who can take on that liability and make sure that things like the tax form at year end, that's called the 5500, is signed for the small business owner. They don't have to worry about that. You know, if someone leaves the company, wants to roll their money over, that's handled for them.
So the takeaway has really become a more of a do it for me approach. And, um, you know, there's one thing that Congress has been able to align upon, and that's that people need to be saving for retirement. We've got a big savings gap here in America on many fronts, and that's where you've seen the legislation really involved.
And so credit to, you know, our Representatives who've come together on that and expanded, you know, tax credits for small businesses, expanded the amount that people can save. And, um, that coupled with the evolution in the industry has just made it much easier and cost effective to start these plans.
Mike Vannoy: Let's do this. I want to maybe maybe kind of recap this evolution. I want to step back a bit. Let's let's actually just define 401k. So I think most most people watching today obviously understand conceptually what it is. Otherwise, they wouldn't be watching listening in, but maybe a little more detail.
What is and is not a 401k plan. Especially as it relates to perhaps, uh, you know, state mandated IRA plans, et cetera, different types of savings vehicles. But then I want to come back to this savings gap because I think this is what's partially really driving so much of the change. So recap on, uh, on the evolution.
I think reasonable for small business owners, especially to have been intimidated out of offering 401k up to this point. I mean, if you think about. What has to happen, you have to pull money out of a payroll system. You have to put that money into a 401k system. If that employee, uh, changes their, uh, election amounts.
Uh, then all of a sudden you're making updates in one system. I'm literally moving money from one system to another. Maybe I'm ACH ing money, but maybe there's all kinds of different complexity there. The employee takes out a loan. Now, all of a sudden there's offsets that have to go back and forth. I have to do all of that in a compliant way.
So I got the tech, I got the operations. I've got scary fiduciary responsibility and acronyms that don't even make sense to me and just go. It makes me give up, right? uh, I mean, and this, this is meant to be an informational conversation, but this certainly vestal is what your firm I'd say is the market leader in this while we partner with you guys.
Um, but the marketplace in general, these plans are so much more accessible. The, the integration with payroll systems is such that that burden is largely removed. Uh, you, uh, vendors like you guys have demystified, uh, the acronyms and the plan administration and just kind of a do it for you, uh, compliance approach, uh, that you can then be as either simple or as complex as you want on the investment side, whether you wanna partner with your own financial advisor, uh, or whether you want to give employees your own direct choices.
Uh. Punchline is small business owners should no longer be intimidated by 401k. This is extremely accessible. Am I overstating that?
Richard Tatum: No, you're, you're, you're exactly right. Um, you know, when I first got into business, all those things you just walked through, it was very cumbersome. Um, Yeah.
you had paper enrollment forms and. Employers would have to collect that, key it into their payroll system. Sometimes they'd have to literally mail a check to a 401k record keeper.
Um, you know, they started going online, but there were still work to be done. And if an employee changed or dropped out of the plan, and, you know, loans were a really big nightmare for employers to have to deal with. And really what's changed is, technology has driven down The, hassle and the costs of offering a plan.
So better technology is really helping close that savings gap. And so now, um, really everything's done through, you know, I'll use us as an example, when a 401k plan is rolled out, you know, we're, we're notifying the employees that, Hey, and a lot of providers do this as well, that, Hey, you, you have a plan you have access to now, and here's how you get signed up.
And, you know, most plans are going automatic enrollment. And if you don't, we're going to default you to this and to this type of, Target date investment or others that are available. And then the 401k platform is collecting that data and automatically pushing that back to those payroll systems we talked about.
And then the plan goes live and the deposits start flowing into their account. And what's really cool about a 401k plan relative to like a health insurance benefit, I always joke that health insurance takes care of the worker today and the 401k is taking care of their future self. But what I've seen that's really cool is it accumulates this tangible asset.
So the employee, they can go online, they can go on their mobile app. They get a statement every quarter, maybe an email about it or some get it in the mail. They can say, wow, I've put away, $2,000 this, last quarter, and my employers put in 500 or whatever the formula may be. And so there's momentum that starts getting gained behind it.
The employer's life is easy. They don't have to deal with all those headaches around payroll, 401k administration. The employee's happy because they're seeing this tangible asset start to grow and get bigger. And once you see that momentum behind a plan, you know, the, the water cooler, the, the coffee pot talk starts happening at small businesses like, Hey, you need to sign up for the plan.
You need to increase what you're putting in. So it's really, really neat to see how technology and things have made it Um, I guess easier to save, but also there's a positive group think around it from workers as well.
Mike Vannoy: know, you and I, as we were preparing for today's conversation, talked a lot about it. I talk a lot on this show. about the changing demographics, right?
If you go all the way back to say 1938, the Fair Labor Standards Act is the first really major federal legislation that kind of gave protections for employees. Um, there was probably always more supply than there was demand for labor. Therefore, uh, employees didn't have a lot of power and the federal government kind of stepped in, okay, you can't, you can't abuse kids.
You gotta pay overtime. You gotta keep them safe. Good records, uh, kind of things that we take for granted today. Fast forward to the sixties, you know, around, uh, civil rights and equal pay, fast forward to the seventies and OSHA, safe work environments, fast forward to the nineties, Americans with disabilities, family medical leave.
So there's this continuum we've been on that is accelerating from, from. Uh, uh, I'd say the power sitting with the employer to the power shifting to the employee. And part of that is just changing demographics is the supply of labor demand, uh, have tilted, you know, declining birth rates of 30 and 40 years ago, uh, the GDP continues to go up, but the labor supply does not and it's flattening.
And so that's, that's really why we're sitting at this 3. 7 percent unemployment for, for such a long period of time. This is a new world. That requires new tactics to recruit and retain. Employees, so there, there's the context of probably getting into why we should be thinking about 401k as a benefit, uh, compared to before, but there's this, there's this undertone of a savings gap where I remember, I remember, it's probably, I don't know, what is it?
3 or 4 presidential election, 2, 3, 4 presidential election cycles ago, a vigorous public debate around privatization of social security, right? I think there's a, there's a very public acknowledgement. Hey, Social Security is not sustainable. You used to have, and you'll know the numbers, but maybe it's 16 workers to every retiree at one point.
Lifespan of about this long after retirement today, it's more like 2 workers to every person in retirement with lifespan this long. The math doesn't work. Combine that with a low savings, There's this shift to the government. I think there's kind of giving up on the prioritization, perhaps, of, of Social Security, but how are they incentivizing this, this underperforming savings gap?
Maybe take us through that in more detail, if you could.
Richard Tatum: Yeah,
You know, I'll start, you know, at the beginning of 401k land, since you, you, um, went through some of the history of legislation, you know, the Employee Retirement Income Security Act that we refer to as ERISA that came out in 74, and that created a section of the tax code called 401k, so it started.
You know, a long time ago, and it took a while for 401ks to really take hold. I don't know that when they originally drafted that legislation, if they understood how big of a program it would be, but you know, the fact of the matter is Americans are living longer and there's a growing population of retirees.
And so it's, it's hard to think through how to sustain that. without the private savings system, if you will. You know, right now, um, 25 percent of U. S. adults, according to PwC, don't have anything save for retirement. And about half of U. S. workers, that's 63 million people, don't have access to participate in an employer sponsored plan.
So that, that's a, that's a big gap there. And, you know, our mission at Vestwell and others across the industry and really the industry in general is to try to. Increase coverage, and that's why you've seen things like the state mandates come out with these IRA programs, which are great programs, and they've really expanded coverage.
You know, whether a business decides to participate in their state sponsored program or start a 401k, you know, it's a win win. You saw in California and Oregon, for example, 2 of the earliest states to come out with the state mandates. The 401k plan adoption rates went up dramatically because businesses.
Kind of got off the couch, as I said, and like, okay, we've got to offer something. Do we do the, the state plan or we do the 401k? It's really about what's the right fit for that small business owner. And so employees, you know, to tie this back to employer sponsor plans, um, you know, AARP put out via CNBC that, You know, employees are 15 times more likely to save through an employer sponsored plan than they are on their own.
And to me, that speaks to, it's convenient, it's easy. Uh, most employees trust their employer. Um, so they know that they've vetted and looked at this. And so it's just statistically proven that employer sponsored plans are better at getting people off the sidelines and saving for retirement. So, the industry and legislation has responded to that and continued to iterate on it and try to.
make it as easy as possible. But when we talk about that savings gap, it's, it's about access. That's where you have to start. Like in businesses, employers have to have access through their business to, to really begin that journey just based on statistics. They're not going to do it on their own. And so now that we're making it easier and more cost effective, um, you're seeing that coverage expand.
Mike Vannoy: I wrote this down the 15 times more likely to save if it's through an employer sponsored plan. I think. Most all employers care very much about their employees. I don't, I don't, I don't subscribe to a bunch of capitalist pigs out there trying to wring every ounce of sweat they possibly can out of their, other teams.
Uh, even if that ever worked, and I don't think it did,
Richard Tatum: That's my it sure as hell doesn't work. It sure as hell doesn't work today. Uh, you know, employees have choices, and they'll vote with their feet. But, a lot of business owners, they're scraping by, trying to make a living and survive. I mean, the failure rate of some businesses is very, very, very high.
Mike Vannoy: Why should an employer Care. Why should they be so altruistic to care about the savings gap versus just a way to attract their employee?
Richard Tatum: Yeah. This gets into a lot of financial wellness. Um, 73 percent of employees statistically, um, are stressed about their finances, and that really affects their productivity at work. And, um, you know, of that 73, a big percentage would be, um, you know, attracted to a business that offered better retirement benefits.
So, um, It's really important that, that small business owners, when they're looking at their, their P& L and they're like, how do we become more profitable? How do we attract the right talent? Employees look at that as a prerequisite now. Employees are stressed out and so when you offer a workplace savings vehicle, it helps them be less stressed, more productive.
They're not losing sleep as much, um, And so there's all these intangible benefits that really become tangible, uh, when you break it down and see that, hey, you know, a large percentage of employees are stressed out about this. How do we, you know, take some of that stress away and enable them to focus on work?
When they go home at night, they can focus on their families and not be stressed about how in the world am I going to retire? How am I going to save for college for my children? Um, you know, a lot of American workers have student loan debt. You know, there was a time period, obviously, where those payments were suspended.
And now that they've started up again, there's A very high percentage weren't able to make payments. And so, you know, we may talk about this more later, but Secure 2. 0, um, really brought student loan savings in and coupled that with retirement savings. And so now employers can match. What workers pay is student loan repayments and, and even take into account those contributions and deduct that just like it was a 401k contribution, um, you know, from their, their taxes that are due.
So, it's, it's, it's really looking at that holistic picture on how do we meet employees and workers where they're at and make it easier for them to save? How do we make it, uh, more tax advantageous for them to save? And that should lead over into a less stressed, happier, more productive employee for small businesses.
Mike Vannoy: most business owners, they genuinely care about their employees. They want to create healthy, happy, productive, positive work environment. So they genuinely care. Sometimes there's a cost to that caring and what and how much you can or can't do.
I think this is one of those things and we're going to unpack here. I want to spend much of the back half of our hour talking about tax credits, Secure Act 2. 0. There's been a game changing event
Richard Tatum: Yes.
Mike Vannoy: recently to make this more affordable than ever before. But you can't miss the fact that employees want it and the financial stress that many, many employees face today is real.
And if you can find ways to alleviate that financial stress that they wear every day and at home, you end up with a more productive, more loyal employee, and be as capitalist pig mindset as you want. That's a win win for everybody.
Richard Tatum: Yeah, exactly. I think that, uh, even if you assume there's a percentage of those capitalist pigs out there, you can make the business case that this helps your bottom line. This is going to help you recruit and retain the right talent, and it helps your business perform better. And. There's a lot of ways inside of 401k that the owner can save for their retirement.
There's ways they can design the plan, um, to benefit employees and benefit them. So there's all, all types of different creative ways where it can be, um, beneficial for all parties involved and, and help them save for their own retirement.
Mike Vannoy: Richard, let's, let's maybe just step back, maybe 20, 000 feet view here. Let's, let's maybe just get some concrete definition around what is, and is not a 401k. And I think especially. You know, there's a, there's a trend, you'll know off the top of your head. I'm going to say it's 18 states have enacted mandates for retirement plans.
Uh, there's many more that have considered it. I know that. Um, but I think actual enacted it's around 18. Um, no, sometimes what the state mandates do is they mandate a retirement plan. So that could be a state sponsored IRA. It might be just an IRA that's not state sponsored, could be 401k. Can you maybe help folks understand what, what is a 401k?
And specifically pre tax, post tax, how does it grow? What's the tax benefit for employee and employer? And then I want to contrast that against IRA, because I think those are the two choices most employers are facing here.
Richard Tatum: Yeah, no, great question. Um, so at its core, you know, a 401k plan is an employer sponsored savings program geared at retirement. Um, there's certain compliance, um, things you have to make sure that are in good order and filing requirements, but, um, at its basic level, it's a way for employees to have money taken out of their paycheck Either a percentage or a flat dollar, every paycheck can go into the plan.
The employer has the option to match that. There's some tax benefits around that for the employer. They can, you know, give some plans have profit sharing contributions, and there's ways to design those plans to mirror their current benefit package in terms of eligibility and things of that nature. So, really, it's just an employer based savings program geared towards requirement, excuse me, towards retirement, and, uh, to get those tax benefits, there are certain compliance requirements you have to manage, um, and that's what, you know, firms like ours help them with and make it easy so they don't have to worry with it.
Um, you know, the state IRA programs, as I mentioned to earlier states that were, um, the first to adopt,
Mike Vannoy: Before we, before we go to the compare contrast on the, on the IRAs, I just want to make sure everybody really understands the, the, the, the tax. So I think most of us understand is from the employee side, right? It comes up pre tax therefore lowering my, my, my, my income. And so my, uh, my income tax is on a lower base, right?
So there's tax benefits. Um, yeah, but I think a lot of people might not necessarily understand that that, that knife cuts both ways in a good way for employers, right? Can you, can you talk about the tax for, we're going to talk about tax credits with Secure Act 2.
Richard Tatum: Yeah, we'll put those to the side.
Mike Vannoy: but what are the tax, the FICA, the tax benefits to the employer for offering 401k period, but then also matching?
Richard Tatum: Yeah, absolutely. Um, so just, uh, an important note in a 401k plan, you know, employees can elect to save on a pre tax or a Roth basis. Um, you know, previously, prior to 2006, actually, um, employees had to do pre tax and now you can, you can save on a Roth basis. So Roth IRAs are really popular. Yeah,
absolutely.
You can do a Roth 401k now, um, and that's really exciting, especially for younger workers who are starting out on their savings journey to be able to sock away money, you know, on a Roth basis, see it grow tax free. So, employees have more choice there, which I think is really a huge benefit. And, uh, as you mentioned, if they elect to do it on a pre tax basis, then there's, uh, tax advantages, you know, at the federal level, um, that, that the worker doesn't have to recognize.
If there are employer contributions, um, that's not reported in a employee's income. So you don't have. FICA taxes and everything on that. You know, I've worked with a lot of small businesses over the years who think creatively about their entire compensation package and they look at, okay, I could give my employee, you know, maybe 5 or 10 percent in the 401k plan.
And I'm saving on payroll taxes by doing that. So there's just a lot of. Things that employees have in terms of flexibility and tax advantages and the, the advantages to the employer.
Mike Vannoy: And you hit on something really important. It's why I wanted to pause there. The numbers are pretty clear. Um, your employees want it. Unemployment is 3.7 It's not going away. The war for talent is real. You're going to have to find new ways to recruit and retain employees. But I think it's also too narrow minded to see 401k as a thing in and of itself, compared to how do you present this as part of a broader compensation strategy.
And when you, and when you present this to employees, you're not being manipulative. You know, this isn't, again, Big brother squeezing the little man here. This is you having a very candid, uh, I'd say trust building conversation with your, with your employees of, Hey, here's a way that I can increase your income in the way that I couldn't afford if it wasn't for this tax advantage.
And they understand it as an entire compensation package and get them off the mindset of just an hourly rate or just a salary, but how can, how, how can you Help them in retirement. How can you help them in a way that helps themselves for tax advantages, but also you as the employer, and therefore that's how you're, you're funding this.
I just think that's a fantastic conversation for owners to have with, with staff, especially more senior employees. What I'm curious for your thoughts.
Richard Tatum: Yeah.
I think that it really shows, um, that the employer cares And you know, are not complete capitalist pigs. And it, it just really shows to their employees that we're, we're not just here to. You know, make sure that the business is okay today. Uh, we want to make sure you're taken care of long term. And I think that mindset's really important.
And I think a lot of employees have experienced that throughout their careers. I was at my son's basketball practice the other night, and, um, one of the dads on the team who I met asked me what I do. I said I was in the 401k industry, and he launched into how he sure does wish his employer matched more, that he had a prior job that had a great match.
And it was. You know, like 100 percent up to six. And so it was doubling his retirement savings. He looked at that as a, you know, a guaranteed return on his investment. He was, he was complaining about his current employer's matching program. So I think that as, as. And, you know, employer, excuse me, employees leave businesses a lot more frequently now, they change jobs a lot more.
And so they've seen different iterations of 401k and they compare those now. And they talk with, with people about it. I mean, I'm talking to basketball practice with, you know, a dad about 401k plans. And so I think that since it is a prerequisite for a lot of employees now, they're going to be asking those questions in the interview process.
You know, they want to make sure the health insurance is there and other benefits as well. But 401k is top of mind for them. And it's not only do I have access to one, but what, what skin in the game does the employer have? And, and how are they contributing to my financial wellness longterm? And how are they making sure that my future self is prepared for retirement?
And then to tie it back into financial wellness, you know, you look at that holistic picture, the 401k is such a. a cornerstone of that and making employees less stressed, more productive. So it all works together. It's all, um, you know, tied together and, and helping businesses, you know, attract, retain, and have their workers be happier and more productive.
Mike Vannoy: And I would just, I would beg any business owner, entrepreneur watching, listening to this program, think about that example, right? So, so maybe this new employer for this, you know, fellow basketball dad, um, maybe they thought that we're doing something good, right? They just rolled out 401k for the first time ever, we're offering this new thing.
And ironically, because they didn't. For whatever reason, probably innocently and unintentionally, didn't have the proper context for what the marketplace offered, it turned out to actually be a bit of a dissatisfier, right? So, I just, I couldn't emphasize enough, really think about this in a broader total compensation package, benefits package perspective, not just discreetly binary, do we offer 401k or don't we?
And if we're gonna, what's the least expensive way we can participate. Am I
Richard Tatum: I would add, yeah, you are. And I would add to that, that is, um, you know, there's become more people that specialize in 401k like myself. There's financial advisors out there that focus on 401k plans. There's payroll companies now that offer great programs. And there's also data that you can look at as a small business owner to see what your peers are doing.
Like what are companies of my similar size or in my same industry doing as a 401k match? And a lot of those professionals I mentioned have access to that data. So now it's easier to kind of get a feel for where you stand and what's out there and how you can stay competitive. Because to your point, this employer may have had a plan for.
10, 15 years. If it's not broke, don't fix it. And they really haven't taken a step back and looked at it. And I think those that are proactive and build that into their overall compensation package. And when they're looking at, Hey, we want to hire this employee. We've got, you know, this amount that we can spend.
Make sure that you factor in the tax advantages and the expectations from workers when they're making their decisions. And so I think that's really important. And I think that, as we'll talk about later, Secure 2. 0 has really made it a lot easier for employers to do that, especially small business owners.
Mike Vannoy: this is game changer. All right. So we, we opened the conversation talking about kind of evolution and how things have changed.
Uh, to make 401k plans more accessible than they've ever been. We talked about, uh, some of the benefits for recruiting and retaining employees and the tax advantages in and of itself. Um, talked about kind of the sea change of expectations from employees. We talked even about states who are now mandating, so not all, but increasingly more and more states are mandating employers offer some type of a retirement plan, whether it's 401k or an IRA.
But now here's the biggie, and I always kind of joke, I say that the 401k business, from my perspective, Employers, you're dealing with the carrot, the stick and the sword. The sword is the war for talent. You're fighting this war for talent and it's, it's a recruiting retention tool. Um, uh, the, the stick is the state mandates.
I mean, the government, local governments, state governments, no federal yet. Um, they're literally forcing you, Hey, do this or go to jail. I say a little bit tongue in cheek, not much. Uh, you must offer a retirement plan, but this, the carrot kind of comes back where you took us at the top of the conversation around this savings gap.
It's like, you know, like I remember the presidential politics ads around pushing old ladies off of cliffs and wheelchairs and stuff, and this whole, I'll call it a vigorous debate around public, uh, uh, uh, retirement and privatization of retirement and whatnot. I just, you don't see those ads anymore. But what is clearly happened is the federal government is continuing to pass legislation that incentivize businesses in the form of tax credits.
to offer retirement plans. Can you maybe, let's spend a minute on Secure Act 1. 0. When did that come into play? What was the intent? What was its shortcomings? And why did we end up with 2. 0? And let's spend most of our conversation on Secure Act 2. 0. And
Richard Tatum: Yeah, so, um, you know, Secure Act, uh, the first Secure Act definitely took a lot of great steps in, offering tax credits and, it had a lot of good things in it. But Secure 2.0 What it really did was even take that a step further. And for example, there's, there's startup credits now for small businesses, like whatever they have to pay to start a plan up.
They can get, if it's under 50 employees, they can get a credit up to $5,000 for those costs. And
um, If they're matching their employees who are participating, they can get, and this isn't a tax deduction, I want to stress, this is tax credit. sometimes those things get muddled together. This is a tax credit.
So you can pay zero with those credits for starting up a plan. Um, If an employee is participating under Secure 2. 0, they can get a 1, 000 tax credit for up to 1, 000 for matching contributions they make to those employees that are participating. So that, that's huge. I mean, that's a game changer for me. Um, I just look at that and, and the, the advantages that that has for a small business owner when they're managing their budgets.
And so it just makes it a no brainer to offer this plan, especially when you look at how much easier it's gotten.
Mike Vannoy: be clear, in case, And in case there's any doubt, a tax credit means a check. IRS cuts you a check for, for that dollar amount to then offset any of these expenses. Right?
Richard Tatum: Yeah, exactly. So it may be a direct, maybe you pay less tax at year end, but whether they write you a check back as a refund or you have to write, you know, 5, 000 less of a tax bill, then it's definitely Right?
in your pocket.
Mike Vannoy: let's go a little deeper on Secure Act 2. 0. I want to get into more of the tax credits. Let's start first, a little bit on, on the benefits for employees. One of the things you hit on was student loans. So if you're trying to recruit employees, And your competitor across the street says, help wanted, we offer a 401k.
And you have a sign that says, help wanted a 401k will help repay your student loans. Which of the two of you on face value, all other things equal has the competitive advantage? This is a really cool thing that Secure Act 2. 0 did to help employees, but a smart employer can really take advantage of this.
Can you unpack that for us?
Richard Tatum: Yeah, so in Secure 2.0 now, there is a feature employers can add to their 401k plan where if employees, make their student loan repayments that they can actually match those repayments and those repayments can also be deducted just like a 401k contribution can from the employee's taxable income.
So, one of the biggest inhibitors for employees to save for retirement has been, student loan debt, which is trillions of dollars, as we all know. And so now. Employees who are having to make those loan repayments can get matched on that to get them started on their retirement savings journey.
And then once those loans are paid off, they're already in the game. And so I think the hope is they'll continue to, you know, save that amount. Hopefully over the years, if their income's increasing, you know, that student loan payment. Um, they make that, then they make additional contributions on top of that.
But it really is, is giving a great carrot, um, instead of a stick to say, hey, make those payments. It's going to lower your taxable income. We're going to match that now. So we're helping prepare for your retirement while you're retiring that debt. So that, that's really a, a huge thing. Um, the other thing that Secure 2.
0 did, which I think is really good, as I mentioned automatic enrollment plans earlier, um, um, One of the, like, the biggest thing we're up against in getting people to save. is inertia and everybody's got lots of things on their plate. You know, I've got three kids. When I go home at night, we're studying for tests.
And so signing up for an optional benefit, historically like a 401k, okay, I'll get to that later. That's about retirement. Now, um, businesses that start up a new 401k, there's an auto enroll mandate and employers have to have that for new plans as a feature in their plan for the most part, and it, it's made it.
a lot, um, easier for employees to not have to make those decisions. So some small business owners may think about that and say, wow, like I, I don't know about offering a plan where employee has to participate. They can still opt out. They still have that choice. It's just they have to choose to not participate as opposed to letting it default to a rate like three or 5%.
And where you now have the tax credits for matching contributions that I mentioned. It's a lot easier case for the employer to say, Hey, we're going, you're going to get default enrolled at 5 percent and we're going to match you half of that because they're getting the tax credit. It's a nice story for the employees.
And so it's really a win win. And I think that you're going to see firms like ours and other in the industry continue to evolve our technology to make it easy where it's, it's, um, simple for employees to understand that, Hey, I'm going to get default enrolled here. I can do more, I can do less and make that process very simple.
Does that make sense?
Mike Vannoy: Right. It does. It does. Um, and hopefully anybody watching today, there's some new nuggets. I think maybe a lot of people understood at least the basics of kind of what we've been talking about so far. The labor trends. Employees want it. Okay, it's simpler. Maybe I should consider offering it. There's FICA reduction benefits to offering it anyway.
Auto enrollment, making it easier, higher participation rates, use the money in different ways for things like student loans. I think these are some, some new concepts.
Richard Tatum: also, I just want to,
make sure I mention there's also an auto enroll tax credit for plans that started before Secure 2. 0 that aren't mandated to have auto enroll. There's also a 500 tax credit for implementing automatic enrollment, so that's a big advantage for existing plans as well.
Mike Vannoy: and Richard, to be clear, automatically enrolling someone is not the same as auto deducting a dollar amount or auto matching, is it?
Richard Tatum: So um, automatic enrollment means when a worker becomes eligible for a 401k plan, um, if they don't do anything, then they're going to get default enrolled to take a certain percentage out of their paycheck. Usually I see that starting anywhere from three to 6%. So that's going to be withheld. They get lots of notification.
That's required by law that they're notified and they get information about the plan and they understand they have the opportunity to go and opt out. And then if the plan does have, um, you know, a matching component to it, That's going to be part of what goes in every payday along with the withholdings.
But if an employee wants to do more, they have the opportunity to save more. If they aren't comfortable participating right now, for whatever reason, they can opt out and there's even a way, sometimes people just miss reading, um, the notifications they get. There, there, there's ways that once they look on their paycheck and say, Oh, wow, I had 50 withheld.
I didn't, I didn't mean to do that. They can go and opt out and even get that money back. Um, so there's an escape valve if you have that situation as well.
Mike Vannoy: So I think, and tell me if I'm getting this right, I think what employers need to know about auto enrollment is there's a tax credit, if you do it, So you'll get literally money in your pocket by doing it. You will increase the level of participation just from your employees, just because it's one less thing that they have to do.
I think safe to assume most employees will appreciate that and like it. Let's, let's face it, especially people at the, uh, lower income levels. Yeah, they can't afford to give half a percent, let alone 3%, because they're, they're trying to feed their kids, right. And they're living paycheck to paycheck and maybe even taking advances to do that.
So, uh, you know, this, this concept of retirement savings is like almost laughable to them. So you can do all this. And not punish those people that, that are the most needing and simply can't participate. Right.
Richard Tatum: that's Right.
And you mentioned, um, lower income workers. There's different components of Secure 2. 0 that phase in over the years. In 2026, Instead of a tax credit, the government will be able to make matching contributions for those lower income workers that participate into their 401k plan. So, there's things even coming down the pike that are going to be really exciting.
So, when you look at the employer's tax credits, you look at the tax advantages for employees, you look at the convenience of it now as technology has evolved, as more companies are taking on that fiduciary role on behalf of the employer. Um, you know, they always have some fiduciary responsibility, but, um, it's, it's made it a lot easier process and, and benefit to manage than it was.
So it's, it's really the best time in history to, to start up or even take a look at your existing 401k plan and hit the refresh button.
Mike Vannoy: Now, now let's talk to some of the, some of the biggies around the tax credits. So secure act and you, and you hinted to someone, but I want to go more detail and tell me if I'm capturing the right buckets. So. The tax credits come in two forms. There's the setup and administration, and then there's the ongoing expense.
I think it's something that has scared small businesses in the past, even if they could get their head around the technology, the administration, the plan options, um, maybe they're a thin margin business and they're just trying to grow and survive, let alone grow. Maybe there just wasn't money left to pay for because there's an ongoing administrative cost.
There was an ongoing, uh, uh, you know, matching cost, uh, that they just felt that they couldn't afford. Can you unpack the details of the setup tax credits, what they are, how they're calculated, how much they can be, and then the ongoing matching tax credits that, and I'm, I feel confident saying this, at least out of the gate for the first couple of years.
Businesses can offer these things truly at zero net cost.
So take us through that if you could, Rick.
Richard Tatum: Yeah, I'm going to focus on, um, employers for 50 and under employees, just, uh, and we can go further if you'd like, but, but basically. Yeah, absolutely. You get a hundred percent tax credit up to 5, 000 for startup costs. So anything that you have to pay a service provider to, you know, write your plan document, to get the plan set up and going, you get a tax credit that's a hundred percent of that amount up to 5, 000.
The employer contribution tax credit, you can get up to a hundred percent as a credit for the first two years, you know, up to a thousand dollars. Um, for each employee. Um, now that, that only includes employees who are making less than six figures. Um, so be, be careful about that as well. In the third year, it goes to 75 percent of the matching costs.
In the fourth year, it goes to 50 percent and in year five, down to 25%. And there's a lot of calculators and things out there online that you can look at as well. Um, if, if that would be helpful, we've got one on our website. I know a lot of other firms do as well. Um, there's also the automatic enrollment credit of 500 that I mentioned.
Um, and when you get above 50 employees, um, 50 to 100, there's a different sliding scale. And then above 100, um, is different as well. But for your small business owner audience, I think that to your point, you know, for the first 3 to 5 years, you can really be looking at paying next to zero. Um, for your 401k
plan, So we'll, we'll, we'll, we'll. Spend more time in each of those buckets. So there's the startup and administration. So this isn't just what you would pay, you know, the payroll company, like an Assure or the 401k company, like, like a Bethwell, this covers all your start. All of it. Right. So it's, it's the plan set up.
Mike Vannoy: Maybe you have to have an interpreter come in to do training. Training on anything involved is a cost to set this thing up for up to 5, 000. It is 100 percent reimbursable as a tax credit, right?
Richard Tatum: Yes.
Mike Vannoy: And so this, this isn't just what you may pay your payroll company, your 401k company, this is all expenses that might come in. So truly set up entering 401k land. Uh, it, it nets out free. Now it's a tax credit. You're going to have to pay for it. And then you'll just like when you, you know, you do your personal income taxes, uh,
Richard Tatum: Yeah, there's qualification,
Mike Vannoy: the check.
Richard Tatum: there's qualification requirements. Um, but those are usually pretty easy to, to look at, um, their, their hard dollar costs, you know, associated with starting up a plan. Um, so that's where a professional can really help you navigate that. You know, if you are a business, you know, with 50 to 100 employees, you are eligible for some of those credits, especially for those first 50 employees.
It starts phasing out after 50 lives. and so you want to make sure you work with your CPA or, um, you know, your payroll company and financial advisor when, when looking at that. Um, but there are really big tax advantages that especially in the first two years. Can make it, um, a very low cost, if not zero, to start up and administer that plan.
Mike Vannoy: Yeah. And we're not talking pricing here, but it's safe to say the normal under 50 employee company, they're not going to spend more than 5, 000. So the 5, 000 cap is going to more than cover any, any setup costs. If let me say this, if you're spending more than 5, 000, give me a call because we got better options for you.
Richard Tatum: Yeah, there's a lot of options that have a really low price point out there.
Mike Vannoy: So to be crystal clear, setting up in, in getting started with a 401k offering to your employees. Can net you zero cost. It's a huge, huge change in the marketplace. Thanks to Secure Act 2. 0. Now the ongoing And I wrote this down. It's year one through year five, a graduated scale. This is on the matching So if you're the employer, you're gonna match funds to your employee.
It's a hundred percent tax credit up to 1, 000 per employee Year one, a hundred percent year two, 75, 50, and 25 percent on through the, through the five years. I have that right. Right.
Richard Tatum: Yes, for years one and two, um, it is 100 percent up to 1, 000. And, uh, in year three, it's 75%. year four, it's 50 percent of whatever those matching costs were up to 1, 000. And then year 5, 25 percent in the 5th year.
Mike Vannoy: So a couple of things. So setup is free in your first couple of years are free. You truly for the first time ever in history, forget about the tech being easier, the administration being easier, the plan options and investment options being easier. Cost is an employer for the first time in us history. You can actually set Set up and for the first couple of years have net zero cost offer 401k to your employees.
Oh, I do want to unpack years three through five and ongoing. What kind of, so if I'm an employer, um, let's say I'm, I'm, I'm, I'm putting in, I'm maximizing the tax credit. So I'm adding a thousand dollars to each employee's 401k account is the employer match. What happens in years three, four or five and beyond, uh, if I want to be super capitalist piggish, or maybe my business is just hurting and I can't afford to do it anymore.
Um, is there a penalty? for businesses who start to contribute less as the tax credits go down? Do they, are they contractually committed to keeping that going? How do, how do the outlying years work? Because, because I'm assuming there's going to be expense involved in the ongoing.
Richard Tatum: Right. And if you, you know, you mentioned earlier that there's a lot of lower cost startup, um, options out there. So, there are, there are ways, um, that you can use that credit towards ongoing administration costs in those 1st, few years. There's some rules around it. It's like 250 per non highly compensated employees, you know, up to that 5, 000 I mentioned.
So, if you only pay, you know, 1, 000 to set up your plan, you can still take advantage of that extra 4, 000 over those first few years of administration. With that being said, um, a lot of small businesses adopt something called safe harbor plans. If you're a small business owner in the past, and you had to deal with something we call testing, and you had testing failures or top heavy testing, it can really sting you.
You can get money kicked out of the plan. You can have to write a check to the plan you are thinking about. So this safe harbor option really is appealing for small business owners, because just through virtue of their ownership, they're going to be considered something called highly compensated.
Employees who make above a certain threshold are going to be considered highly compensated. And if you're not a Safe Harbor plan, they may be restricted by what they can contribute based on what everyone else does in the plan. Safe Harbor plans, you have some choices on it. You can do a matching contribution.
An example of that is dollar for dollar up to 4%. So an employee puts in 4 percent of their paycheck, you put in 4%. That can get you around all those tests. Um, if you can't afford to be a safe harbor plan and you do just a traditional plan, that's fine. Just be cognizant of those tests. Where I'm going with this in relation to your question is that if your business runs into, you know, changing market conditions or things that are inhibiting you from making either a safe harbor contribution or a traditional match.
You know, make sure you consult with your service provider because there are some rules around it. You do have options to, you know, lower that, you know, to even shut it off. If you need to, uh, you may not get the tax advantages on some of that still, but you'll want to navigate that appropriately so that you don't do something that's actually going to cost you more money.
Um, and so you have to look at that and make sure you take that into account. But there are definite ways where you could, you could lower the contribution. You could shut it off for a period of time. Just want to make sure you take into account any compliance conversations and make an educated decision.
Mike Vannoy: Yeah, so I guess, Richard, I had a word about time. Here's, here's how I would and have been guiding small business owners to think about this. I think it's reasonable to think that after your 5 year window of all your tax credits, there's some expense in the form of, matching. The administrative burden is, really low.
the fact is, because it's a pre tax expense, you're lowering your, employer side of the FICA requirement. So there's a tax offset to just simply providing 401k anyway. I think you and I are already there. I think in this next two, three, four, five year window, people are going to realize this was never a war in Ukraine or a presidential politics or a pandemic.
This really was. The war for talent has been baked for 30 years based on declining birth rates and growing GDP. the labor shortage is here to stay. And as people start figuring that out more, they're going to realize they're just going to have to offer benefit plans like 401k as part of the comprehensive benefits and compensation plan to, be competitive.
So you're gonna have expense in the outlying years, but there's never ever, ever been a time in our history for an employer to offer this sizable, sizable, uh, uh, benefit to their employees that nets them tax free. So just, just imagine you got that employee with, maybe it's an employee who makes $50,000 a year and you pop a thousand dollars match into their 401k and it's a hundred percent deductible to you.
It costs you nothing. Thousand bucks is a lot of money to somebody making 50 a year. And I'm not trying to be all manipulative capitalist pig here, but I mean. Good for them and good for you that how the relationship building, the, the, the trust, uh, the, the loyalty that that could build in an employment brand.
Uh, I just think it's crazy not to take a really, really, really hard look at 401k if you're a small business owner today, you know what, uh, I'll give you the last word, uh, Richard, what do you want people to walk away from today's conversation thinking about?
Richard Tatum: Yeah, I want them to, to know that, like you said, the time has never been better to start up a 401k plan or to take a look at your existing plan and see if there's ways that it could, it could be enhanced. You know, legislation has evolved to make it cheaper, to make it more manageable. Technology has evolved to make it much less of a headache and you can outsource, you know, almost all of the administrative headaches around a plan for the most part.
Um, you know, service providers are stepping up on the fiduciary front to help small business owners out and take a lot of that, you know, responsibility off their plate. And so I would encourage you to, um, you know, make sure you're talking to your advisors in business, whether that be a CPA, your payroll company.
your financial advisor, because there's just so many opportunities now to, to help Americans save. And it, it not only benefits the individual worker, it, it also benefits the business, but it also benefits our whole society when we have people that are, um, financially well off and, you know, feel good from a financial wellness perspective.
And so really it's, it's a, it's a great thing on all fronts. And, uh, just. Hope that any business owners out there who are thinking about?
it, that the conversation today maybe helped get them off the sidelines and really ready to go and move forward.
Mike Vannoy: Richard, I really enjoyed talking to you today and I'd love to have you back on the show. We can go deeper on some of these more granular topics, but I think that it was, it was a great overview on the 401k landscape day. So thanks for joining me
Richard Tatum: Yes. Thanks, Mike. I appreciate it. Have a good day.
Mike Vannoy: and thanks to everybody else for joining until next week. Uh, hope you enjoyed this mission to grow. If you liked it, if you learned something, invite you to share, comment, uh, enjoy on any, any podcast or video platform of your choice. We will see you next week.
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