3 Reasons Your Small Business Should Offer a 401(k)

Most small businesses don’t, but offering a retirement plan benefits both you and your employees.
Even the smallest businesses can offer a 401k. Find out why offering a retirement plan might be a good idea. (Photo: DD Images/Shutterstock)

If you employ fewer than 50 people, chances are you don’t offer a 401(k). And that’s probably a mistake.

Even the smallest business can offer these retirement plans, according to Seth Gansman, financial adviser and financial planning specialist for Morgan Stanley Wealth Management in Blue Bell, Pennsylvania. “I’ve been the adviser for plans with one owner and two employees,” said Gansman.

It’s gotten easier and cheaper to offer a 401(k), noted Donald Morgan, a financial adviser with Independent Wealth Connections in Spokane, Washington. “The plans are both easy and reasonably priced compared to 20 years ago, when you needed to spend a fair amount of time, effort and money to put together a compliant package that would work well for everyone.”

Generally, a plan will have investment management fees and plan administration fees for basic services such as record-keeping and accounting and to cover trustee and legal costs. Add-ons that may cost extra include offering participants access to customer service representatives, the ability to check account values and enter transactions online, and educational seminars.

Fees vary greatly based on what the plan administrator offers in the way of services, the types of investments and whether administration fees are based on the number of participants or the amount of assets in the plan.


Offering a 401(k) can help a small business owner keep and attract top talent, says Lindsey Handley, co-owner of ThoughtSTEM. (Photo: Lindsey Handley)

Working with a third-party administrator helps simplify and streamline the process as well as make the most of the opportunity. “Education is the key to making these plans work, and a good adviser is a great partner to really affect and change employee retirement outcomes,” said Morgan.

Lindsey Handley, co-owner and operator of the startup ThoughtSTEM in San Diego, California, said it’s well worth the $2,000 she spends annually to maintain the program for her 30 employees. “It’s an easy-to-manage option for a small business looking to keep hold of its more experienced talent,” said Handley.

Here are three good reasons to offer a 401(k).

Attracting the best employees

A good benefits package, including a 401(k), can help you recruit and retain top talent.

“Not having a retirement plan to offer potential employees can send some of the best away in a hurry,” said Brent Dickerson, owner and financial planner at Trinity Wealth Management in Lubbock, Texas. “This means losing a potential advantage to the competition, and that can ultimately cost a small business everything.”

Gansman, a former small business owner, acknowledged that sticking to a budget while trying to hire top talent can be difficult, so providing benefits beyond a salary can be “a game changer.”

Offering a 401(k) helps you compete not only with other small businesses but with larger ones as well. “If you’re competing against big companies for employees, you need to offer the same types of benefits as they do,” said David Pietig, general manager for Arlington Machinery in Elk Grove Village, Illinois, which offers a 401(k) to its 11 employees.

Today, even younger staff members want to participate in a 401(k), said Pietig. “It seems counterintuitive, but as we hired more millennials, they were more interested in investing for the future than our seasoned employees. I think this comes from the shift in what children are taught. There’s more of a focus in schools from very early on to direct them to real-life and real-world skills.”

Tax benefits


Tax benefits are a major incentive for small business owners to offer a 401(k), says Shomari Hearn, financial planner and vice president of Palisades Hudson Financial Group. (Photo: Shomari Hearn)

If you offer a company match, the tax benefits alone can be enough to make it worthwhile to offer a 401(k), said Shomari Hearn, financial planner and vice president of Palisades Hudson Financial Group in Fort Lauderdale, Florida. You’ll receive a business tax deduction for any company match contributions made on behalf of your staff.

Keep in mind that a 401(k) is still valuable to employees (and to you) even without a match. Employees who participate save on taxes by investing part of their salary pre-tax. And the money in their account grows tax-deferred. “This means that as dividends pay, or interest is accumulated in the account, the saver will not pay any tax on those earnings until they withdraw money from the account,” said Dickerson.

Your own retirement

Don’t forget a 401(k) allows employers to contribute to their own retirement as well. Owners who contribute to the 401(k) on their own behalf will get a tax benefit on their personal income tax return just as their employees do, Hearn noted.

There are several types of 401(k) plans, including traditional plans and Safe Harbor plans, so talk to your financial advisor to figure out which one is right for you and your business.

“We initially offered a small employer match in a non safe-harbor plan,” said Mickey Swortzel, CFO of the tech company New Eagle in Ann Arbor, Michigan, which now has 20 employees. “This means if employees don’t work with us for a certain number of years, that matching money comes back to the employer when they leave the company. We then had enough financial stability that we could offer a safe harbor match. This has proven to be a more attractive benefit to employees and allows us to leverage the tax laws to the fullest extent.”

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