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Why small business owners should set up a 401(k) for their employees — and themselves

Posted by Grace Townsley

April 8, 2022    |     4-minute read (708 words)

As a small business owner, you already have a lot on your plate. It’s easy to put off establishing a retirement plan for yourself and your employees when you get caught up in the day-to-day management of your company. 

According to the Bureau of Labor Statistics, only about 45% of small businesses (with under 100 employees) offer any kind of retirement plan to their employees. Considering how many of today’s workers are employed by small businesses, it’s not surprising then that nearly half of all working families have no retirement savings, and of those that do have savings, the average balance is only $17,000!

You may think retirement planning should be left up to each individual, not the small business. But there are several reasons why your small business should consider setting up a 401(k) program for your employees — and yourself. 

Retirement benefits help you retain top talent

Health insurance, paid time off and retirement benefits are three of the most important job benefits, according to a large survey by Glassdoor. A full 88% of employees say a 401(k) is on their “must-list” when looking for work. Among younger workers, many would prefer better benefits to higher pay. 

If your business chooses to match your employee’s contributions, your plan is an even more powerful talent attractor. These kinds of plans typically require the employee to work there for at least a year before the matching kicks in, encouraging every worker to stay longer. 

Setting up a small business 401(k) might be easier and more affordable than you think

First, let’s debunk a major myth. Many small business owners assume their business is too small to qualify for a 401(k) plan. But in fact, there’s no size limit. Even sole proprietors (businesses with only one employee) are eligible to make a plan. 

Traditional 401(k) plans used to be complicated and time consuming to set up and manage. Today, many plans offer automated enrollment, and the funds are managed by robo-advisors. This cuts down on administration costs and streamlines the whole 401(k) process. 

There may be tax credits available to help your business offset the cost of setting up a 401(k) plan. Any employee who contributes to your plan is eligible to deduct those contributions from their taxes (up to the annual limit), but in some years, the IRS allows additional credits for companies who launch a 401(k) plan for the first time or automatically enroll their employees in the program. 

For small businesses where the only eligible employee is the owner (or the owner and their employed spouse) the Individual 401(k) is a simpler alternative to the traditional 401(k). It requires less paperwork and smaller administration fees. For sole proprietors with no employees or LLCs that work with independent contractors, this can be a great way to keep more of what you earn while saving smart for retirement. Small business owners who are employed full-time but run a business on the side are even eligible for this special plan. These business owners can contribute to their employer’s plan and their small business 401(k), as long as their total contribution stays below the annual limit. 

Your business may not be enough of a nest egg

Business owners are even less likely to have a well-funded retirement plan than their employees. Many owners consider their business to be their nest egg. When they’re ready to retire, they assume they can sell the business and retire on the profits. But according to some studies, up to 75% of owners had to sell their business at a discount, decreasing their retirement savings. 

Your IRA or business proceeds may not be enough to get you through retirement. Setting up a 401(k) now, years or decades before you’re ready to retire, gives your tax-sheltered income time to grow.

Whether retirement is just a few years away or decades down the road, it’s not too late to start thinking about a 401(k) plan for you and your employees. Offering the right benefits can strengthen your business more than handing out raises and promotions, and set you up for a safe, comfortable retirement. 

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