There are substantial reasons for small business owners to start a 401(k) retirement plan for themselves and their employees. It’s a way to thank employees for their efforts, reduce turnover and send a signal that the company is financially stable.
Unfortunately, myth, misperception and general lack of knowledge regarding 401(k) plans cause many small businesses to avoid moving in that direction.
To dispel the most common myths and bring the truth to light, Small Business Trends recently spoke with Stuart Robertson, president of Capital One Advisors, LLC, via telephone. Robertson specializes in helping small businesses set up 401(k) retirement plans.
Here’s what he had to say:
Dispelling the Myths: 10 401k Facts
Myth 1: A 401(k) is too expensive to set up and manage.
“A decade or more ago it was commonplace for 401(k)s to be costly for a small business owner,” Robertson said.
Truth: That’s no longer the case, Robertson added. A company with 10 employees, for example, can set up a plan for a few hundred dollars in upfront costs and maintain it for no more than $80 per month in administrative expenses.
Also, the advent of digital technology along with investment advisors who focus strictly on the small business marketplace has made getting into 401(k)s less expensive.
Robertson said that the switch to ETF index fund investing has also made pricing very affordable.
“The personal tax benefit for the business owner is likely greater than the cost of the plan for his company,” he said.
Myth 2: A 401(k) is complicated and confusing.
“It is a regulation, and the thought is any legislation has to be complex,” Robertson said.
Truth: Employers only have to make simple plan design decisions, he said. The use of digital technology along with advice from small business investment experts have also streamlined the process.
“Where there used to be tons of paperwork sent back and forth, now you can set up a plan over lunch,” Robertson said. “It only takes 20 to 30 minutes to understand which plan is right for your business and get it set up.”
Myth 3: I have to take on fiduciary responsibilities and risks when I set up a 401(k).
“In the past, financial advisors would put the liability for selecting the right plan on the business owner,” Robertson said. “Typically, when an employer started a 401(k) benefit for his company, the provider would take him through the steps and ask about plan design. He might say, ‘You need to get down to a prudent list of investments across a range of asset categories. Here are 300 funds to choose from; figure out 15-20 that fit. The fiduciary responsibility is all on you.'”
Truth: Plan providers now share the risks and make the process simple.
“Providers understand that small business owners don’t have the time or desire to take on risks,” Robertson said. “An investment committee of expert CFAs determines the investment roster and monitors funds, replacing them with better ones in the asset class. They do the heavy lifting, so the business owner doesn’t have to think about it.”
Myth 4: I have to be an investing expert to set up a plan for my company.
“This myth builds off the last one,” Robertson said. “Lots of people aren’t investing experts and don’t know where to start.”
Truth: If you choose an ERISA 3(38) provider, you don’t have to be an expert, he said.
There are pre-configured models that investors can choose from, which take some of the decision-making responsibilities out of the business owner’s hands.
“We take the pressure off of determining the investment offering,” Robertson said. “The participant can choose from the investment roster, picking the one that best fits his goals.”
Myth 5: My company is too small to warrant setting up a plan.
“There is a myth that says 401(k)s are only for larger companies,” Robertson said.
Truth: No company is too small to invest in a 401(k). It doesn’t matter whether or not the person is self-employed or how many employees the company has. It can be any size. All that’s needed is the desire to set up a plan.
“Any owner-only business can qualify for an individual 401(k) — often referred to as a solo 401(k),” Robertson said. “The advantage to a solo plan is that the employer is also the employee. That means you can set aside $18,000 tax-deferred. If you are over 50, you can do a catch up of another $6,000. You can also do profit sharing if you make enough money — up to $53,000 between employer and employee and $59,000 if you’re over 50.”
Myth 6: I can’t afford a match.
The myth says that 401(k)s require an employer contribution.
Truth: Matching is not needed when offering a 401(k) plan, Robertson explained. Not matching can reduce the amount employees earn, however.
“Employee matches are tax deductible but if the business is not in a place to so do, it’s not required,” Robertson said. “There are many mutually-beneficial reasons for owners to offer a match or profit sharing to their employees, however, and both can reap great rewards.”
Myth 7: Managing a 401(k) is too time-consuming.
“The myth is that a 401(k) is another big thing for me to handle,” Robertson said. “Owners feel they will be faced with lots of paperwork and fear making the additional time commitment.”
Truth: You can set up a plan online and receive support from small business investment experts who can help educate you and your employees, he said.
“You don’t have to manage an investment lineup,” Robertson added. “It takes a few minutes of your time per month each payroll and a little time at year-end. It’s not very burdensome at all.”
Myth 8: 401(k)s are only for companies with a CFO or HR department.
Business owners feel that they need to have specialists on board who can manage retirement plans.
Truth: While those can help, most providers have expert financial advisors and resources (e.g., videos, web conferences) to educate employees and field questions about investing, Robertson explained. As such, business does not need specialists to have a great plan that’s easy to manage.
“Hopefully, this myth is going away now that companies understand how easy it can be to keep employees in the know and saving for retirement,” Robertson said.
Myth 9: My employees don’t care if I offer retirement benefits or not.
“We actually get that when we talk to businesses,” Robertson said.
Truth: Surveys indicate that 75 percent of people view 401(k) as an important vehicle for saving for retirement, and 83 percent feel they should be required no matter the business size.
Myth 10: No small businesses offer retirement benefits, so why should I?
“It’s true that only 13 percent of small businesses with under 100 employees offer a retirement plan,” Robertson said. “That means that one-third to one-half of all employees have no access to such plans because they work for a small business.”
Truth: The business owner will want to retire at some point or be forced to do so. A 401(k) can help when that time comes. Also, replacing an employee can cost 150 percent more than his salary considering the time it takes to hire a new employee, the loss of productivity and loss of customers.
“Not having a retirement plan in place can be very damaging to the company, “Robertson said. “Sometimes people leave for benefits.”
To help small business owners solve the retirement plan problem, Robertson and his team created a new product, Spark 401k, which makes the same kind of benefits available to small companies that big businesses enjoy. These include the ability to build a retirement nest egg with tax-deferred dollars, reduce business taxes and recruit and incentivize employees.
401k Folder Photo via Shutterstock