For the average Small Business Owner (SBO), the thought of offering a 401(k) plan is almost always low on the daily priority checklist. At the top of the priority list is growing the business’s top line and bottom line. Yet offering employees an employer-sponsored retirement plan is a great tool for retaining good employees and growing a business. With pension plans becoming a thing of the past a 401(k) plan allows the small business owner the ability to save for his or her own retirement while helping employees do the same.
What’s holding the small business owner back?
The key objections to setting up a plan come down to the two main factors none of us have enough of – money and time. The four objections we hear most are:
1. Administration: the general fear is that the setup time and ongoing maintenance will be overwhelming for either the business owner or the person at the company dedicated to human resource issues. Fact: Technology has made the day-to-day management of a retirement plan quite easy.
2. Plan Costs: There is a perception that a retirement plan is excessively expensive. Federal regulations have forced providers to fully and understandably disclose all fees associated with 401(k) plans. This transparency has led to s steady drop in plan costs.
3. I’m not making enough money: According to INC Magazine, 37% of the business owners without a retirement plan said they do not make enough money to open a retirement account. Compounding this perceived lack of earnings is that 21% of respondents reported having no retirement savings because they funded their business by utilizing either an IRA of 401(k) savings from previous employment.
4. My employees are not interested in a retirement plan: For some this may be true, but many others will take advantage of the ability to save tax-deferred and directly from their paycheck.
Why should your business offer a retirement plan?
A company sponsored retirement plan has benefits for both the business owner and employees. According to the Small Business Administration, having a system where payroll deductions are available for savings makes it much more likely employees will save for retirement. Regulations requiring employee education and not overly risky investment choices make investing more likely.
For the employer, having a robust benefits package helps attract and retain talented employees. According to a survey of small businesses, 94% of small business owners who offered a 401(k) plan reported that the plan helped drive recruitment and retention. With historically low unemployment rates it is getting more difficult to recruit talent. Happy employees equal better profitability.
But the plan is just not for the employees. As a business owner you have the ability to save for yourself as well. At Magellan Financial, Inc. we always recommend that our business clients diversify their savings. The SBO need to save for retirement as well – you cannot rely solely on business profits and the expectation of receiving fair compensation when ready to retire. Diversifying mitigates the risk of having all your financial assets tied up in one entity. Diversification does not guarantee profits or protect against loss in declining markets.
Finally, there are tax advantages to having a retirement plan. Owner contributions are tax deferred while any employee matching funds are considered to be business expenses. For new plans the IRS allows a credit of 50% of your ordinary and necessary eligible startup costs up to $500 per year for the first three years a plan is offered.
Employer-Sponsored Retirement Plan Options
There are three popular options available to the SBO looking to start an employer-sponsored retirement plan:
1. SEP IRA – Cost effective retirement plan that allows an employer to make deductible contributions for employees. Contributions are discretionary and made by the employer only. A worthy option for the self-employed and closely held businesses with either low employee turnover or high turnover in the first two years of employment.
2. SIMPLE IRA – Contributions are made by both employee and employer. The employer needs to complete an IRS document to establish the plan then notifies all eligible employees that the plan has been established. Each participating eligible employee would have a SIMPLE IRA account opened up in his or her name. Similar to a 401(k) without the required complexity and administration cost.
3. Traditional 401(k) – A defined contribution plan that allows both the employee and employer to contribute to the account for the benefit of the employee. Employees contribute through salary reduction on a pre-tax basis (or after-tax if the plan provides for ROTH contributions), employers through a matching contribution and/or profit share. A plan document outlining the plan parameters.
Get Help Developing Your Company Retirement Plan
Eventually, you want and need to retire. Because you should expect to spend decades in retirement, you may find retirement planning very difficult. You can’t predict the future, and even if you could, you may still have trouble figuring out how to generate enough income to cover expenses for decades.
An experienced retirement planner will help evaluate your current financial situation, define retirement goals, and provide direction. At Magellan Financial., we’re here to help. You can take the first step towards your comfortable retirement by emailing us today. Once you tell us a little bit about yourself, we’ll tell you how people just like you achieved their goals.
Wells Fargo Advisors Financial Network is not a tax or legal advisor. Be sure to consult with your own tax and legal advisors before taking any actions that may have tax consequences.