BERLIN – As a small business owner you probably spend so much time dealing with the day-to-day responsibilities of managing your business that you may overlook retirement planning for your employees or even for yourself. Because Social Security is expected to continue to provide a lower percentage of retirement income, individuals are becoming more responsible for saving for their own retirement. The predominant sources of income in retirement will come from individually driven, personal savings vehicles, like 401(k)s, IRAs, savings and investments. All of this means that it’s even more important for business owners to consider ways to secure their own financial futures and help their employees do so as well.
It’s well known that defined contribution plans such as 401(k)s have become increasingly popular in the workplace. But if you’re like many small business owners, your company may not offer a 401(k) plan – or any type of retirement savings program yet. According to a Spectrem Group report, only 15 percent of businesses with five to 99 employees currently offer a defined-contribution retirement savings plan. Of firms with 11 to 50 employees, only 31 percent offer some type of retirement plan.
Even if you do currently offer some other type of retirement plan, you might find that a 401(k) provides attractive benefits. But what benefits do 401(k)s offer that other plans don’t?
A 401(k) plan can have a significant positive impact on the success of your business and is best suited for mature businesses with stable cash flows. These plans provide the greatest number of features and tax advantages and are one of the most popular types of employee benefit plans because they meet the needs of both employers and employees.
As an employer, a 401(k) plan can be one of your biggest allies in attracting and retaining superior employees who will help your company grow. Competition for skilled workers is often fierce, especially with millions of baby boomers nearing retirement. Some tax benefits of offering such a plan include being able to deduct a percentage of the "matching" contributions from your federal taxable income as a business expense, and being eligible to receive a tax credit to cover 50 percent of a 401(k) plan’s set-up costs, up to $500 a year for the first three years.
Along with health care benefits, a 401(k) or similar retirement plan is one of the key factors most people consider when they decide where they want to work. For employees, 401(k)s are attractive because they can reduce their taxable income by making salary deferral contributions. Employees also value this type of plan because it offers a broad range of investment choices, while also providing flexibility to move plan assets if they leave the company.
The most common type of 401(k) plan used by businesses is a traditional plan, funded with employees’ pre-tax contributions through payroll deductions. These contributions are fully vested immediately, meaning that they cannot be forfeited. Additionally, employers can choose to make contributions to employees’ accounts. These contributions can be set up to become vested over a period of years, which can offer a powerful tool for helping you motivate and retain workers.
A Financial Advisor can assist in helping you choose the most appropriate plan for your business in the context of your overall goals and objectives.
Regardless of which plan you choose, the message is clear: There’s no time to waste. By setting up a 401(k) plan now, you’ll strengthen your business’s ability to compete in the marketplace – and help ensure a successful financial future for you and your valued employees.
(The writer is a Merrill Lynch senior financial advisor. She can be reached at 410-208-9084.)