There are a number of reasons small business owners should consider sponsoring a company 401(k) plan. The top two: personal self-interest and small business smarts.
- The Fastest Way To Build Personal Retirement Wealth – 401(k)s should be a cornerstone of any wealth building strategy, because they allow individuals to contribute up to $18,000 per year ($24,000 if you are over 50), without taking into consideration company matching and profit sharing. Annual maximum contributions can be up to $53,000 – 59,000 for well-designed plans that are taking advantage of all the features that 401(k)s have to offer. These amounts are much higher than IRAs, which cap contributions at $5,500 ($6,500 if you are +50 years old).
- Employee Retention Reduces Costs – Let’s face it, the job market is tight. The April 2017 unemployment rate in Seattle was 2.9%, one of the lowest rates in the last 30 years. Deloitte Consulting believes that the cost of losing an employee is 1.5-2.0X the employees annual salary – due to the cost of hiring, onboarding, training, ramp time to peak productivity, error rates and corporate environment.
- Successful Recruitment Grows Profits – How do you attract that desirable employee that will help you ramp up your next product line? By offering benefits the recruit values. A 401(k) plan is one of the most valued benefits for employees (second only to healthcare).
- Tax Savings Opportunities Everywhere – Who likes to pay taxes? For a small business, the costs to administer a 401(k) plan are tax deductible, as well as 100% of matching contributions. Small business owners with less than 100 employees who start a new 401(k) plan can claim a federal tax credit of up to $500 per year for the first three years of the plan. Once the money is in the plan, it grows tax free, until the money is withdrawn from the account.
- Technology Enables Low Cost, High Value Plans – We are living in the golden age of financial services. In the past, it was very difficult to set up any type of retirement plan for a small business due to high fees and limited options. That has drastically changed. Today you can set up a small business 401(k) that has dramatically better performance, lower cost and higher value than my 401(k) when I worked at a Fortune 500 company just over a decade ago.
- It Demonstrates That You Care – Compensation is just one factor that creates job satisfaction. Showing that you genuinely care for your employees is a tangible demonstration of goodwill that will pay future dividends via work effort, morale and teamwork.