VANNOY:
Game changing tax law incentivize small business owners to offer 4 0 1 K. This is a relatively new legislation passed in December of 2022, and I think businesses are just now starting to learn about this where there are tax incentives to spur interest and incentivize small business owners to offer retirement plans to their employees. And this is a game changer because I think most small business owners, they know they got to compete for talent, right? Their employees want big company benefits, but for the most part, small businesses had a hard time offering 4 0 1 K. It was expensive, it was technically complex, but things have changed dramatically here. So I have a great guest to my show today to help unpack all this. Help everybody understand what’s the new tax law, what’s involved in setting up a 4 0 1 K, what are the advantages? Why should businesses consider it and maybe why should they be considering it now when they maybe haven’t in the past?
So my guest today, rich Brindisi, he’s the 4 0 1 K product manager, atsu. He has extensive experience with retirement and other qualified products having spent over two decades with companies such as Raymond James, sun Life Credit Suisse, and a prominent national human capital management company promoting qualified plans. Rich also earned his law degree at the University of Richmond School of Law, and today, rich is helping small and mid-size businesses understand the opportunities and nuances of Secure 2.0 act, which is legislation that enables businesses to offer 4 0 1 K plans to their employees, really like never before. Rich, welcome to the show.
VANNOY:
So I think anybody who is watching today, they probably know what a 4 0 1 K is, but can you just maybe give an explanation in the context of an employer because, and I’ll back up. There are increasingly states who are mandating employers, even small businesses to offer retirement plans, and so some people just assume that means 4 0 1 K. Well, it could also mean ira, so maybe just a primer from a small business owner’s perspective, what are qualified plans? What’s the difference between offering an IRA versus offering a 4 0 1 K?
BRINDISI:
Sure. Well, when you think about a qualified plan, there’s really two ways to think about it and really it focuses on who really owns the plan or who sponsors the plan, so to speak. An IRA is owned by an individual. It’s called an individual retirement account. Now it could be a regular IRA or traditional IRA or a Roth IRA, but they’re both owned by individuals. 4 0 1 Ks are sponsored or owned by businesses for their employees. Their retirement plans benefits for employees, so they’re two very different ownership structures. IRAs allow individuals to invest in anything they want that they can open in an account in whereas 4 0 1 Ks, there’s kind of a limited basket of investment possibilities. That’s actually not a bad thing as we can get into later.
VANNOY:
Okay, so as I see it, there are three mega trends happening here that is this confluence of events that is changing 4 0 1 K for small businesses. Number one is the Secure Act 2.0. We’re going to get into that in a lot of detail today explaining what that is. In spoiler alert, it’s tax credits that darn near make four one K free for small business owners. So big stuff, that’s what I would say is the carrot. There’s also a stick. Increasingly there are states that are mandating businesses implement retirement plans, and obviously this is the backdrop of they know that the social security as it exists today, it’s not going to survive under its current structure, but I don’t think Washington necessarily has the will to change social security, so they’re going to do this tax credit incentive and then the states mandate, and then the third is just the war for talent.
The labor shortage is here to stay. This is not a pandemic thing. Unemployment’s sitting at a 50 year low and in all forecasts there’s going to stay that way. There’s more jobs in their employees. Small businesses have to compete for talent like they never had before, which means offering things like more benefits. All those things combine the time has never been more opportune for small businesses to offer 4 0 1 K. Can you speak into, maybe we’re going to get into the tax credits. I think that’s where we’re going to spend most of our time today talking about secure Act 2.0. What can you say about the state mandates and what specifically are they actually mandating?
BRINDISI:
Sure. Well states as part of, I think we ought to back up a little bit and think about why is there this push on the three fronts that you talked about?
VANNOY:
Well,
BRINDISI:
When Social Security was first created, there was one retiree or there was 16 people contributing to the system for per retiree, and when retirees reached age 65, their life expectancy was on average another seven years. Today that 16 for every retiree is shrunk down to about three, a little less than three, and life expectancy have expanded tremendously another 10 years if you reach age 65 on average. So the system as it was designed to be built that was built needs supplementation, so to speak.
So you mentioned Secure Act 2.0, we’ll talk about that. States have also gotten into the act, and so states have really mandated say if you are a small business or if you’re a business in general, you have to provide a retirement plan for your employees. Now we’re going to make it really easy for you because we’re not going to charge you for it, and your employees are all going to be put into what most of the programs are Roth IRAs, and they’re going to automatically deduct 5% of your post-tax income into that. Then the tricky part of that is that they’re going to calculate that 5% based on gross income and gross income. So what will that do? That means you’ve got a larger number coming off your post-tax income, so it’s really going to be more like 7%, and that’s going to be kind of a heavy burden for a lot of employees to just say, Hey, for your own good, we’re giving you a 7% haircut on your post-tax income and your take home income.
VANNOY:
So if you’re an employee and you live in a state where the state mandates that your boss, your employer provides retirement, the path of least resistance for the employer is to simply put you on what is probably an IRA, the state IRA plan. But because that’s after tax, that 5% is actually pretty darn expensive for you In a world of today’s inflation, when families are making decisions of how do I put gas in the car or groceries on the table to feed my kids? I mean, I don’t want to be too melodramatic, but people, this inflationary period is not easy on folks that the mandate could actually end up hurting employees and when employees aren’t happy, that hurts employers. Am I overstating that?
BRINDISI:
No employees are, they really want to be in control over what their take home income is more, and that’s why there’s a huge opportunity in 4 0 1 K because first of all, your 4 0 1 K income does two things for you that’s going to potentially raise your take home income. Number one, it’s going to lower your gross income, your taxable income. So if you are making, because
VANNOY:
It’s pretext and just so everybody understands, I think most people get it, but the IRA, it’s after you’ve been taxed. So if I made a hundred dollars and I’m at a 25% tax rate, now I have to pay for that IRA of my 75 remaining dollars versus coming up before taxes. So I’ve literally lowered my tax burden, right?
BRINDISI:
Correct.
VANNOY:
Yeah,
BRINDISI:
Right. So you lower your tax burden, you’re more in control over how much gets deferred into your retirement account and you’re going to be taxed less, frankly, your taxable income’s going to go down
VANNOY:
And
BRINDISI:
You’re much more in control, and that’s before we even get into potential employer matches.
VANNOY:
Right, right. So that’s benefit to the employee of a 4 0 1 K. How about benefit to the employer?
BRINDISI:
Well, the employer Secure Act 2.0 aside, the employer employees universally, almost universally want 4 0 1 Ks. There’s been a number of studies done and 88% of workers, Charles Schwab did a survey. 88% of workers, they consider a 4 0 1 K plan, a must have benefit for looking for a new job. Really it’s health insurance and 4 0 1 k.
Georgetown University did a survey in 2023 in conjunction with Bank of America, and they basically revealed that 46%, almost half of employees say they’re looking to change jobs in the next year, and only one in three were happy with the benefits package they had before. Then. You think about the US Small Business Administration and they utilize an organization called SCORE to do various studies and release that back to the small business administration so they can take action upon that, and there’s only 28% of businesses with less than 10 employees even offer retirement plans, and then you compare that to 87% of businesses with over a hundred employees offer retirement plans. So the real gap is with small businesses and small businesses want the best talent. They want people that have been in the workforce have experience in their industry, and it’s hard for them to attract it without really high quality benefits. Packages of which 4 0 1 kss are really the cornerstone with health insurance.
VANNOY:
This is one of those things, I think your employees are smart, they know what’s up, and some might not know the difference between IRA and 4 0 1 K, and they might not understand all the nuance of pre-tax versus post-tax, but I think for the most part, most of them do, and even if they don’t, it’s an easy explanation. So when you’re competing against that same business across the street, either it’s an advantage they don’t offer it or you’re a disadvantage because they don and you don’t. Right.
BRINDISI:
Well, right. If an employee has ever had an IRA versus a 4 0 1 K, they will know the difference and they’ll want the 4 0 1 K.
VANNOY:
Right, right. Okay. So what other reasons should a business consider? So if you’re in a mandated state and how many states are there? Is it 18 and growing? Is
BRINDISI:
That right? It’s actually 18 of passed legislation. Not all of them have actually implemented the functioning of the state plan yet, but 18 have passed it, so it’s imminent at some point.
VANNOY:
How many of those states have already enacted?
BRINDISI:
Eight to nine.
VANNOY:
Okay. Okay, so this is growing like crazy. Then what would be, and not holding into anything, what would be your prediction 2, 3, 4 years from now? Is this something that eventually all states have, or do you think this is kind of a red state versus blue state thing? How do you see this playing out?
BRINDISI:
That kind of depends on what happens on the federal level because congress has been kicking around a mandated, they call a secure K type of federal mandate, but it wouldn’t be a 4 0 1 K delivery would be, again, more IRA level delivery. So if the federal government does that, I think maybe states that haven’t really picked it up probably won’t. That being said, there’s only about six or seven that haven’t started debating this. So of the 18 that have passed it all, but six or seven are currently kicking it around within the legislatures.
VANNOY:
So this really is an active conversation in almost all the states at this point then. Okay.
BRINDISI:
Right,
VANNOY:
Right. Okay, so the federal government has the carrot and we’ll get to secure Act 2.0 in a sec. The states are giving the stick and then the labor market is kind of creating, you have to be competitive. Are there other things that an employer should be considering? Let’s start with the mandated state. So you live in a state that mandates providing retirement plans, and so the state IRAs, this kind of meets the minimum requirement 4 0 1 K is probably preferred. Why isn’t this just a no-brainer that all small businesses would just dual a 4 0 1 K if it’s self-Evidently better. Why are so many just going with the state IRAs?
BRINDISI:
Well, the state IRAs, there’s no charge to the employer. There is a cost for 4 0 1 Ks to employers that the Secure Act 2.0 is designed to alleviate to a large part, and that’s really why small businesses haven’t dived into it. They don’t feel like they can afford it. They don’t feel like they’re large enough to be able to provide a 4 0 1 K. It’s actually more kind of a badge of prestigious status that they can provide a benefits package that includes a 4 0 1 K traditionally.
VANNOY:
I completely agree. I talk to small business owners all the time and their employees ask them for it and it’s like, can’t afford it. I’m not sure that they even know that they can’t afford it. I think there’s an assumption of cost. Maybe they kicked it around once years ago, but I also think a complexity issue, I think the administration and implementation of 4 0 1 K plans scared the crap out of a lot of small business owners.
BRINDISI:
Well, yeah, there’s been a lot of, I’d say within the last 10 years or so, fiduciary responsibilities have arisen or been exposed on the administrative side and the investment side within 4 0 1 Ks that really require you to have a lot of policies in place that are really more compliance in nature today. Many record keepers alleviate those fiduciary responsibilities. So traditionally small business, look, let’s face it, they have a lot to work on. They just want to focus on their business and growing it. So having to learn ERISA section three 16 in order to be able to not get fined because your 4 0 1 k plan is out of compliance is not higher on their list. So if you give them an easy way out, those
VANNOY:
Words would be enough to scare me into not doing it right, because
Okay, I live in this industry and I know what ERISA is. I don’t think the average very, very smart, talented, hardworking entrepreneur knows what ERISA even is, but you start talking about statutes in compliance with a plan, it scares the heck out of you. So in plain English rich, what’s different now, and I’m not talking about tax credits, I’m not talking about state mandates. What is it just about 4 0 1 ks and plan sponsors and record keepers. I think most people don’t even know what those words mean. And forgive me if I’m offending folks. I think the average business owner doesn’t know what those phrases mean. What is it about the administration and implementation execution and ongoing compliance monitoring that has changed?
BRINDISI:
Well, first of all, recognition of the fact that these fiduciary responsibilities exist and then businesses have arisen to take that burden off of the hands of a lot of business owners. So for example, ERISA section 3 38 lays out all of these requirements in order to monitor select investments within your 4 0 1 K plan. And without having that kind of background, it’s almost impossible for a business owner to know how to comply with these. And there are now businesses within the 4 0 1 K broader product delivery that will take off, that will take on that fiduciary burden. And so businesses don’t have to worry about it. It’s the same thing with the administrative fiduciary responsibility. The businesses that deliver the 4 0 1 K have largely taken that fiduciary responsibility on because they’re the experts. They know how to comply with the law and take that burden away. So with those two things or three things really off of their plate, business owners can breathe a sigh of relief that A, they don’t have to learn all of this, and B, they’re not going to run a foul of law.
VANNOY:
Right? And to me, that is the biggest change that I think most employers don’t know. I think it we’re going to get into the tax credit stuff that I think is absolutely game changing and I think there’s going to be a mad rush to 4 0 1 K for small business owners in the next 18 months, but if businesses knew how much easier it was and how it’s been, de-risked for entrepreneurs and business owners in the last, call it two, three years, where the providers in these 4 0 1 K platforms, they’re the ones taking on the TPA, the third party administrator kind of roles and administration and ownership of risk that what used to be as a business owner, you actually had to learn all this stuff and be willing to sign up for that risk versus now it’s an online platform, you just choose it, right? And yep, this is the platform that we use. Employees go ahead and choose which investments, and you don’t have that risk like you used to.
BRINDISI:
Yeah, and the real danger was is that employers didn’t truly understand the risk and what offer it and be taking all those risks on their own. So for example, if you had an employee that you hired and your 4 0 1 k plan said they needed to be, they were eligible after one year and you missed that one year, there’s a fine associated with it. And the real bad thing is is that a lot of times, unless some sort of audit or whatever turns it up, maybe five years down the road, well the fine is applied, but then interest and penalties associated with that fine all come due. And there were some instances that I’d seen in the past where you had a small business that was perfectly thought, they were perfectly compliant, made one mistake and was facing a bill for fines and penalties and what have you, that could have taken their business out of existence because of one small one-time mistake
VANNOY:
That
BRINDISI:
Is largely gone. Now,
VANNOY:
Anything else before we jump into secure Act 2.0? It’s probably where we want to spend most of our time today. Anything else that’s kind of changed in the landscape that makes it easier for small businesses and why they should be thinking 4 0 1 k?
BRINDISI:
I mean, I think we touched upon the compliance aspect of it 4 0 1 K. It’s
Used to be quite the compliance landmines everywhere. And now like I said, the industry has largely taken that away and it’s easier to offer that than it’s ever has been from an employer standpoint. Being able to tell a potential employee, Hey, we have a 4 0 1 K plan until your employees are announced to your employees, we now have a 4 0 1 K plan. The reason why and before we get into secure Act 2.0 that’s so important is if you have, I’m going to talk about employer match for a second for their employees versus IRAs and I mentioned at the outset IRAs, you can invest in anything. Well, you can pick your rate of return. I think if you ask any reasonable investment manager what a rate of reasonable rate of return is you’re probably going to find, they’re going to ask, depending on the interest rate environment they’re in is anywhere from in the low interest rate environment you’re around 6% and in a higher interest rate environment, you’re probably around 10 to 12. And if you think about a 4 0 1 K employer match, you invest a dollar in your 4 0 1 K and your employer matches it, that’s a hundred percent return on that dollar, which is simply not available in the investment markets markets. It’s not even an investment, but it is. It’s the return on your dollar with the employer match before you even put it in. Whatever the investment choices are in your 4 0 1 k, it’s a hundred percent return. It’s the best deal for employees around and employees know it.
VANNOY:
So if you’re an employee, the benefit is just an absolute no brainer. I’m investing and whatever return I get on these investments in an IRA, it is what it is and the 4 0 1 k, it’s that’s better. But even if I don’t understand that, I sure as hell understand matching and for every dollar I put in, my boss puts in another buck. Oh my gosh, I’m doubling my money overnight. That’s no brainer. There’s vesting schedules and all that kind of stuff. But the other side of that same coin is probably what is scared employers because if you’re a small business owner and you’re trying to scrape by coming out of covid and maybe you’re not in growth mode, maybe you’re in survival mode or your growth, but you work on really thin margins and there just simply isn’t money available to do match, why should employers be thinking about doing a match in today’s world?
BRINDISI:
Well, now we’re going to drift into secure Act 2.0 which secure Act 2.0.
VANNOY:
And before we go there, rich, can you maybe speak to tax advantages for the business? I think we need to do probably a follow-up show because there’s other wealth creation strategies and we’re not fund managers, but there are other tax and wealth creation strategies for business owners to be thinking 4 0 1 K and different types of plans. But can you just talk, if I’m giving an employee a dollar to a 4 0 1 K, it doesn’t necessarily mean net a dollar to me because there’s other, besides Secure 2.0, there’s there’s tax consequences for me as the employer as well, not just the employee. Am I thinking about that right?
BRINDISI:
Yeah, it will lower your gross, it’ll take your gross revenue and from a taxation standpoint, from a tax burden standpoint, we’ll lower that. And so be your business will be taxed on a lower number then the gross revenue as well. And so your tax burden will go down as an employer.
VANNOY:
That’s right. That’s right. So the contribution is tax deduction expense, but also the match itself. And because it’s pre-tax to the employee E, you’re just increasing the overall expense. The net tax burden to you is also less. It’d be lying to say that you wouldn’t have to come out of pocket to do an employer match, but it’s not dollar for dollar because there’s tax benefits to doing it, period, by increasing your expense, therefore lowering your profit. So there is a inherent tax benefit and probably topic for another show is how to think about if I’m an employer and I’ve never offered 4 0 1 K, let’s say I’ve got a hundred dollars to spend and I’ve maxed out my compensation plan in the form of salary and I just don’t have margin to give something like a match, you could think about and in today’s world, based on the stats that you cited, maybe you change your mix that dare you say maybe it’s a 5% reduction in salaries, but that 5% goes into things like employer match, right? So there’s different ways to think about the entire match, all
BRINDISI:
That.
VANNOY:
Go ahead.
BRINDISI:
Thinking about it as part of an overall employee benefit. So it’s really what’s the mix of dollars allocated within your employee? Do you offer a health plan that looks like APPO or do you offer a health plan that looks like high deductible plan, which has different cost parameters, but if you’ve already allocated to your benefit plan a certain amount of dollars, you can then allocate more over to the 4 0 1 k. It’s a different mix, but it definitely gives you flexibility.
VANNOY:
I probably gave that too much time. I just want people thinking about compensation planning. But the reality is because of secure Act 2.0, absolute game changer, it sets businesses up, business owners up to be able to offer match, dare I say for free. So I’m going to let you unpack what that means. There’s a bunch of components to secure Act 2.0. Maybe just start out with definition, what was 1.0, what is 2.0, what’s the purpose of this incentive? And let’s kind of take it through the layers of what all these tax credits look like and how people get it.
BRINDISI:
Sure. Well, secure Act 1.0 was designed to incentivize businesses to start 4 0 1 K plans. And what they did was offer $5,000 tax credit to businesses set up 4 0 1 K plans, but they did it on, it was basically 50% of expenses. So you had to be large enough and incur enough of the expenses to reach that $5,000 a year. So you
VANNOY:
Would’ve had to spend 10 to get five back,
BRINDISI:
Right? And so 2.0 and frankly wasn’t really that successful in moving the needle. So Congress doubled down and said, you know what? Okay, we’re going to offer secure Act 2.0 and for businesses from one employee to 50 employees, we are going to reimburse you really $250 per employee, but up to $5,000 a year for the first three years if you have enough employees to get to that $5,000 number for administrative expenses, for educational expenses, and for startup costs of a 4 0 1 K. Also, we are going, if you put an employer match in up to for any of your employees that make for less than a hundred thousand dollars and you match their 4 0 1 k, we will give you a tax credit dollar for dollar up to a thousand dollars per employee up to 50 employees.
For employers that have from 51 to 100, it looks a little bit more like secure Act 1.0. So it’s 50%, you can still get the $5,000 per year back for the first three years, you still get the employer match credits back, but it’s starting at employee 51 to 100. They start to phase out, but it’s still a significant, it looks a lot like 1.0, but it’s still a significant help for a larger small business, so to speak. But from one to 50, it’s a complete no-brainer. Essentially, if you have up to say 20 employees, you get to that $5,000 level and you can set up for the first three years, you can really set up and run your 4 0 1 k. If you net it out with your tax credits for nothing, we won’t the tax credits for dollar. For dollar.
VANNOY:
We won’t go into all the details because some of this is based on the pricing from your 4 0 1 K provider. So for example, for us, so we provide 4 0 1 K services to our payroll customers. Anybody with say more than nine or 10 employees, anybody less than say 50 employees, it’s probably going to work out that what you would pay in 4 0 1 k administrative fees is going to be such that it’s going to be less than $5,000. You’re going to get all that money back, like a hundred percent of it. So if you’re a real small company, there might be some costs still. If you’re a bigger company, over 50 employees, there might still be some costs. But Main Street America, 10 to 50 employees, which is a huge part of Azure’s customer. I mean this thing, the tax credit nets out that your four one K turns out to be free, right?
BRINDISI:
And to put some numbers behind that, there are 6.2 million small employer businesses in the US and 5.4 million of them have fewer than 20 employees. So there are so much opportunity for small businesses to take advantage of this tax credit to offer large company competitive benefits.
VANNOY:
So just to make sure everybody understands the tax credit come in two different buckets. There’s set up and administrative fees, but then there’s matching. Help us understand the separation of those two things.
BRINDISI:
So if you start a 4 0 1 K, there’s usually set up fees. You have to upload employee census and really just set up the mechanics of it, the machinery of it.
You also have employee education expenses. So if you hire an advisor or what have you to come in and meet with your employees, tell ’em what the benefits are, go over the investment options and all of that, that’s counted, that counts also that. So that’s the one side, it’s one bucket. They’re kind of fixed expenses and they’re really kind of on the front end of it ongoing. Well, we talked about the employer match. So if you’re matching your employee’s contributions up to a thousand dollars dollar for a dollar, you’ll get a tax credit dollar for dollar up to a thousand dollars for each of those employees up to 50. And like I said, if you’re over 51 up to a hundred, you’ll get some, it starts to phase out, but you will get some matching. Now for the first two years, the third year, 75% of it is you get a tax credit on it.
The fourth year you get half of it as a tax credit and the fifth year, 25%. So if you think about a small business that wants to grow, the thing that they really, really want and don’t have enough of is time. And if you say, Hey, you want to offer this benefit, how much? What are you doing? You’re giving them time. You’re saying you get to offer this and it really is not going to cost you a whole lot until it may not cost a ton anyway. But in year five is really where normal expenses get picked up. And if you say, how do you think you’re going to be in five years, they’re going to say, you can be five years of time and I should be able to run with this. And it’ll excite a lot of people because the number one thing it’s going to give them is time.
VANNOY:
And so I just wanted to get crystal clear to folks, and forgive me if I’m just being repetitive here. There’s the setup and administrative a hundred percent tax credit up to $250 per employee. And that’s for the first three years of the plan, right? First three
BRINDISI:
Years, first three years, right? First three
VANNOY:
Years. So there are some people are going to fall outside the boundaries here, a really small company that might have fees that exceed that really big company, but most employers that we’re talking to, it’s going to mean that they set up and the administration of the plan is free for the first three years. So no brainer. No brainer. No brainer. Oh my gosh, truly game changing. The reason I was going down that rabbit hole, excuse me. The reason I was going down that rabbit hole earlier about thinking about your compensation mix, if you were going to tell your employees, Hey, I want to do a match, but to do a match, I’m going to have to decrease your salary. I don’t think any of ’em are going to like that, right? They will all probably want a 4 0 1 K. They’re not going to be cool with you lowering their salary to fund that because they’re going to see that as neutral and maybe worse.
Now, it’s even harder to buy groceries and it’s all deferred income at that point, but this is where this five year phasing in of the contribution is so important because if you think about your entire compensation strategy, how much of that is salary? How much of that might be bonus performance based? Maybe? How much of that is 4 0 1 K? How much of that is health insurance? How much of that is whatever else you put into your benefit plans? You have five years to walk it down to incorporate that. So if you were giving, say, an annual pay increase to your employees, the contribution is free for the first two years, year one and year two, it’s 75% of free in year three, it’s really not until year five that you have to have this mix adjusted. So perhaps you, instead of increasing your salaries as much as you otherwise would’ve, you increase them but less.
And part of that money then goes back into pay for your match. So as the employer, it doesn’t end up costing you over the long haul anyway because you’re going to have to adjust for inflation. You’re going to have to adjust for cost of living, you’re going to have to increase salaries of your employees. But if over time part of that benefit that you’re giving to your employees is a 4 0 1 K match in lieu of some salary, you’re not taking any cuts today and you’re building into what probably a more thoughtful comprehensive compensation package looks like for the future. By the way, this is what big companies in corporate America have done for decades. And so now finally, small businesses can play in the same level playing ground to compete for talent in the exact same compensation modeling. Do you think I’m saying that right?
BRINDISI:
Yeah, yeah, exactly. It’s all about compensation. So what we’re doing is we’re taking a little bit of income from really off the top, not letting it be tax and deferring it out into the future. And it’s really just a matter of the employer figuring out the most. So to put numbers around your example, if I’m going to give my employees a 5% raise, maybe I give ’em a 4% raise and I take the difference and I’m not going to keep it from ’em, but I’m going to put it in the employer match, so I’m going to give it to them, but it’s going into the retirement plan. So it’s just a matter of am I paying them now or am paying them later? And how does that mix change?
VANNOY:
And the reason I’m trying to beat up this topic is I don’t want employers to sign up for this because it’s free, and then five years later they find themselves with an expense that they weren’t prepared for. You have to be thinking the states are going to mandate, or the federal government’s going to mandate that employers, increasingly small businesses provide retirement plans. Your employees want 4 0 1 k, this gives you a way to grow into it for free. So yes, it’s free. I don’t want to downplay that at all. Free setup, free for the first couple of years. This feels like beyond no brainer, too good to be true, get what’s the catch? Well, the catch is eventually you’re going to be managing a 4 0 1 K plan that’s going to have expense to you as the employer. So that’s the only reason I’m going here because this isn’t too good to be true, but five years from now, you’re going to have to manage a 4 0 1 K plan, but my opinion, you’re not going to be successful as an employer attracting and retaining any employees if you don’t offer good retirement benefits. That’s already becoming part of life based on the stats that you said at the top of the discussion.
BRINDISI:
And the other thing about that is that if you really are going to do the math, and I’m not going to sit here and do the math and bogged down on that right now, but if you just look at IRA contributions and look at somebody who’s 30, 35 years old and look at what reasonably they could contribute to an IRA where there’s no matching and they’re investing and they’re getting investment returns kind of within the statistical norms, it’s not going to come close to what they need in retirement, according to what the government statistics say is a reasonable average retirement. It just doesn’t give them a shot. So really the only way is to utilize not only the 4 0 1 K opportunities, but with employer matches, and this is going to probably even get more popular and there’s going to be more of a push from the government around employee saving just because they need to, because if you play it out in the long run and people that can’t retire are going to keep working, and then there will be people that are of retirement age taking up an employment spot that the younger generation coming up really, really needs to make a living.
So it’ll be a drag on the economy as a whole if we don’t address this problem.
VANNOY:
That’s right. That’s right. Rich, there’s a couple of nuances that I want to explore. So at the risk of sounding like a game show host, but wait, there’s more. There is another tax credit here around, so instead of a $5,000 tax credit, it could be a $5,500 tax credit around this concept of auto enrollment, right?
BRINDISI:
So that is,
VANNOY:
Can you explain what safe harbor and auto enrollment, what do those concepts even mean, and maybe more importantly, why should a small business care?
BRINDISI:
Well, auto-enroll is essentially from a secure Act 2.0 standpoint. Auto-enroll gives you $500 tax credit if you auto-enroll all of your employees eligibility. Now the eligibility could be day one or all your current employees, or you could have some sort of eligibility requirement that if they’re with you for six months or a year, then they’re eligible, whatever that is, they’re automatically enrolled. And generally they’re automatically enrolled at a certain percentage, usually three or 4%, which they can adjust up or down as needed. And then at a certain age of 55 or 50 or 55, there are escalators that allow them to save even more, defer even more. But auto enroll, the concept itself is just that all your employees are automatically enrolled. And if you do that, the government will give you another $500 tax credit. It doesn’t matter how many employees you have, it doesn’t matter anything, it’s just check the box, auto enroll, you get the credit,
VANNOY:
And that doesn’t force the employee that they have to contribute. So they could be enrolled but not contribute, is that right?
BRINDISI:
Yeah, I mean they can take their contribution down to a 10th of a percent, but they’re enrolled and because of that enrollment, they will qualify. It’s really not. Do they have
VANNOY:
To contribute anything or could you auto enroll an employee and that employee says, Hey guys, I’m broke. I don’t have a penny to give. I don’t want to contribute any money, but the employer through Safe Harbor does a match of a thousand bucks that the employee just got a free thousand dollars, the employer gave that a thousand dollars and is getting a hundred percent tax credit, so it’s free to them. Will that work where the employee literally doesn’t even contribute anything or do they have to contribute something to be considered a plan member?
BRINDISI:
If you’re an auto enroller, you will be the mechanics of it. They will automatically enroll you and the employee will find out when they get the email saying, congratulations, you’re in the 4 0 1 K. They can go in and take their contributions right down to zero, but they’re in it.
VANNOY:
Okay, and that’s what I thought. So feels silly. This is like a wait and wait. There’s more because that’s how much incentive Congress has put here for small business owners to do this, right? So think about this, the employee facing tough times, literally they’re not enrolled, they’re not participating in retirement because they just simply can’t afford to save your judgments for whatever reasons. Maybe they’re just in a life situation, they can’t afford a single penny on anything other than groceries for the kids.
You as an employer could set up your plan for free. You could auto-enroll them and get an extra $500 tax credit by auto enrolling them because the government wants to make it as easy as possible for them to invest in retirement. They’re not trying to put the burden on you here with this tax credit. They’re trying to make it as easy as possible on the employee. So you auto enroll that employee, you match, give ’em a thousand bucks, that’s a thousand dollars free to you because it’s a hundred percent tax credit on that a thousand bucks. Can you imagine the look on the face of that employee who’s barely able to put groceries on the table to feed their family and you just gave ’em a thousand dollars gift as the employer and you didn’t cut their salary to pay for it? I mean, I can’t imagine anything else in US corporate history where employers have had the opportunity to just give such a gigantic benefit to their employees. Employees are going to freaking love you as the employer.
How could they not be attracted to join you in the first place? If you explain that, how could they not be engaged and loyal to you after the fact once you’ve done it? Rich, can you talk about, and I don’t know if I’m going into Dangerous Waters here or not, but one of the things that, so a lot of companies will implement vesting schedules around 4 0 1 K. So if I give you that thousand bucks, okay, rich, I’m giving it to you, it’s yours, but you’re only going to, you earn $333 of it in year 1, 3 33 in year two, and then after three years it’s all yours. So basically it’s an incentive for you to stick around. And so this can also be in the context that one of the three reasons to do this, so the carrot is the Secure Act 2.0 tax credits. The stick is the state mandates, and the war for talent is the bucket number three. So the context of war for talent, what would you say about vesting schedules to get these benefits and the match as a retention tool for employers?
BRINDISI:
Yeah. No, it’s a very effective tool because what you have is you have your vested amount, you have your non vested amount, and an employer or employee can see right in their 4 0 1 K schedule, here’s what I have, here’s my top line, and if I left today, this is what I would’ve, and it’s very incentivizing to stay. If all things being equal, understanding your vesting schedule when all of your top line will be yours, it’s a, it’s tremendous incentivization for employees to stay because they don’t want to give away that money.
VANNOY:
And I’ve seen a change, I don’t know about you. Years ago when I entered the workforce, I would see just my own employer’s vesting schedules that were fight off a here. I wouldn’t say punitive. It was just kind of standard, but you had to wait for your money. You didn’t get it all upfront, and it might be worth zero in year one and year one year anniversary that it was worth something. Increasingly over time, I’ve seen the vesting schedules shorten and I’ve seen the amount you get in year one or even upfront increase. I have been seeing employers say, okay, the match isn’t on a per pay period basis. The match is at the end of the year we’re going to put all that money in your account and it’s just yours. So it’s like no vesting schedule. What do you see as pros and cons for employers? What guidance would you give employers to be thinking about how to pay it out when and how to think about matching? Is like a one-time payout? Do they have to earn it through a vesting period? Do you spend this over time? What do you think some of the best practices are?
BRINDISI:
Well, on the one hand, you have having a vesting schedule and everybody kind of knows the rules. I don’t think employees really think about it until they actually get into it, but I think an employer could explain it to them and say, Hey, we could, and we’re well within our rights to implement a vesting schedule. Now, if they’re inclined to give it to them, not have the vesting schedule and say, this is yours. This is all yours. In year one, at least the employees understand they could have required me to stay over three to five years, whatever the vesting schedule is, but they’re giving it to me all at once, and that engenders a certain amount of loyalty and a certain amount of good feelings, and that if they’re inclined to ever look around at other employment opportunities, that’s one of the things they’re like, am I really going to go somewhere where they treat us well, they’re giving us our 4 0 1 K matching and there’s no vesting schedule. That itself is a competitive advantage. I
VANNOY:
Agree. I feel like it’s maybe counterintuitive. I feel like the whole vesting schedule has been, okay, I’m going to give you this money, but I’m going to make you stay and I’m not going to give the money and you’re going to have to stay and earn it. That was maybe fine with seven 8% unemployment where employees didn’t have a lot of options. But at 3.8% unemployment, I mean, when people can just leave, if it’s a thousand dollars match, a three-year vesting schedule is 333 bucks a year, are you going to tick ’em off and say, well, I’ll go get a $335 raise by walking across the street. I don’t need your vesting schedule. Versus treating it as a gift where whether you love it or hate it or a bit of an instant gratification society, I think people would view it more. It ends up playing out more like a bonus than it does golden handcuffs that force me to stay someplace that I might not want to. Right?
BRINDISI:
Oh yeah, absolutely. And the war on talent isn’t going away, as I believe you’ve addressed in past webinars, demographics, the way they are right now, the demographics are here to stay as far as the pool of eligible workers versus available jobs. So employers are going to continue to have to be competitive to get the top talent and to retain their best talent as well.
VANNOY:
Rich, I know we’re coming up on time. There’s a whole bunch of other stuff in the Secure 2.0 act. We’re not going to try to unpack all of it, but one of them is, I think there’s something around student loans. Is there legislation specifically about student loans or is it more something about way employers could incorporate a benefit to knowing that their employees have student loan issues? Help me understand. I think
BRINDISI:
It’s really more around most young employees are going to have student loans. So the first thing they’re going to do and they’re really required to do is pay off those student loans because the interest rate’s fairly high. B, there’s really no option. And employees are viewing this as my discretionary income is going to pay my student loans. I can’t even begin to save. I don’t want to begin to save until I pay this off. And the government is saying that through all of the statistics that they’ve looked at, the earlier you start saving, the better off it is when you get to retirement age. So it’s allowing small business owners to give employees via these employer matches a way to turbocharge savings. They can save just a little bit, but it’s going to turn into essentially double what they’re putting away while they’re paying their student loans. It’s kind of a real, if it’s just a reality that that student loans are their every everywhere and they’re a drag on the economy because frankly, either you’re going to be paying off student loans or you can save some and then spend some. And when you spend some, that means that another business has revenue and it’s better, and then they can hire more people, and it’s just better for the economy as a whole.
VANNOY:
Got it. Anything else in the Secure Act 2.0 that you think people, business owners need to know? Here
BRINDISI:
In the Secure Act 2.0, there’s something called the emergency savings, which allows a person to save up to $2,500, I believe, and you can contribute to it like a 4 0 1 K, but then you can take it out to use for any reason up to $2,500 in any given year. So there’s no retirement plan restrictions about accessing your money to pay for emergencies or anything like that. And that’s a feature that no retirement plan or savings vehicle it had before.
VANNOY:
Anything else that you think that business owners need to understand?
BRINDISI:
Well, there’s an entire, the Secure Act 2.0 is kind of the gift that kimson giving, and there’s several more components on there. And unfortunately, I don’t think we have time to unpack all of that right now. But I think the headline of Secure Act 2.0 is what it does for 4 0 1 K and allowing small businesses to implement 4 0 1 kss and for their employees.
VANNOY:
So let’s do this. I’ll give you a chance to recap. Why should employers, especially small businesses today be looking at offering 4 0 1 kss and what is it about the Secure Act 2.0 that makes this a, I’ll say it kind of a no-brainer at minimum, it’s a game changer that you have to at least look at it and think about. It is probably a no-brainer for most small businesses to implement.
BRINDISI:
Yeah, to recap, employees want 4 0 1 Ks. It’s the gold standard of retirement plans. Small businesses, by and large have thought that this was something that only businesses of a certain size bigger than them could offer their employees. Now through Secure Act 2.0, the government is making extremely affordable, if not in a lot of certain circumstances, no cost. When you net out the tax credits for the first three years up to five years, not no cost, up to five years, but very cost effective to deliver this for your employees. And what does that mean? That means a lot of employees that are searching for great benefits packages, and that would be looking to at employers of certain sizes, we’ll now look at employers of smaller sizes to help them grow and bring talent down to small businesses, which will be a Kickstarter for, not that the economy’s slow in general, I think our GDP number was pretty strong, this last number, but it’ll just keep the engine moving. And you have talent and small businesses, and they’re growing those small businesses and the economic engine just keeps rolling.
VANNOY:
Yeah, yeah, well said. I couldn’t encourage business owners enough. Check out Secure Act 2.0, hop on Azure’s website, tons of documentation, ebook, blogs, articles, videos like this one. We can watch the recorded version of this show and just tons of incentives to combine this with payroll. It’s an opportunity that’s never presented itself before and I can’t imagine not implementing something like this when it truly is free and it’s what your employees want. So Rich, thanks for all the information. I think we need to do at least one follow-Up show. I can think of probably two or three reasons we got to go deeper and unpack a few more topics. One of the things I want to think about is the benefits to the employers. I think employers of small companies, small firms, okay, they might not have a lot of employees. They think of 4 0 1 K as this thing for employees. They don’t realize this is actually something they can use for themselves for wealth creation as well when partnered up with the right advisor. So more to come. Exciting topic. Thanks for being my guest today, and thanks to everybody else. Until next week,
Speaker 1:
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