Earlier this week we covered some of the most common myths about small businesses and retirement planning, in order to correct misconceptions that might be preventing some small business owners from offering a company-sponsored retirement plan.
Read on for four more 401(k) myths that we busted with the help of David Bass, a Sure401(k) specialist with over 20 years of small business retirement planning experience.
Myth 5: 401(k) plans hold small business owners liable for plan performance.
David Bass: "You know, when I talk to small business owners who haven't yet established a retirement plan for their small business, most have been held back by the fear of making the wrong decision when it comes to plan selection and management. The truth is, a small business owner does have responsibility when selecting and implementing a plan to make decisions that are in the employees' best interests.
"Specifically, when it comes to making investment decisions and providing an investment menu to their employees, most small business owners are out of their comfort zone, which is understandable. Beyond not being entirely familiar with the landscape, the last thing most small business owners have time for is the ongoing monitoring and management of that investment menu. But there are options that eliminate the burden for small business owners. For example, at Sure401(k), we've teamed up with an investment manager to act as the fiduciary of the plan and select the investment menu, monitor plan performance, and make ongoing changes to the menu if needed. This removes the risk from the business owner and allows them to offer a competitive benefits package without the additional liability and time commitment of managing the plan."
Bottom line: You have options. If you are concerned about taking on fiduciary responsibility for your small business retirement plan, consider one that removes the risk and manages the investment portfolio for you—and maybe even consider bundling the retirement plan with back-office services you already have in place, such as payroll, to consolidate touchpoints and access.
Myth 6: There's no small business benefit from a 401(k).
DB: "This one always surprises me, because in addition to some of the potential tax benefits available to small businesses who provide retirement plans, providing a retirement plan as part of a competitive benefits package results in happy employees. Happy employees are productive employees, and long-term employees are a very valuable asset to any business. Turnover hurts business continuity and is expensive.
"Consider this: most businesses, small and large, go through an annual planning process to determine wage increases; when a business pays an additional dollar through payroll, it's subject to payroll taxes, which means that $1 wage increase actually costs an employer $1.12 or $1.15. But if you offer a company match through a 401(k), a dollar actually costs a dollar and is not subject to payroll-related taxes."
Bottom line: If you're focused on the short term costs of establishing a small business retirement plan, you're missing the big picture: happier employees, savings for your own retirement, and business tax benefit.
Myth 7: We don't have enough employees for a 401(k).
DB: "I think I've made the point that there is no one-size-fits-all retirement plan, which means that company size, whether large or small, is not a prohibitive factor in establishing a retirement plan. Think about this: it is often more affordable to offer a company match for two employees vs. 100 employees; in this case small can be better.
"For an individual business owner who wants to save aggressively for their own retirement, there are even 'Solo(k)' and business owner-only 401(k) plans designed specifically for sole proprietors."
Bottom line: It's not a matter of IF having a retirement plan is the right choice for your business, it's a matter of WHICH plan is the best fit for your small business needs and retirement objectives.
Myth 8: I don't need a 401(k) as a small business owner.
DB: "I've already covered a few reasons why this isn't true, but I could really write a book of reasons why small businesses in particular can benefit from a company retirement plan. First and foremost, as a business owner you work hard for a number of years to build a successful business, but it's really important to remember that you are an employee as well, and you need to be prepared for retirement when the time comes.
"Beyond yourself as the business owner, when it comes to employees you are competing for talent against every employer in your community, and it may be tough to compete with the larger players. If you can find a scalable retirement plan designed for small businesses, it will make your overall benefits package that much more appealing and in line with what larger companies are offering.
"To wrap it all up, one of the most key features of a 401(k) or other company-sponsored retirement plan is that it is a payroll-deducted savings program. Most people, whether small business owner or employee, lack the discipline to set up their own retirement savings plan—if the paycheck hits their bank account, they're going to spend it. The key to saving money for retirement is to do so consistently and over a long period of time."
Bottom line: What's the cost of waiting? The longer you put off establishing a retirement plan for your small business, the further behind you and your employees will fall in the race to retirement, which means you will have to aggressively save over a shorter period of time and likely have to work longer, which ultimately results in prolonged healthcare costs on employer-sponsored plans.
Watch our on-demand webinar, Strategies to Maximize Your Retirement and Tax Savings in 2017, to learn more.