Employee Benefits and the Pandemic
On March 12th we officially entered into a bear market. The reaction to COVID-19 has sparked the Dow Jones Industrial Average (DJIA) to drop more than 30% since its 52 week high. Although these numbers may seem surprising, investors should not be shocked. Historically, a 30% drop in the market happens every 7 years.
According to a 2018 study by the U.S. Bureau of Labor Statistics, approximately 38 million private-sector employees in the United States do not have access to a retirement savings plan through their employers. While some employers are under the impression that starting a 401(k) for the first time can be a daunting and expensive administrative headache, LT Trust guarantees to get your plan set up within 30 days with the help of the LT Trust Payroll Assist service.
With the U.S. taking precautionary measures to control the spread of COVID-19, small businesses are rightfully concerned for their future. Although we pray for an end to this virus, there is a silver lining. Small business owners not adversely affected are finding that right now is a great time to add an important employee benefit – a retirement.
Why is now an opportune time to start a 401(k)?
“Buy low, sell high” is a common investor strategy.
While easier said than done, we all have an opportunity to buy low right now. Given the current bear market, mutual fund/ETF prices are depressed, giving the investor a “discount” on funds available. LT Trust offers an open architecture 401(k) lineup, meaning you can choose amongst 30,000 mutual funds or ETFs. In addition, due to this difficult time we’ve decided to waive our set up fee for all plans!
It’s becoming mandatory.
As of now, there are 10 states that have enacted a mandatory retirement plan for small businesses, while over 30 states have considered legislation for this to be state-mandated. It may be a matter of time before your state passes the same bill.
Tax credits are given to your business for starting a 401(k).
A startup 401(k) plan can now receive up to $5,000 credit per year. Here is how the rule is calculated: The lesser of $250, multiplied by the number of non-highly compensated employees eligible for the plan, only to cap out at $5,000 per year up to 50% of Employer paid fees. You can claim this credit for a total of three years. The expenses do not apply to employer contributions.
Recruiting and retaining employees should be an important aspect to your business.
While you do not have to offer any type of employer contribution, starting a savings vehicle for them will add to your benefit package. Having a 401(k) plan will show your employees that you are excited for their future.
What kind of 401(k)s are available for small businesses?
Once you’ve made the decision to start a 401(k) plan, it is important to choose the right plan for you or your business. Small businesses can choose between either a traditional or a safe harbor 401(k) plan.
A traditional 401(k) allows you to customize from a list of plan specifications. There is no mandatory employer contribution, and you can customize a match as you wish. In addition, employers can put a vesting schedule on the employer contribution as well. This type of plan is subjected to Non-Discrimination testing at the end of each year per the IRS Code. Owners and highly compensated employees will most likely be limited on their contributions.
A safe harbor 401(k) allows owners and highly compensated employees to contribute the maximum deferral limits, but there is a required employer contribution with no vesting schedule. Below are the three choices:
Basic: Matches 100% of the first 3% of compensation, plus 50% of the next 2% of compensation. This means that if an employee contributes 5% total, the employer would have to match 4% total of compensation.
Enhanced: Matches 100% on the first 4% of compensation.
Non-Elective: Contribute 3% of compensation to all eligible employees regardless if employees contribute or not.
Timing is everything.
Hypothetically, let’s say you started a 401(k) for the first time in 2009. If a participant put $100/month into the S&P 500 index for 10 years, assuming the 13.48% 10 year return that the iShares S&P index had between the periods of 12/31/2009 to 12/31/2019, your balance at the end of 2019 would be $25,764.93. Dating back from the 1920’s, the S&P 500 index historical annualized average return is around 10%.
Mutual funds and ETFs are at a discount right now. Whether you have a 401(k) in place or are looking to start one, right now is a great time to start saving. As the great Warren Buffett said, “I make no attempt to forecast the market – my efforts are devoted to finding undervalued securities.”
