Why Sponsor a Company 401(k) Plan?
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.
A Company 401(k) Plan is 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 Once the money is in the plan, it grows tax free, until the money is withdrawn from the account.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.
A Company 401(k) Plan 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.