In a recent survey by Paychex, Inc., 56 percent of small business owners who offer retirement benefits said they do so to attract and retain top talent.
The availability of a retirement plan is an increasingly important factor in recruitment and retention, yet many small businesses (53 percent according to the survey) do not offer 401k plans to their employers or themselves.
There are several common myths around retirement plans that prevent small businesses from offering these benefits, but the facts can help small business owners understand the value of 401ks and how they can build upon business success.
Here’s the truth about eight common 401k misconceptions:
Myth No. 1: Offering a 401k plan is too expensive.
Fact: According to the same survey, 59 percent of small business owners who don’t offer a retirement plan don’t think they can afford it. The truth is, the tax benefits from retirement plans help offset the cost. Business owners can deduct 401k expenses and contributions, such as administrative fees, employer matching, or profit sharing, on business taxes, plus tax incentives for new plans can be as high as $1,500 ($500 a year for three years).
Myth No. 2: A particular company is too small to offer a 401k plan.
Fact: Retirement plans exist for all business sizes, including sole proprietorships. Business owners can start small with a plan that can grow with the business.
Myth No. 3: Employees can’t afford a 401k plan.
Fact: It doesn’t take much to get started. An employee’s daily small coffee costs around $1.64, totaling around $18,000 over 30 years. Factoring in compounding interest, that same $1.64 per day in 401k contributions can amount to $60,644 over 30 years (assuming an investment return of seven percent).
Myth No. 4: Employees aren’t interested in a 401k.
Fact: According to the Federal Reserve Board’s Report on the Economic Well-Being of U.S. Households, nearly one-third of Americans have no retirement savings, but a study by MetLife found that 64 percent of employees said that a retirement plan is critical or very important. Employees are interested in solutions to help secure their families’ future and their own.
Myth No. 5: An IRA is enough.
Fact: A 401k plan has many advantages compared to a SIMPLE IRA. The maximum annual salary deferral is higher for 401k plans than that of a SIMPLE IRA and the 401k plan catch-up contribution over the age of 50 is double that of a SIMPLE IRA. 401k plans also feature profit sharing, loan availabilities, and Roth option opportunities that SIMPLE IRAs do not.
Myth No.6: Matching is required.
Fact: Matching is not required with a 401k plan as it is with a SIMPLE IRA; however, an employer has the option to add matching at any time. Not only does matching help maximize the employer’s personal contributions, matching contributions are generally tax deductible.
Myth No. 7: If “My business is my nest egg” or “I don’t plan to retire” then I don’t need a 401k.
Fact: You can’t predict the future, but you can plan for it. Expecting the best and planning for the worst is the safest option, as the economy, consumer demand, health, and family needs can change at any time.
Myth No. 8: 401ks are complicated to set up, choose, and maintain.
Fact: Partnering with a reputable provider can ease the administrative burden of retirement offerings. Benefits providers help with plan design and onboarding, and integrated solutions providers can ease administration further through the integration of payroll and retirement systems.
Retirement offerings are a no longer a nice-to-have but a must have in today’s recruitment and retention environment. Fostering a true understanding of all benefit options among your small business clients is key to ensuring they make informed retirement plan choices for themselves and their employees.
Paul Davidson is director of product management at Paychex, a provider of integrated human capital management solutions for payroll, HR, retirement, and insurance services.