Retirement Benefits Planning

Retirement Benefit Plan Options 

If you’re like many business owners, you might assume 401(k)s are the only real option for retirement savings benefits. Some small business owners might be under the impression that 401(k)s are expensive options that are only realistically available to large, long-running businesses. Neither of these things are true.

Adding a 401(k) to your benefits plan may also make you eligible for certain startup cost tax credits. Some businesses may qualify for up to a $5,000 tax credit for three years for starting to offer a SEP, SIMPLE IRA or other qualified plans, like 401(k)s.

The set-up cost for starting to offer a 401(k) may range from about $500 to a few thousand. Annual administration fees are usually in a similar range, with some plans costing less than a thousand dollars to higher-tier plans costing several thousand a year.

What can get expensive is providing matching funds, but there may be strategies to offset these costs. For example, you can potentially pay lower salaries if you offer matching funds since workers may view the benefit as more than offsetting the slight decrease in pay. In other words, you can make up for matching funds by paying your workers slightly less, since they will eventually be making that money back via 401(k) matching. The average matching, according to Vanguard, is 4.5 but there are still many employers who offer less or no matching.

While most small businesses probably won’t want to offer defined benefit plans, defined contribution plans or other types of pensions, those are options for some employers. Things like profit-sharing and employee stock ownership plans (ESOPs) are also attractive options. Depending on how you structure compensation packages, businesses can potentially break even on these types of benefits or even come out ahead in the long run.

Businesses can also offer SIMPLE IRAs, which are discretionary investment accounts that many employees appreciate, especially those who want more control over their retirement investments than a 401(k) affords. The difference with a SIMPLE IRA is employers are required to match 100 percent up to three percent of contributions or two percent of the employee’s salary, whichever is higher. The contribution limits are higher on a SIMPLE IRA than they are for traditional IRAs but less than 401(k)s.

SIMPLE IRAs don’t have the administrative form requirements that 401(k)s have, which some employers appreciate. There are also no management costs, which also means no administration. Employees will be on their own with investments, which may be viewed as ideal for some employees and overwhelming for others.