401(k) Retirement Plans for Small Business: Why, What and How To
By: Steven Joshua Samuel, JD, MBA, AIF®
Retirement plans, such as 401(k)s can be important to a small business's ability to attract and keep employees as well as enhance a business owner's retirement. Nevertheless, only 30% of small businesses in the US offer 401(k) plans, according to a Surepayroll survey cited in the Wall Street Journal (9.30.13 page R2).
Small business owners likely avoid creating 401(k)s out of concern that the plans are time consuming and hard to administer, expensive, and not important enough for themselves or employees. Though there is some basis for these concerns, help from 401(k) independent specialists routinely address these concerns. Here's what small business owners and employees need to know when considering a 401(k) plan:
Why Create a 401(k)
In a basic 401(k) plan:
Owners and employees can get an income tax deduction for themselves in 2014 for saving $17,500 ($23,000 if age 50 or older) in a 401k plan, compared with $5,500 for an IRA (if over 50, $ 6,500);
Owners can get a business tax deduction for company contributions to employee accounts, including their own, up to the maximum total contributions per account of $51,000 ($56,500 if over 50);
Small businesses get a tax credit of up to $500 a year for three years to offset the costs of starting a 401(k) plan, and all annual administrative fees paid by the business are tax deductible;
Employees can save easily through payroll deduction and get a tax deduction for their contributions;
For a well-advised plan, contributions can be invested in quality low cost investments;
Very successful businesses can set up a complimentary retirement plan that allows owners to put away significant dollars for their benefit ($200,000+ depending on circumstances) in addition to the 401k limits described above.
What Services and Costs are Involved in a 401(k) Plan
Services required to maintain a 401(k) plan can be minimal and still be adequate to meet fiduciary requirements to employees. Additional services such as education and advice can be provided effectively with slightly more cost;
Costs in 401(k) plans should be evaluated in relation to the type and quality of services necessary to achieve business owner goals;
All 401(k) plans require record keeping services to account for what is in each participant's account, at a cost usually between 25 basis points - 100 basis points (0.25% to 1%) per year or may be priced as a flat fee per employee;
Investment costs vary between 10 basis points and 200 basis points or higher;
Assistance with plan design, administration and other owner-related fiduciary responsibilities vary;
Payment for professional advising may be based on commission or a flat fee arrangement and generally decrease as plan assets grow.
How to Put a 401(k) in Place and Maintain it Painlessly
Giant mutual fund and insurance companies as well as smaller independent financial advisory firms enable small business owners to start and maintain 401(k) plans. Services can be bundled or a la carte. Independent financial advisory firms help businesses from A to Z with designing a plan to meet their personal, company and employee needs and then select vendors (mutual fund companies for investments and specialized "third party administrators" for record keeping and administration) that best meet the business's needs. Having an independent advisor helps ensure services and investments are fairly and competitively priced and that there are no conflicts of interest when it comes to recommendations. As always, it is best to have a conversation with a trusted advisor who has experience with these issues.
Samuel Financial LLC is located at 858 Washington Street, Dedham, MA 02026 and can be reached at 781.461.6886. Securities and advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment adviser. Commonwealth does not provide legal or tax advice. Please consult with a legal or tax professional regarding your individual situation. www.samuelfinancial.com.