What Small Businesses Get Wrong About 401ks

Continued misperceptions prevent many from investing

401k, small business, benefitsSometimes the benefits aren't transparent.

Increasingly, small businesses are looking to 401k plans to attract and retain talent and boost confidence about their future, according to the Spark 401k Small Business Retirement Planning Index.

The national survey of small businesses found 94 percent of small business owners who offer a 401k say it drives employee recruitment and retention, up from 89 percent in 2013; and 86 percent of business owners with a plan are confident they are saving enough for retirement, an increase from 82 percent in 2013.

However, continued misperceptions about plan access and costs prevent many business owners from investing. The survey showed that 59 percent of owners who don’t offer 401k plans believe their business is too small to set one up, 22 percent say they can’t afford matching contributions, and 16 percent believe plan costs are too high.

Nearly half of all business owners are saving less than 10 percent of their income for retirement, with a quarter saving nothing at all.

“While it’s encouraging to see more small businesses reaping the benefits of 401ks, it’s clear misperceptions and myths are preventing many owners from starting a retirement plan,” Stuart Robertson, president of Capital One Advisors 401k services, which oversees Spark 401k’s suite of all-ETF 401k plans, said in a statement. “We want every business owner, including the self-employed, to know that no business is too small for a 401k, contribution matching is not required, and low-cost plans are available.”

Following are key themes uncovered by Spark 401k’s Small Business Retirement Planning Index.

Savings rates are down, despite many business owners feeling confident about their retirement plan.

  • While 62 percent of business owners say they’re confident they’re saving enough for retirement, nearly half are saving less than 10 percent of their income and one-quarter aren’t saving at all.
  • Many business owners are saving less than they did four years ago–47 percent have saved a nest egg of $100,000 or more, compared to 59 percent who saved at least that amount in 2013.
  • Confidence increases when business owners have a 401k plan; 86 percent with a 401k are confident they are saving enough for retirement.
  • Female business owners are more likely to say a 401k has boosted their confidence (55 percent), compared to male owners (47 percent).

401ks support employee recruitment and retention and help boost the bottom line.

  • Ninety-four percent of Business owners who offer a 401k say it drives recruitment and retention, and about half report it helps attract better quality employees (52 percent) and inspire increased employee engagement (47 percent).
  • A quarter of business owners who offer a 401k says employee demand played a role in establishing a plan (up seven percentage points from 2013).
  • Half of business owners with between two and 50 employees say departing employees have said a lack of retirement benefits influenced their decision, and those owners say it costs a quarter of the employee’s salary to replace them.
  • A third of owners with a 401k say it has reduced personal taxes and business taxes.

Myths and misperceptions about plans continue to prevent many from setting up a 401k.

  • Most business owners without a 401k think their company is too small to offer a plan, and two-thirds of owner-only businesses believe they’re too small to access a plan, as do 54 percent of business with two to 50 employees.
  • Nearly a quarter of business owners who don’t offer a plan say they can’t afford matching contributions and 16 percent think plan costs are too high.
  • More than a third of business owners plan to fund their retirement by selling their business. More than half with revenues of $500,000 or more say they’ll sell their business to fund retirement.
  • A quarter of business owners believe five to nine percent is a fair amount to pay in 401k expenses; only 10 percent think fees of one percent are fair.
  • A third of without a plan say they would consider offering a 401k if tax benefits existed and a quarter would reconsider if plan costs were lower.

“Meaningful tax benefits and low-cost all-ETF 401ks that keep investment expenses under one percent are available, and can empower more Americans to affordably build their nest egg, providing them options on how they want to spend their retirement years,” Robertson added. “Here at Spark 401k, we’re committed to partnering with more small businesses so they can gain peace of mind and take control of their financial future.”

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