Business owners and entrepreneurs are readying for 2015 with a list of resolutions they hope will invigorate their business and facilitate growth and prosperity in the New Year and beyond. In fact, according to Capital One's latest Spark Business Barometer, many businesses will be prioritizing compensation increases, and investing in training and recruitment in 2015.
Unfortunately, one priority most business owners aren't putting at the top of their list is retirement. Though the economy is stabilizing, only 24 percent of owners currently offer retirement plans to their employees - a number that has held steady since 2013. Today two out of three new jobs are created by small businesses, making it critical for more business owners and employees to have access to simple, low-cost retirement solutions.
Prioritizing retirement may be one of the most important things a small business owner can do for their and their employees' futures. Starting a retirement plan can help a business retain its most valued employees and attract top talent. The tax-deductible contributions an owner can make for their business and the tax-deferred contributions they can make for their personal retirement savings can help them manage taxes and grow their nest egg. And with the future of social security uncertain and pension plans dwindling, it also empowers employees to build a nest egg on their own.
In many cases, setting up a 401(k) plan may be simpler than most people realize -- you may be able to complete it over a lunch break. Matching -- while tax deductible for the business -- may not be required (depending on the plan) and affordable plan options do exist.
Once you decide to focus on retirement planning, don't wait to set up a plan. Here are some simple tips that may help you and your business get started early in 2015.
The Most Important Step -- Getting Your Plan Started
The most common mistake people make when it comes to retirement planning is procrastination. Quite simply, the longer you wait, the tougher it's going to be to save enough for your golden years. Business owners should have a plan, and setting up a 401(k) may be a smart first step.
There are advantages to beginning to save at the beginning of the year, too. Putting in a full year of contributions makes it more likely you'll hit 2015's maximum 401(k) limit of $18,000 of personal contributions ($24,000 for people 50 and older). Every month you wait to set up a plan may make it harder to reach that magic number.
To Match or Not to Match?
Remember, offering a match program may not be required and no business is too small for an affordable plan - even solo or owner-only businesses.
Once you've decided to establish a plan, the next step is figuring out what type best fits your company. At ShareBuilder 401k, our most popular plan is our Simplified 401k plan, also known as a Safe Harbor 401(k) (which does require an employer match). Because these plans require immediate vesting and automatically satisfy IRS non-discrimination testing requirements (allowing owners and other highly compensated employees to contribute to the 401(k) limit maximum), they may be a good fit for many small business owners.
However, some business owners avoid Safe Harbor plans because they're not sure they can afford the required employee match. What they may not realize is that matching contributions are tax deductible, and businesses with less than 100 employees may be able to access additional tax credits to offset some of a plan's administrative costs. Remember, limitations apply and you should talk through any retirement and business planning decisions with a financial consultant and tax advisor.
Additionally, as seasonal businesses often have a hard time making regularly scheduled employee matches because of uneven cash flow, these owners could consider an end-of-year profit share into a 401(k). This option still provides employees the key benefits of a 401(k) plan and demonstrates that you're committed to helping your staff save for retirement.
Finally, if you can't match at all right now, that's OK too. Whatever option you choose, the most important thing is to make sure you understand your plan's business and personal tax benefits and how to take full advantage of them.
Don't Forget the Fees
Before setting up a 401(k) plan, closely examine its fees and expenses. You should understand exactly how much you will be spending -- and if more than one percent of your 401(k) plan assets will go to administrative and investment management fees, you may want to shop around or negotiate.
According to our 2013 ShareBuilder 401k survey, 35 percent of small business owners negotiated with their current provider after reviewing their fee disclosure documents, and 34 percent benchmarked their data to compare their plan with others.
We advocate that businesses pay no more than one percent in all-in fees because over the course of a 40-year career, the difference between one or two percent in fees can translate to hundreds of thousands of dollars in lost retirement savings. Despite that fact, our survey revealed that owners who read their fee disclosure statements still consider three percent (on average) to be a reasonable price to pay for their plan.
Proactively Plan to Reach Your Goals
Many small business owners believe their business's current or future valuation is an asset they'll have access to once they retire. Often owners expect their business to keep growing or plan to sell the company and live off the profits. Remember, many owners think the sale of their business will be their primary source of retirement income, but only about 17 percent are actually able to identify a buyer and execute such a transaction.
No one knows what's coming 10, 15 or 30 years down the road, and hope is not a sound investing strategy. By setting up a retirement plan now, you are taking responsibility for your own future. And setting up a plan may help you achieve your other 2015 business goals as well, which could translate to a win-win for everyone at your business.