As a business owner, you have likely considered sponsoring a 401(k) plan for you and your employees. Yet, there is something holding you back from doing so.
When we ask employers why they hesitate, we hear many reasons. Whatever the reason, it usually stems from a lack of understanding of 401(k) plans.
Let’s put the top five misconceptions about sponsoring a 401(k) plan to rest.
Misconception 1) The 401(k) plan would not benefit me, the business owner.
False; it may benefit you the most!
A well-designed 401(k) plan can offer the greatest benefits to the business owner(s) when demographics work in your favor. A good third-party administrator (TPA) will employ a creative plan design that may allow the owners to receive the larger percentage of plan contributions.
401(k) plans also benefit business owners by reducing their current income tax liability. Plan contributions, whether on behalf of themselves, other owners, or staff, are tax deductible up to a certain limit. Nothing like turning tax dollars into retirement benefits!
Misconception 2) I already save for my retirement in an IRA; why do I need a 401(k) plan?
Higher contributions!
It is great that you are funding an IRA because that means you understand the importance of saving for your retirement. Unfortunately, annual contributions to an IRA are capped at $5,500 in 2015 ($6,500 for those 50 and above).
401(k) plans permit far greater contributions. The maximum amount that any eligible participant can defer annually to a 401(k) plan in 2015 is $18,000 ($24,000 for those 50 and above).
401(k) plans can allow for profit sharing and/or matching features as well, meaning employer contributions can be made in addition to 401(k) deferrals. The maximum amount which can be allocated to any one participant, including the 401(k) deferrals, is the lesser of 100% of the participant’s compensation or $53,000 ($59,000 for those 50 and above) in 2015.
Misconception 3) A 401(k) plan is going to be too costly for me.
Costs are offset by income tax savings.
401(k) “costs” come from two general sources:
- Employer contributions paid to eligible employees, and
- Fees paid to service providers.
1. Employer contributions paid to eligible employees
With a good plan design, a 401(k) plan may allocate a majority of the contributions to the owners while minimizing contributions to employees. However, don’t forget that offering a 401(k) plan helps attract and retain good employees. Keeping good employees far outweighs the costs of contributions made on their behalf to the 401(k) plan. Finally, remember, plan contributions are tax deductible.
2. Fees paid to service providers
There are costs associated with sponsoring a retirement plan. It is very important to work with your team of advisors to find the right services and products that will provide for a successful plan and offer the greatest value for the cost. A business owner can deduct the expenses as a business expense, or the expenses can be passed through and paid for by the participants.
Misconception 4) I don’t know what my profits will look like in 2-3 years, so I shouldn’t offer a 401(k)/profit sharing plan.
Contributions can be optional!
For employers in a cyclical industry where it is hard to predict future profits, fear not! Contributions to a 401(k)/profit sharing plan can be easily budgeted, discretionary, and determined at the end of each plan year. So if you have a bad year, you are not obligated to make profit sharing contributions.
Misconception 5) My competitors don’t offer their employees a 401(k) plan; why should I?
That’s exactly why you should offer one!
A 401(k) plan is a fabulous tool for attracting and retaining quality employees. If your competitors do not offer a 401(k), but you do, your firm can become a magnet for top talent. And as we all know, top-notch employees fuel profitability.
401(k) plans are extremely flexible and can be designed to fit the needs of a wide variety of firms. To discover if your firm can benefit from a 401(k) plan, contact Pinnacle Plan Design.
Robbie Petrillo is the marketing coordinator at Pinnacle Plan Design. 