Why Offer a Retirement Plan?
With the complexity of the plans out there that making offering retirement plans a chore, why would a small business owner want to provide retirement benefits? Let's study the issue, starting with the reasons small business owners say that they don't currently offer plans.
Time and money are precious resources for small business owners, so it’s understandable why wading into the world of retirement planning might seem daunting. Some reasons why small business owners don’t offer a plan:
Let’s debunk these one by one:
1. Too costly to administer
While small business retirement plans historically have had higher costs, things are changing. Technology companies and traditional 401(k) companies have been innovating to provide flat administration fees and, overall, investment fees are trending down. And, if you look outside traditional 401(k) plans, SEP or SIMPLE plans carry low setup fees and a variety of investment options.
2. No plans available for small employers
There are thousands of plans sponsored by small businesses with only two or three employees. What’s more, the cost for so-called “micro” 401(k) plans has come down significantly in recent years thanks to increased market pressure and advances in technology that are creating more efficiencies in the small business market.
3. Unable to afford a company match
How about this one? This can be a big concern for employers who are not sure what is and what is not required in terms of company match contributions. There are plenty of plan options available that don’t require an employer match contribution. Second, even if you decide to include a company match contribution in a plan, there are a number of plan design options available to you—including the option of having a completely discretionary matching contribution (meaning you only contribute a match contribution when it is affordable).
4. Unstable business circumstances
While this concern should definitely be a key factor in considering what type of retirement plan might be right for your business, it does not mean that sponsoring a business retirement plan is beyond your reach. You’ll learn as you check into your options, there are a variety of ways you can retain the flexibility needed to navigate various ups and downs.
Benefits of offering a plan
While there are clear and understandable concerns you may have about offering a plan, there are also clear advantages to doing so.
Meet your own retirement goals
Many small business owners view their business as their biggest asset, but establishing a plan and putting money away for yourself can help you to diversify your assets and avoid putting all your eggs in one basket.
While you might think that retirement savings is not a “front of mind” issue for employees, small business owners who sponsor a business retirement plan believe otherwise. When surveyed, small business owners consistently rank retirement savings highly in terms of their perception of their employees’ company benefits. You can turn this into a competitive advantage to attract and retain quality employees.
Tax credits for plan startup
Businesses with 100 or fewer or employees are eligible for federal tax credits to offset the cost of setting up a retirement plan and for offering an "auto-enrollment" option to their employees. The following plan types are eligible:
- SEP IRA
- SIMPLE IRA
The tax credit can be claimed the year you set up the plan, and the two following years. The amount is either $500 or $250 per eligible employee, up to $5,000. You also can claim a credit of $500 for the first three years for establishing a plan with an auto-enrollment feature.