How to Communicate the Importance of 401(k) Plans to Your Small Business Employees

Author: Mike Cohen, AIF® / Reviewer: Callie Adams Farnsworth, QKA, CAFCA
17 Mar 2023 / 401(k) Plan Information

As a small business owner, offering employee benefits like a 401(k) plan is important. However, where many small business owners struggle is when it comes time to communicate the importance of these benefits to their employees. As a result, your employees may not take advantage of valuable benefits that could help them save thousands for their retirement. Here’s how to make sure your employees know why they should take advantage of your small business 401(k).

Start with the basics: What is a 401(k) plan?

You might be surprised by how many of your employees, especially younger ones, may not be familiar with what a 401(k) plan is and how it works. Provide a brief overview of the plan to help them understand.

Not sure where to start? Try saying something like: “A 401(k) is a savings plan designed specifically and only for retirement. It allows you to move a portion of your earnings before you pay taxes on that portion and save it in an investment account. That money is invested into stocks, bonds, and other financial instruments, and it grows, earning interest, and you don’t pay taxes on that money until you withdraw it in your retirement.”

Emphasize the benefits

Step two: Explain how–aside from saving for the future–your employees will benefit from making retirement contributions. These upsides include:

• Tax Savings: Contributions to a 401(k) plan are made with pre-tax dollars, which means that employees can reduce their taxable income and lower their tax bill.
• Employer Contributions: Many employers offer matching contributions to their employees’ 401(k) plans, which means that the employer will contribute a certain amount of money to the employee’s account based on the employee’s contributions. (Also known as “free money.”)
• Compounding Interest: The money in a 401(k) plan grows tax-free and earns interest, which means that the account balance can grow significantly over time.

Explain how to enroll in a 401(k) plan

The third step in effectively communicating the importance of a 401(k) plan is to explain how employees can enroll in the plan. (We recommend an all-hands meeting, since not everyone reads their email.)

It’s important to make the enrollment process as simple and easy as possible for your employees. This may involve working with a third-party administrator or financial advisor to set up the plan and provide educational resources to your employees.

Provide educational resources to your employees

This can include information about the investment options available in your small business’s 401(k) plan, the tax implications of contributing to the plan, and how to manage their account.

It’s important to make these resources easily accessible to your employees. Online portals and mobile apps are the way to go. You can also consider offering financial planning services or seminars to help your employees make informed decisions about their retirement savings. And you can always guide your employees to the Ubiquity blog, which is full of articles that explain the various features and benefits of retirement plans.

Address common misconceptions about 401(k) plans

Many employees may have concerns or misunderstandings about contributing to a 401(k) plan, such as:

• “I can’t afford to contribute to a 401(k) plan”: It’s important to emphasize to your employees that even small contributions to a 401(k) plan can add up over time, and that the tax savings and potential for compound interest make it a valuable long-term investment.
• “I don’t understand investing”: Many employees may feel intimidated by the prospect of investing their retirement savings. Providing educational resources and tools to help your employees make informed investment decisions is important.
• “I’m not planning to retire for a long time”: Some employees may feel that retirement is a distant goal and not a priority. It’s important to emphasize that the earlier employees start saving for retirement, the more time their savings will have to grow.

Encourage saving for retirement–and make it part of your company culture

The sixth and final step in effectively communicating the importance of a 401(k) plan is to foster a culture of saving for retirement within your small business. This can involve setting an example as a business owner by contributing to your own 401(k) plan, as well as encouraging and rewarding employees who contribute to their plans.

You can also consider implementing automatic enrollment or automatic escalation of contributions to make it easier for employees to save for retirement.

 

Ubiquity is not a registered investment advisor and no portion of the material herein should be construed as legal or tax advice. Please consult with your financial planner, attorney and/or tax advisor for advice.