I get asked this question frequently… Small business owners often enjoy perks that their corporate counterparts may not always have the chance to experience; a strong sense of community, a family-like atmosphere, and the ability to make each employee feel as though their voice is truly heard are all experiences that can be unique to the small business culture. My father was a sole practitioner for 20+ years and it always great to see him succeed with clients and the small number of employees he had along the way.
One thing that’s often overlooked in small businesses, however, is benefits. Today’s workforce of all sizes expects employers to assist them financially in many ways - with things like health insurance, student loan repayment, and, yes, retirement.
Many small businesses, and their owners, fall behind when it comes to the benefits that are offered, especially when looking at retirement savings. Recent studies suggest smaller company employees have an average of $23,000 less than their large-company colleagues socked away for retirement. But why? It all starts with having access to a plan, which is where the pitfalls of small businesses often begin.
We work in the retirement industry day-in and day-out, and we’ve heard all of the excuses before. “My company isn’t big enough!” Or “I can’t afford to sponsor a plan. That’s way too expensive!” And we can’t leave out: “My employees aren’t interested in a retirement savings plan!”
These common retirement myths are often spouted out by those who haven’t had the time or motivation to uncover the reality surrounding workplace retirement plans, but we’re here to debunk the rumors and set the record straight.
Common myths small businesses don’t offer a 401(k) plan:
COMPANY ISN’T BIG ENOUGH
While having a business that is “too small to offer a retirement plan” is one of the top reasons small business owners decide not to offer a 401(k) or other workplace retirement savings option, there’s no validity to the claim. Companies of any size can offer a 401(k) plan; many providers even offer options for owner-only businesses. So the next time you start thinking your business doesn’t have enough employees to warrant a retirement plan, remember that one is all it takes.
CONCERNS ABOUT COST
Many small business owners worry about the cost of starting and operating a retirement savings plan, which isn’t necessarily an unjustified concern. But the reality is that the employer cost of sponsoring a retirement plan tends to be lower than that of other benefits that are usually offered to employees, including common perks like health insurance and paid leave [1]. Plus, qualified employers may receive a tax credit of up to $5,000 per year for the first three years they offer the plan* just for starting it up.
“But that just covers the start-up cost, right? What about matching contributions?”
Employers are able to decide whether or not to provide a match based on their chosen plan type and design. If you do decide to match employee contributions, remember that qualified employer contributions are tax-deductible. In fact, many business owners report that offering a 401(k) has afforded them tax breaks—both professionally and personally [2].
Perhaps the most ridiculous of these common excuses, uninterested employees aren’t nearly as prevalent as small business owners might think. Who doesn’t want to safeguard their financial future or work toward reaching their retirement goals? And if common sense alone isn’t enough to convince you that retirement savings plans are sought-after by today’s employees, maybe this stat will: a recent survey by Charles Schwab determined that 88 percent of workers say a 401(k) is a must-have benefit [3].
And if you’re included in the 55 percent of employers who don’t view retirement savings plans as “very important,” you may want to adjust your thinking. Why, you ask? Because 81 percent of workers agree that retirement benefits offered by a prospective employer are a major factor in their final-decision making when job hunting [4], and another 90 percent say they would think twice before taking a job that didn’t offer a 401(k) [3].
Clearly, employees and prospective employees alike are interested. So give the people what they want and begin researching the numerous benefits small businesses enjoy when sponsoring a workplace retirement plan.
Regardless of size, companies that offer some type of employer-sponsored retirement savings plan all cite similar reasons for doing so. Sixty-five percent say they offer a plan to help employees save and prepare for retirement, 60 percent to retain existing employees, 55 percent to offer a competitive benefits package, and another 54 percent to increase employee job satisfaction. Why else might it make sense to sponsor a retirement package? There are plenty of reasons.
While only 72 percent of employers believe that offering a 401(k) is important for attracting and retaining employees [4], today’s workforce has other opinions. As we mentioned earlier, it’s apparent that prospective employees see retirement plans as high-value benefits and they expect to be offered one. If the option isn’t on the table, they’ll likely keep their job searching moving in favor of a company that does offer the benefit.
Don’t forget that as the small business owner, you also need to grow some sort of nest egg to live a financially free life in retirement. Assets in 401(k) plans and similar accounts can grow tax-free. And study after study has shown that we’re more likely to save for retirement when we have access to an employer-sponsored retirement savings plan—regardless of company size or job title [4].
Ten states have already introduced laws that provide state-run retirement savings initiatives, which means you may be required by law to provide some sort of retirement savings program to employees. Specific regulations vary from state-to-state, but if you live in California, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, Oregon, Vermont, or Washington, it’s a good idea to take a look at current legislation regarding your state’s mandated retirement program. And even if it’s not required by law, consider showing some good faith and join the 55 percent of employers that feel responsible for helping their employees achieve a financially secure retirement.
The benefits of sponsoring a 401(k) or similar retirement plan as a small business owner are numerous—that much is clear. And just think about how good you’ll feel knowing you are making a lasting impact on the financial future and overall retirement readiness of your employees.
Connect with our team to see if a 401(k) Plan is right for you.
Sources:
[1] https://www.bls.gov/news.release/pdf/ecec.pdf
[3] http://corporateservices.schwab.com/public/file/P-10419818
[5] https://www.pai.com/blog/is-my-business-too-small-to-offer-a-401k-plan
