3 Myths about small business retirement plans

Myths about small business retirement benefits

Most workers—four out of five—want to work for an employer that offers a 401(k) plan.1 Yet at companies with fewer than 50 workers, only one in four employees has access to a 401(k) plan.2 Compare that to organizations with 500+ employees, and that jumps to 89%.3 A retirement plan benefit gives large corporations a huge advantage in hiring talented people. But great workers are essential for business growth, so small businesses need to snare them, too.

Small business owners often cite cost, complexity and headcount as reasons they don’t offer retirement plans. Before you cross this benefit off the list of things you can offer, let’s take a look at the reality for three of the most common myths about retirement plans.

Myth #1: I can't afford to fund matching contributions.

Busted! Offering a 401(k) plan doesn't mean you must offer a match—some companies don't. Just administering the plan for your employees can still be a benefit without a matching contribution, since they can make pre-tax contributions to it. You can decide on your company's contribution to employees' accounts in the plan.

Consider this: Employer matching contributions to 401(k) plans are tax deductible.4 So if you're deciding whether to offer a 401(k) match or boost employees' wages, consider that with a pay increase or bonus, small business owners will owe Social Security, Medicare, unemployment and other taxes. And under a traditional 401(k) plan, small business owners have the flexibility of changing the amount of employer contributions each year, according to business conditions.

Myth #2: I don't have the resources to set up and administer a retirement plan.

Busted! This isn't a misplaced concern. With fewer employees on the payroll, small businesses often don't have an internal staff member with the know how to set up and administer a retirement plan, but engaging external help isn’t as costly as you may think.

Consider this: Small businesses with 100 or fewer employees may be able to claim a tax credit of up to $500 a year – for three years -- to help cover startup, administration and education costs for a 401(k) plan.5 For reference, administering a plan for a company with fewer than 50 employees should cost no more than $1,000 to $2,300 per year.6

Or consider this: A SEP IRA is a retirement account for small business owners with any number of employees, and it's relatively low cost and easy to administer. A SEP IRA doesn't require annual plan filings with the IRS, just certain employee notifications, and contributions-- which are made by the employer only -- are tax deductible.7 Talk to your tax professional about whether this path would make sense for you.

Myth #3: I don't have enough employees to make this worthwhile.

Busted! Forty-two percent of small business owners don't offer a 401(k) plan because they don't see the value in it.8 But retirement plans are a crucial employee recruitment and retention tool—35% of employees say the retirement benefits are one of the most important reasons they decided to work for an employer.9 And 47% cite retirement benefits as an important reason to stay. If anything, retirement benefits may be more important for a small employer, for whom one talented employee might be a vital piece of the workforce—so it's important to keep her.

Consider this: If an employee leaves due to a lack of a retirement plan, you'll typically spend about a fifth of his or her salary to fill the spot.10 Remember, too, that setting up a 401(k) plan means the small business owner also gets to put money aside for retirement, which is essential for future financial security.

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