Human Interest - The 401(k) provider for small and medium-sized businesses

Why Small Business Owners Don't Offer a 401(k), But Why They Should (And How They Can!)

By Catherine Alford -

An American Express Survey found that 60% of small business owners were not saving the money they needed for retirement. This means many of their employees are likely not saving enough for retirement either. However, a small business 401(k) carries with it not only incredible employee benefits, but also special tax incentives that SMB owners can get from offering retirement plans to their employees.

What's more, prohibitively expensive 401(k) fees have decreased significantly in recent years. By automating administration, companies like Human Interest are able to keep costs down to about half that of a traditional provider, and far less than a single employee's health insurance!

If you're feeling completely lost, check out 401(k) Basics for Employers.

Before we dive in, let's review how to start a 401(k) at your company. The process is relatively straightforward:
  1. Find a plan administrator - preferably, one that takes care of automated payroll deductions, monitors and tests for IRS compliance, has affordable fees, and more. Ask a lot of questions and be sure to do due diligence at this stage.
  2. Sign up with the service, connect your payroll, and fill out the necessary paperwork to make sure your company is properly set up with the 401(k) plan documents.
  3. Encourage your employees to start participating! After all – you only want a benefit if your employees will use it. Every eligible employee can select his or her own contribution amount, and some companies even allow for selecting specific funds in which to invest.
As you'll see below, each step has nuanced details and complications associated with it, but there has never been an easier or better time to start a 401(k) for your company.

Why Small Business Owners Don't Offer a 401(k)

1. Administrative difficulties: Setup time and maintenance

Many 401(k) policies are difficult to create. They often come with instructions that are time consuming, challenging to understand, and, in general, laborious. The paperwork alone can be overwhelming for many small business owners who often juggle many different responsibilities throughout their work day and don't have time to sort through pile after pile of IRS paperwork to start up a new 401(k) plan.

In order to make the process more streamlined, small business owners should look to new companies who offer more streamlined and automated options for 401(k)s. With new technology and innovation in the retirement space, there are many ways of making this process easy and simple so small business owners can concentrate on what they're good at: running their businesses.

2. They think 401(k) benefits are too expensive & only for the big guys

Many owners have looked into providing 401(k)s for their employees, but found that most services are geared towards large businesses with a high number of employees. While this might have been the case in the past, there are now options for small business owners to provide these policies at an affordable price. Not only that, but employers can get significant tax deductions from offering retirement plans to their employees, which often make the overall costs to provide them minimal.

3. They think their employees won't participate in the 401(k) plan, so why bother?

Human Interest's client companies have an average participation rate of over 70%, with many companies having as high as 90% participation! When employees are educated about the financial benefits of contributing to a 401(k), the signup process is easy, and administrators are easily able to monitor participation rates, your employees will definitely take advantage of this worthwhile benefit.

4. They can't afford an employer match contribution

Matching programs vary widely! In fact, they're entirely optional. You can offer a 401(k) plan for your employees to contribute money to even if you're not able to afford a company match.

If a 100% match for your employee contributions sounds steep, you can still offer to put something in. Many put in 50% of what their employees contribute, up to a certain percentage. Vesting schedules that require employees to have worked at the company for a specific period of time before the match is offered is also an option.

Also, the IRS allows employers who offer matching programs to deduct those contributions on their taxes.

5. They hate sorting through red tape and want to focus on company growth

401(k) plans require significant organization and compliance on behalf of the business to ensure all promises are being met and all money is accounted for. SMB owners might struggle with wanting to put all extra capital into their own businesses to help it grow. While these are valid concerns, small business owners should still offer retirement plans because the pros far outweigh the cons.

Here's why:

Why Small Business Owners Should Offer a 401(k)

1. To show their employees some love

Giving employees amazing benefits is the best way to ensure they are happy, remain loyal to your company, and want to help you make it succeed. In fact, according to a recent Forbes article, having happy employees contributes to higher profits, as much as 22.2% as shown in data from the Fortune 100 Best Companies to Work For. So, since many employees cite retirement options as one of the primary benefits they seek when deciding where to work, offering it to them can contribute to higher work satisfaction, help you reduce turnover, and even help your business make more money. Offering a quality retirement plan benefit can be a smart way to level the talent competition between you and larger businesses.

2. Because SMB owners shouldn't rely solely on business profits

You never know what will happen or when your business will struggle. Recent data shows 8 out of 10 small business fail in the first 18 months. It's not a positive number, but it's important to consider. This is why it's so important for business owners themselves to save money by starting a company-sponsored retirement plan for themselves and their employees. You'll be helping yourself and your employees get on the right track for retirement. That way, everyone's hard work is rewarded in the end because everyone prioritized their retirement savings throughout their working lives. Retirement savings are meant for the future, so even if you experience variable income or business troubles, everyone's retirement accounts remain solid as long as they don't touch them. Give your savings a chance to grow, including through contributions, compounding interest, dividends, and capital gains. Keep in mind that, as a small business owner, your retirement plan is entirely on you.

3. Technology is making retirement saving easier than ever

Small business owners rarely have HR departments. If you have a business operations manager or someone similar who would typically be responsible for employee benefits, you might be hesitant to overload that employee with new responsibilities. That's why firms often outsource 401(k) plans to a financial services company. This eliminates the headaches and responsibilities that come with setting up and managing a 401(k) program.

Make sure to find a plan administrator that won't charge high fees, and offers a wide range of fund options. Not all 401(k) plans are created equal, and you'll want to make sure the service you provide to your employees is truly useful.

With recent developments in technology, a lot of the tedious administrative work around starting a 401(k) and paperwork has been significantly reduced. Human Interest offers a tool specifically created to make it easy on business owners to offer 401(k)s with zero ongoing work.

4. Tax, tax, baby: The tax advantages of retirement accounts

We're finally getting to the best part of a 401(k): All the money you and your employees save and gain on investments is tax sheltered until retirement. That means your employees put money in savings before taxes are taken out of their paychecks. Then, when they retire and start withdrawing money from their 401(k)s to live on, they will be taxed at an income tax rate versus a capital gains tax rate, which is far better.

The best bonus for the SMB owner, though, is that they can get a tax deduction for contributions to their employees' retirement accounts. Since, as a small business owner, you are also your own employee, you can match your own contributions giving even more tax savings. Read more about how the IRS allows employers who offer matching programs to deduct those contributions on their taxes.

If you are a new small business with at least one employee, and you start the first 401(k) for your company, you get a $500 tax credit each year during the first three years of your business. That's $1500 that can help with the costs of starting a 401(k).

Want to be extra generous? Set up a top-notch 401(k) plan by giving employees a match and get a bigger tax deduction. If you match part of your employees' contributions to their retirement plans, you get to deduct those contributions and help your employees grow their savings. Plus, since you are your own employee as well, this means that you can match your own contributions too. In all, there are many tax advantages that SMB owners can tap into by offering a 401(k).

Ultimately, the more money you put into 401(k)s, whether through matching employee contributions or something called profit sharing (where you give employees a separate amount in addition to a match,) the more you shelter that money from taxes. Plus, the earlier small business owners and their employees start saving the better due to the benefits of compound interest.

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Because of the tax benefits for SMB owners, it makes sense to offer 401(k) plans to employees as early as possible, preferably, during the startup phase of your business. You'll also enjoy seeing all the other benefits it brings, like employee happiness and retention, which can help your business become an enjoyable and profitable place to work right from the start.

If you're looking for a great 401(k) for your employees, click here to request more information about Human Interest.

Content for this article was also contributed by Zina Kumok of Debt Free After Three. Photo credit: Toa Heftiba.

Avatar Catherine Alford

Catherine Alford is the go-to personal finance expert for educated, aspirational moms who want to earn more, reach their goals, and take on a more active financial role in their families.

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