Why Small Business Owners Should Care About 401(k)s

Date: October 09, 2014

It’s getting easier to set up the retirement plans, and your employees will appreciate the benefit.

Just one in four small businesses with fewer than 50 employees offers a 401(k) plan, according to a July 2013 survey by ShareBuilder 401k, a subsidiary of Capital One. While this number is up from 10 percent in 2008, small businesses still without 401(k)s could be limiting their potential. 

Consider these reasons small business owners should consider offering 401(k)s.

Lower Barriers to Entry Than in the Past

One of the reasons small business owners are still hesitant about setting up a 401(k) plan is the perceived costs and work associated with doing so, says Matthew Boersen, a certified financial planner for Straight Path Wealth Management in Pierson and Grand Rapids, Michigan. However, Boersen says, the truth is that the cost of setting up a 401(k) plan has dropped significantly over the past 15 years. Expenses for start-up plans can be as low as 1 percent of assets, and small business owners can outsource most of the work.

Retirement Saving is Crucial

Other small business owners may have held off on setting up a 401(k) plan due to lukewarm interest from some employees. But financial planning is too important—especially in light of the looming U.S. retirement crisis—to ignore offering this benefit. 

“For everyone, myself included, work is a journey to retirement,” says Jay Healy, president of Century Wealth Management in Memphis, Tennessee. “An employer has to recognize this fact and enable, even coach, his or her employees with the tools they need to save, invest and plan for the day they leave work behind. I find it very rewarding to know my employees are putting money away every month and building a nest egg.”

Employee Recruitment and Retention

“Small business owners should consider the power a strong retirement program can have on completing corporate culture and attracting top-level employees,” says David Morehead, vice president of advisory services for Retirement Benefits Group in San Diego, California. “We very commonly see employees describe their workplace based on the benefits they receive. A well-priced, comprehensive retirement plan is often one of the first things they mention during this discussion.”

Healy adds that potential employees who are considering working for a small, entrepreneurial company will look at a benefits package, including the 401(k), as proof that the employer cares about his or her workers and is willing to invest in the foundation of the business itself.

Benefits to Small Business Owners

Not only do employee match contributions earn small business owners tax deductions, but a 401(k) plan also allows them to contribute significantly to their own retirement account—up to $17,500 per year, plus the employer match and any profit-sharing contributions, just like their employees, says Boersen.

A company 401(k) plan also provides an option for succession planning down the road.

“One of the most overlooked reasons for starting a 401(k) plan would be to enable your key employees to buy out your business when you’re ready to retire,” says J. Scott Thompson, a business and estate consultant from Statesville, North Carolina.

Thompson and his team of business and estate planning experts dealt with this situation with a business owner client who wanted to retire and sell to two of his top employees. Since the employees did not have the liquidity to purchase the business, Thompson and his team recommended they buy it with 401(k) proceeds.


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