In today’s employment market, it is extremely important for employers to offer special benefits to stay competitive in their industry. Wage increases, new job creation, and sign on bonus offers can make it difficult for small business owners to obtain and retain the employees they want. We have seen this in West Michigan with the “great resignation” making its way to our job market as well. One of the ways that employers are attempting to entice prospects to join and employees to stay is by offering an Employer-Sponsored Retirement Plan. We have helped many small business clients get these types of plans up and running for their employees, and we have some great partners to do so. Sometimes however, there can be some pushback from small business owners when posed with the idea of starting a retirement plan for their employees. While there are many questions and concerns, let’s go over the top 3 misconceptions we often hear from small business owners in the area.
1. “I don’t have enough employees to start a Retirement Plan.”
I think this misconception often comes from the idea that you need to be a large company to be able to offer your employees a 401(k). In reality, you can start a plan with very few employees. You don’t need 100+ employees to start a plan! There are a variety of plan options available for small businesses, one of which is the SIMPLE IRA Plan. We have been utilizing the SIMPLE IRA plan with many of our small business clients. Any small employer with less than 100 employees can start a SIMPLE IRA Plan for their employees. SIMPLE IRA Plans offer employees the opportunity to contribute to their retirement while the employer must match either dollar for dollar up to 3% of the employee’s salary or a non-elective 2% of each employee’s salary across the board. The SIMPLE IRA plan offers higher contribution limits than a personal IRA but lower contribution limits than a 401(k). While we're on the subject, you don’t need 100 employees to start a 401(k) either. 401(k) plans can be a good option for small business owners who want the ability to offer an investment vehicle for their employees with a high contribution limit without the necessity to offer matching to their employees. A small business can start a 401(k) with any number of employees, it just depends on whether the costs make sense for their budget. That brings us to our next point.
2. “Starting a Retirement Plan would be way too expensive for my business.”
This statement could theoretically be true depending on your business’ budget, but starting a retirement plan may be more cost efficient than you think. 401(k), 403(b), and SIMPLE IRA plan costs are continuing to go down. Because of this, it is more affordable than ever to start a plan. For example, we have started a 401(k) plan for as little as $750 with ongoing annual fees starting at $1,000 and increasing based on a set $25 fee per participant. It is also worthy of note that there is an advisory fee and a record keeping fee charged to the plan assets. SIMPLE IRA plans can be set up even cheaper, but the employer is required to match. As we mentioned earlier, this creates a cost that the employer would need to budget for. We have great partners that can help us help you in starting these plans and getting costs defined for your business. Reach out to us if you are looking to add this benefit for your employees and have questions about what it may cost you!
3. “Sure, this is a great benefit for my employees, but on my end it looks like just another expense to add to my books.”
So, what is in it for the employer? There are a few reasons why this is more than just another expense for small business owners. We already mentioned that this can be a retention and employee attraction tactic. Offering a retirement plan, in whatever form chosen, could be the differentiator for a prospect picking between you and another job or an employee choosing to leave or not leave for greener pastures. Any added employee benefits are helpful in today’s market. Also, implementing a retirement plan not only allows your employees to begin saving for retirement, but you can too. Employer plans have higher contribution limits than personal IRAs and the business owner can also utilize matching in their own account. The employer also benefits from having access to deduct the contributions they make to employees from their business taxes at the end of the year. There is also new legislation passed that allows for specific deductions for specific plans within their first years of inception. We would love to discuss these benefits further if you are interested.
Hopefully this blog has answered some questions for you if you are a business owner. Maybe it has even prompted some questions. If it has, feel free to talk to us. Our team has experience with starting, implementing, and maintaining plans for small and large business owners alike and relish the opportunity to talk with others. We look forward to hearing from you.
Have a great week!
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.