A recent Slavic 401(k) article mentioned this surprising statistic: Only one in four small businesses have adopted 401(k) retirement savings plans. This means that 75% of small business owners are missing out on a very important tool for building their retirement nest eggs.
Why is that number of 401(k) enrollees so low? The author of the article had this to say:
“One reason for this may be that too many owners plan to primarily fund their retirement years through the sale of their businesses. Yet many are finding—perhaps even to their surprise—that a 401(k) plan, grown over the course of 30 or more years, can provide a more reliable safety net, and in many cases provide a greater value than the very businesses they run.”
Another reason business owners may be forgoing 401(k) plans? The perceived cost—business owners may think they can’t afford a match on employee contributions. However, in many cases you do not need to match employee contributions, and the administration fees are often very affordable. This does not mean a 401(k) plan is the right fit for every small business, but it does mean that every business should at least take the time to consider a company-sponsored retirement plan. Here are five options all small business owners should consider.
As of 2016, employees can defer a percentage of their pay with an annual limit of $18,000 (and an additional $6,000 catch-up if they are over 50). As an employer, you can decide whether or not you want to match employee contributions, and you have the ability to make additional “profit share” contributions if you would like. These plans can be limiting for some business owners due to rules about your own contributions vs. employee contributions—if your employees don’t contribute enough, it can greatly limit your own saving ability.
Safe Harbor 401(k)
These plans work a lot like traditional 401(k) plans, but they allow business owners to max out their own individual contributions regardless of employee contributions. The biggest difference is the requirement to either match employee contributions or put in a company contribution for all eligible employees. This can be a little more costly, but it maximizes the savings opportunity for business owners.
These plans are for the smallest of businesses—business without employees or that employ only a spouse. Between individual and company contributions, a business owner can put away up to $53,000 per year ($59,000 if over 50).
A Simple IRA plan works very much like a 401(k) plan. They are typically less costly to administer, but they have lower limits for how much you can put away. An individual can contribute only $12,500 (with an additional catch-up contribution of $3,000 for employees over 50).
In SEP IRAs, the employer contributes on behalf of the employees. A percentage is chosen (up to 25%) and that same percentage is used for all eligible employees. This can become costly for businesses with numerous eligible employees.
Wondering what to do now that you’re aware of your options? Your next step is to speak with your investment advisor about the specifics of your small business and which plan might be the best fit for you (and your employees). Regardless of which plan you choose, I can assure you that having no retirement plan is not the answer!