When you’re self-employed, nobody is saving for your retirement except, hopefully, you. (And as a freelancer, I’m right there with you.) But if you have employees, one of the most valuable benefits you can offer them will also provide you with a structured, tax-advantaged way of building your own nest egg: a 401(k) plan.
Many small business owners shy away from offering a 401(k) because they believe it may be too costly or difficult to manage, but that isn’t necessarily the case. Offering employees a 401(k) option may be easier and more affordable than you ever thought possible.
“Retirement is the second-most requested benefit right after health care,” says Andrew Meadows, consumer and brand ambassador at The Online 401(k). “Employees want it, so providing this not only retains current staff, but is a great tool to attract new talent. While there are other options such as IRAs, 401(k)s are the best option due to the ability to make the higher contribution limits.”
Implementing a 401(k) can be accessible and easy — and life-changing for your employees. Here are the answers to some of the most commonly asked questions regarding small business 401(k) plans.
Won’t It Cost Too Much?
The cost of a 401(k) plan comes in two forms, Meadows says: One is administrative work, such as documents, testing and tax reporting, and the other is investments. Administrative work costs depend on the provider you choose and can range from $105 a month to $5,000 a year.
“Investments are a bit trickier,” Meadows says. “First, these costs come from the funds and are barely visible. Most small businesses aren't experts in this, so 1.5 percent doesn't sound like a lot, but it certainly can be over time.” To protect your savings and the savings of your employees, Meadows recommends finding an investment vehicle with investment costs under 1 percent.
“Small business owners have a number of affordable options available to them, and in fact, have access to the same institutionally priced investments as large organizations with thousands of employees,” says Mike Narkoff, senior vice president at Ascensus, a provider of high-quality retirement plan solutions for organizations of all sizes. “Employees can share in the costs, similar to how businesses manage health care offerings.”
Don’t I Have to Offer a Match?
While matching employees’ savings is certainly a nice gesture, it’s not required. However, if you plan to maximize your own savings in the 401(k), you may consider offering a match to encourage employee participation in the plan. “The IRS requires testing each year to ensure the plan is fair to all staff,” Meadows says. “If the owners have the lion's share, it can look like you aren't making the plan attractive enough to the employees.”
Isn’t My Business Too Small to Design the Plan I Want?
There are a number of plan design options, and most can be customized to fit your specific needs, even if your company is very small. Meadows says to look for these essentials: pre-tax contributions from employees; a “discretionary,” or not required, profit sharing option; and loans. “Other than that, you basically want to create very few barriers to enter the plan,” Meadows says. “Immediate eligibility and vesting are great ways to do this. As you grow, you may want to amend the plan once you've gotten a good participation.”
As a benefit, the 401(k) should be used to help employees while creating a reason for them to feel incentivized. “For example, say you're running low in cash, but still wanted to give a year-end bonus,” Meadows says. “If you make profit-sharing contributions, you know it goes to their retirement, it's a great reward and that contribution is tax-deductible on your corporate taxes.”
Won’t It Be Too Much Work?
Offering any benefit takes some time and resources, but it doesn’t have to be a dealbreaker. Meadows recommends utilizing technology to avoid all the paperwork and streamline the process. “If you're a tech savvy firm, you may want a provider with more do-it-yourself, easy access,” he says. “However, if you want to pay for it, you can certainly have a very high touch, even local provider. Both would likely be easy to manage, but you get to decide what is best for you, probably based on cost.”