Blame it on a lack of knowledge or limited time and cash flow, but either way tons of small business owners aren’t offering their employees some form of retirement savings, despite the fact that it ranks second just behind health care in terms of things workers want.
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While you may not be under any specific requirement to give your employees a vehicle to save for their retirement, offering it does help with recruitment and retention, particularly if you are competing with the big boys for top talent.
“There are three major reasons small businesses should offer a plan,” says Connie Certusi, vice president and general manager, Small Business Solutions, Sage North America. “For one it’s an important tool for attracting and retaining good talent. There’s also a tax advantage and finally it’s the right thing to do.”
Small businesses are the backbone of the economy, but if their workers are struggling to save money for their retirement the repercussions will be felt for years to come, experts warn.
Consider this: By 2020 40% of the American workforce or 60 million people will be self-employed and/or small business owners. What’s more, according to the Small Business Administration or SBA, over 40 million workers do not participate in a retirement plan.
Offering a retirement savings vehicle isn’t going to be too costly, but doing nothing will. According to Terry Dunne, senior vice president, managing director of Rollover Solutions Group, at Millennium Trust, some of the IRA options are “very inexpensive to administer.” What’s more, he says by keeping it simple, you’ll avoid having to hire a consultant or record keeper, which is more typical for standard 401(k) plans. “Right now if a small organization does nothing they risk losing employees,” says Dunne. “Eventually the talented ones are going to get a job somewhere else.”
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When it comes to offering retirement savings you have a lot of choices depending on the size of your company and your cash flow. If you are one of the many business owners who don’t have any money set aside for your own retirement, you can create a Solo 401 (k) account. According to Dunne, a Solo 401 (k) gives you the same plan options, contribution limits and flexibility that is often found with a 401 (k) at a larger company. “
As a result, single-owner businesses can put away more money for retirement in a shorter amount of time using a combination of salary deferral and profit sharing contributions to fund the plan,” he says.
If you have the cash flow and a workforce, another option is the Employer-Sponsored SEP or Simplified Employee Pension IRA. With this, Dunne says you can make contributions to the employees’ retirement accounts but there are limits. Contributions can be up to 25% of the employee’s compensations or $49,000, whichever is less, he says. Keep in mind the SEP IRA is completely funded by the employer.
An Employer-Sponsored Simple IRA lets companies with less than 100 employees establish an individual retirement account for each employee who participates. You can match all or part of the employee’s contributions, says Dunne.
When it comes to choosing a plan, experts say you have to research all your options to find the one that meets your needs. You also have to take a hard look at any fees, administrative costs or work that will be required of you. Andrew Meadows, Consumer & Brand Ambassador at The Online 401(k) says you want to choose a provider who offers the most flexibility in enabling you to maximize how much you and your employees can put away for retirement. Meadows says most small business employers he works with are looking for a plan that is easy to setup and one that has a low cost flat fee.
“There’s a lot of fear in that the 401 (k) is going to be costly, complicated and one extra hat to put on every year,” says Meadows. “The thing is recent changes in the industry has really opened up the door to allow 401 (k) plans to be more successful. You don’t have to be afraid anymore.”