Job vs. Career path: the 401(k) difference

By Nathan Gibson, Generation Next Governor-at-Large
Canfield Equipment Service, Inc.

This article was originally published in the July 2017 issue of Generation Next Edition.

During a recent interview with a potential new employee, I was surprised by a series of questions I was asked in return. The interviewee, a millennial, posed an in-depth dive into our company 401(k) offering:  What is the employer match? What funds are offered? What are the expense ratios of those funds? What is the vesting schedule? Is there an option for profit-sharing directly into the 401(k) account? I knew some of the answers, but not well enough to instill confidence.

I should’ve expected the next question: Is your 401(k) any good? The answer is relative to how our 401(k) offering matches up to other small businesses -- and I did not know the answer.

The final question really hit home: Are you offering me a job or a career?  The difference between the two, as it was explained to me: If I spend 30 years with a company, I better retire comfortably and on time, without question.   

The interview went well, but I had to do some research and provide these answers to sway the decision.   As it turns out, our 401(k) was terrible, and I wasn’t able to hire this person who I considered to be a great candidate. I had always taken for granted that just because we had a plan, it was fine. 

Would I be able to retire with this plan? Panic.

A piece of the recruitment and retention puzzle

Let’s get the obvious out of the way. If you are a business owner and you do not offer a 401(k) or equivalent, you should give it a second look.  

NTEA has spent considerable time and resources trying to solve the problem of employee recruitment and retention, and while a lot goes into that, I have learned from experience that offering a solid 401(k) plan is a critical piece of that puzzle. Most potential employees are going to expect a 401(k) as part of their benefits package – especially millennials. The days of the pension are all but gone now, and the 401(k) has taken its place.

401(k) plan options and administration was more complicated than I imagined. First thing I did, was get a grasp on the statistics of our company plan. Two numbers told the story: The percentage of employees  enrolled in our plan, and the average deferred contribution percentage. Both numbers were very low, which told me that either our employees weren’t aware of the plan or they didn’t think it was worthwhile. We brought our plan administrator in to do a presentation, and the needle still did not move. 

Our plan was terrible, and our employees thought so too.

Are you offering a job or a career?

I raised the question again, are we offering them a job or a career? 

We got to work with the plan administrator to help improve the quality of the plan. There was a lot to consider and I’ll draw attention to two of the finer details that matter.

Contribution limits:

  1. The cap for how much an employee can contribute is $18,000 a year (employees aged 50 years and over can contribute up to an additional $6,000).  
  2. The limit for overall contribution is $ 54,000.

I had to stop and think about that for a while: An employee can contribute $18,000, but their employer can kick in another $36,000 on their behalf.  

This would be the ultimate company match – a $2 match for every dollar deferred. This seems pretty unrealistic for a small business. 

The other way to get there would be to offer profit-sharing ability in a plan. So, a company bonus would be paid into an employee’s 401(k) instead of an extra paycheck. This is something to consider – the company would save money since it doesn’t have to pay payroll taxes on the bonus, and the employee doesn’t pay taxes on it right away since it’s a tax-deferred account.  

Employee participation and discrimination tests:

If you are a well-paid business owner, you are going to want to maximize participation in your plan for your own sake. The IRS now has rules that make all company 401(k) plans pass a discrimination test. The test is designed to prevent employers from only offering 401(k) benefits to highly-paid employees. You will notice if you are failing this test if you receive a check (with taxes taken out) from your 401(k) every year. 

If only a few people participate, odds are those will be your highly-paid employees – so the test makes sense. You can modify your plan to help pass this discrimination test by including options such as automatic enrollment and offering a safe harbor 401(k). If you do not pass, your top talent will not be able to effectively contribute to their 401(k). This is a sign that your 401(k) is terrible.

Final thoughts

John Oliver did a Last Week Tonight bit on the effects of high expense ratios on a 401(k) plan. This was the first time I’d considered the aspect of the expense ratios for fund offerings. 

If you are a job seeker, you would do well to ask some of these questions during an interview. If you are an employer, you would do well to have the right answers. Offering a 401(k) can create loyalty and help you retain your employees.

Owning a home and having a 401(k) are the two pillars of retirement. How are you doing so far?

(Or you could work forever. I think golf is boring.)  

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