While there is no federal mandate that all companies with 5 or more employees offer workers a retirement savings plan, many states do require this. And it’s just good business. More than 60% of employees we surveyed responded they feel stressed about their finances and it’s estimated that employee stress costs U.S. companies $4.7 billion per week. Offering your employees a way to save for retirement is a key way you can help lower their financial stress as well as bolster your recruitment and retention efforts. But the 401k isn’t always the best way to do it. Here’s why.
The Problems 401ks Cause Employers
The 401k was created 50 years ago as a supplemental retirement plan to the pension as large companies began to phase out this type of employment arrangement. It was meant for large companies with a workforce that stayed put for decades. Because of this, the regulations that rule the 401k space create an inflexible, expensive plan and annual testing requirements that are easy for small and medium-sized businesses to fail. Even large companies experience problems with offering a 401k to their workforce. These are some of the most common problems 401ks cause employers:
- Expensive annual non-discrimination testing. Every year, every company that offers a 401k must run a test to ensure their plan doesn’t unfairly benefit their high earning or key employees. If they fail this test they must either give back the requisite contributions to their high earners or key employees, and said employees will pay taxes on those amounts. Or they can make the necessary contributions to their non-high earning employees. It’s also common for small and medium sized companies to fail their compliance testing because they typically have a larger percentage of “rank and file” employees that contribute lower amounts to their 401ks.
- Employers retain fiduciary duty to employees. As part of this duty, employers must make sure the fees charged to their employees are reasonable, the plan offers a sufficient amount of diversification and there are no conflicts of interest. For small and medium employers this is a very challenging threshold to meet because plan participants at their companies are more likely to be charged higher fees than employees at larger companies. Because fiduciary lawsuits have ballooned in the last 10 years, many companies have started carrying ERISA fiduciary liability insurance (which is an added operational cost).
- Plans are expensive and complicated to set up, administer and maintain.
- Lack of portability leads to abandoned accounts. Since 401ks are tied to the employer, when employees leave they must either complete a complicated and costly rollover to their new employer’s 401k plan, cash out their balance or abandon their plan. Every year, 2.8 million accounts are abandoned which can cost employers additional fees and may require special handling.
The 401k No Longer has a Product-Market Fit with Modern Workers
Anyone who has started a new company or built or created a new product knows that one of the essential milestones to success is finding “product-market fit”. This is when your target demographic is buying, using and proselytizing your product and usually happens when you have figured out how to sufficiently solve a key problem for them. The 401k had product-market fit with boomers because they stayed at the same company for decades. For employees who move around a lot, or who are contract workers, it’s no longer an adequate solution. And there are more of them than you think.
In fact, in the last 10 years 94% of net employment growth came from 1099s and in 2025 it’s estimated that 50% of the workforce will be 1099 workers. That means 50% of the workforce won’t be eligible to contribute to a 401k.
Beyond that, millennials and Gen Z employees stay an average of 2.75 years at each company. If they work for 40 years, that’s about 15 companies. Which means they’ll have to keep track of 15 401ks or complete 14 rollovers in order to fully take advantage of their retirement savings plans. It’s no wonder that $92 billion in assets are cashed out each year at job change.
In addition to the non-portability of the 401k, and the fact that it won’t even be available to half the workforce in a few years, this type of retirement plan carries high fees that eat into participants’ savings and investment portfolios that are predetermined by their employer. This means the types of assets they can buy are limited and might not fit their needs.
The modern worker needs a retirement plan that:
- Moves with them from job-to-job-freelance-back to job.
- Charges low fees so they can keep more of their savings.
- Offers personalized investment options that can fit their diverse needs.
- Is easy to use.
- Is offered by their employer.
Icon is the Right Product Fit for the Modern Worker
Icon solves the problems inherent in a 401k for both the employer and employee alike.
For employers Icon:
- Removes the fiduciary burden. Icon’s is an IRA-based plan so employers aren’t bound by ERISA regulations. Icon is an SEC-registered investment adviser and retains the fiduciary liability.
- Removes the annual testing requirement. Again, since our plan is IRA-based, there are no non-discrimination rules to comply with.
- Offers a turnkey retirement savings solution with a low, transparent fee structure.
- Provides employee onboarding and education.
- Provides companies with a clear and informative dashboard for easy plan monitoring.
For employees Icon:
- Provides a portable retirement savings plan they never lost access to.
- Provides high-quality, personalized and low-cost investment portfolios.
- Provides access to a workplace retirement savings plan for every worker, even contractors.
- Offers a clear and informative dashboard and app for easy plan management.
- Gives them an easy and automatic way to save for their future.
Icon is the most cost effective way for companies to offer employees a retirement savings plan. If you’re interested in an alternative to the traditional 401k, reach out today.
