Small Business Retirement Savings Plans
Myths About 401(k) Plans
Written by Stuart Robertson for Gaebler Ventures
If you think your small business can't afford a 401(k) plan, think again. We discuss some small business 401(k) plan myths that simply don't hold up under scrutiny.
There is nothing small about Small Business.
Small businesses employ over 33 million Americans, drive innovation, and often provide a level of customer service that bigger companies can't match.
But many face the major obstacle of finding time to think about saving. And I'm not just talking about putting away a tidy sum for retirement and protecting monies from Uncle Sam, but also the savings and revenue impact of retaining and competing for top-notch employees. It is simply too often the case that small businesses don't offer great benefits like 401(k) retirement plans.
Most small business owners think that offering 401(k)s isn't even an option. The very name is intimidating. It sounds like you need a full-time accountant just to set one up. Unfortunately, this is one of the most common -- and destructive -- misconceptions in the world of small business.
In reality, plugging into 401(k) benefits today is incredibly simple -- and it's a great way to attract talent. The smartest small businesses -- about 14 percent as of 2007 -- already know this. But the majority still seem to think that 401(k) plans aren't feasible -- probably because of one of the following myths.
Myth #1: Employees Aren't Interested
Just the opposite is true. According to a survey conducted by Harris InterActive and ShareBuilder 401k, nearly two-thirds of small-business employees think that their employer is obligated to offer a 401(k). Eighty percent classified offering a 401(k) as "socially responsible."
For businesses, robust retirement benefits are a huge draw in attracting first-rate talent. With high-quality workers, the better your business runs, and the faster it grows.
Myth #2: Employers Must Offer Matching Contributions.
Although many businesses do offer dollar-for-dollar matching contributions to an employee's 401(k) account, they don't have to.
It's by no means mandatory that employers contribute to their employees' 401(k)s. In fact, how much you as an employer give is entirely up to you. For businesses that do match, some like to do an on-going match managed automatically with their payroll. Others prefer an end of year profit share.
Myth #3: Small Firms Don't Have Enough Employees to Make a 401(k) Worth It
False again -- small businesses have a multitude of options that can be tailored specifically to the firm's needs.
For example, there are "Solo" 401(k)s for the self-employed, in which the plan holder can contribute up to $46,000 annually. There are plans specifically for firms with 2-10 employees, with built-in employer contribution maximums and low start-up and maintenance fees. Some prefer a plan without matching, but profit share depending on hitting business goals.
Myth #4: 401(k)s Are Too Hard to Administer
The emergence of online 401(k) accounts means that setting up and managing a plan has never been easier. You can likely setup a plan over a lunch break -- and it will take just minutes a month to manage going forward.
Ask California small business owner, Lilly Hernandez Arc. Every ShareBuilder 401(k) Plan customer's experience may vary and cannot be guaranteed, of course, but earlier this year, she had a great experience in setting up a 401(k) plan for her six-person iron shop. As she puts it: "We had been dreading this, thinking that setting up a 401(k) plan was going to be a really major production. But it was so simple to set up . . . [N]ow it's routine to log on and manage the plan when I do the payroll every week."
It's easy for participants, too. They can set up and track their contributions online with very little paperwork. And because it's all web-based, fees tend to be lower across the board.
Myth #5: 401(k)s Are Too Expensive
The costs associated with offering a 401(k) are much less than commonly assumed, especially measured against the benefits. The average 10-person firm, for instance, can hook into a plan that costs less than $500 to set up and includes a flat monthly maintenance fee of less than $100.
What's more, employer contributions are all tax-deductible. And the federal government offers a $500 annual tax credit for businesses with 2 to 100 employees for the first 3 years they have a 401(k).
Gene Fairbrother, a consultant at the National Association for the Self-Employed, framed the question of whether to offer a 401(k) this way: "Will it cost money? Yes. But retirement plans can provide you with the opportunity to enhance one of your most valuable assets: your employees."
FACT: Today's 401(k)s Are Perfect for Small Businesses
With 401(k)s, small businesses can easily compete with big firms when attracting talent. With an uncertain economy, Social Security in doubt and taxes rising, employees everywhere are looking for ways to build an adequate retirement. When the spotlight falls on the retirement benefits your company offers, it's important for you to be able to point to a robust and employee-friendly plan.
Stuart Robertson is general manager of ShareBuilder Advisors, a subsidiary of ING DIRECT and operator of ShareBuilder401(k).
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