In 2019, a survey conducted by SCORE, a network of volunteer business mentors, found that 28% of businesses with fewer than ten employees offered small business retirement plans. Of those with 25 to 49 employees, that figure rose to only 63%. Twenty-two percent of the companies surveyed have not even thought about offering a retirement plan to their workers.
The reasons for these relatively low totals typically revolve around setup fees and the lack of resources to administer these plans. While half of the respondents assert that their employees are not interested in having a retirement plan, the SCORE survey found that 48% of those workers who left their company cited a lack of retirement benefits as having influenced their decision.
According to SCORE, many small business owners, unaware of the actual costs and benefits of retirement plans, might have a different opinion of them if they knew that retirement savings would cost only about 2.5% of an employee’s compensation while having a positive influence on recruitment and retention.
Here are a few facts about retirement plans that every small business owner in New Hampshire and Massachusetts should know:
There are two types of retirement plans: defined benefit and defined contribution
Not too long ago, defined benefit plans, better known as pensions, were the lone retirement offering. Funded totally by the employer, they promised workers a specific monthly benefit at retirement. Typically, the amount that workers received at retirement came from a formula that included earnings, age, and years of service.
In 1978, it became possible for smaller companies to establish defined contribution plans. Workers could now invest their own money in a tax-advantaged account, sometimes with a matching employer contribution. Unlike defined benefit plans, these plans do not promise a specific package at retirement. Instead, the employee receives the entire balance of the account at retirement.
Defined contribution plans are now the most popular retirement plan option for businesses across the board – not just small businesses – largely due to the fact that they are considerably more affordable.
There are several types of retirement plan fees
Any savvy business owner is going to shop around before deciding which retirement plan to offer (or even whether to offer one at all). Part of that decision-making process should include research into the costs of each plan.
Here are three fees and expenses to be aware of when shopping for small business retirement plans:
Investment fees will be charged to cover the cost of investment management. For example, sales loads are charges that an investor might pay when buying or redeeming shares in certain mutual funds or fees for investment advice for monitoring and researching investments.
Investment fees are often charged indirectly to participants, rather than plan sponsors. However, they can be the most expensive part of a retirement plan and they can be hard to spot. To avoid surprise costs, it’s a good idea to pay attention to expense ratios and net total returns, which can offer insight into whether the ends justify the means.
2. Plan Administration Fees
Plan administration fees cover expenses such as record-keeping, accounting, legal, and trustee services.
401(k)s and profit-sharing plans may include additional administrative fees to cover the costs of retirement workshops for employees, access to customer service representatives, online transactions, and online access to account information.
Sometimes, administrative fees are deducted from the employees’ returns. Other times, the fees are passed off in part or entirely to the employer. These fees may be charged pro rata (correlating to the size of each participant’s account) or per capita (as a flat fee per participant).
3. Individual Service Fees
Service fees cover features such as participant loans and rolling 401(k)s over to an IRA. They are generally charged to the plan participant. Although it’s a good idea to be aware of these fees for the sake of employees and participating owners, these costs are not charged to the business itself.
Who pays retirement plan fees?
It all depends on the individual plan. The employer often pays any setup costs and sometimes the administrative fees, while employees pay the asset-based costs such as the investment fee.
When the business owner has the most assets in the plan, as compared to employees, it can make sense for the business to pay the majority of the administrative fees. The expenses are often tax-deductible when paid by the business and may even qualify for a credit. It is wiser to get a tax deduction for these fees than reduce the value of the business owners’ tax-deferred retirement plan with these fees. And at the end of the day, the significant tax deductions to the business owner can more than offset the fees.
Fees vary by retirement plan and provider
The fees and expenses associated with small business retirement plans can differ greatly depending on the type of plan and the plan provider.
For example, SEP IRAs and SIMPLE IRAs are often popular choices for small business owners because they are easier to set up, typically require little administrative work, and often have very low or nonexistent fees.
401(k)s, on the other hand, can be more challenging to fund.Here is a breakdown of the fees in an average small business 401(k) with $500,000 in plan assets:
|Type of Fee||Asset-Based Fee||Total Cost|
|Plan Administration Fees||0.36%||$1,800|
|Individual Service Fees||0.05%||$250|
Although these fees may start high (as outlined above), the cost, as a percentage of the assets in the plan, should significantly reduce as the plan assets grow.
Moreover, retirement plan fees and expenses can vary by provider(s). Some businesses opt to contract an assortment of providers to manage various retirement plan services – record keeping, investment management, etc. – paying separate fees to each company.
However, many business owners choose instead to contract one plan provider that manages the entire plan on behalf of the business. This option can be the least time-intensive for small business owners and can make tracking expenses a far easier endeavor.
The benefits of a retirement plan usually outweigh fees and expenses
Retirement plans for small businesses afford an opportunity for the employer and the employee to save for retirement. They provide tax advantages for both parties. And the plans go a long way toward recruiting and retaining top talent.
A common mistake of business owners is not balancing the contribution of profits into the business and their retirement. Where the government will pay a third or more of the contributions to your retirement plan through tax savings, it makes sense to take full advantage of this tax break.
Business owners need a plan B if their business will sell for less than they anticipated due to market conditions, disability, or premature death. While there are considerations when choosing a retirement plan, starting one for a small business doesn’t have to be expensive or complicated. There are tax credits to help small businesses reduce the burden of starting a retirement plan. Plus, guidance from an informed and experienced financial advisor can help small business owners minimize costs and tailor their plans to their specific professional and personal goals.
Bartley Financial and your small business finances
Robert Bartley, the founder and owner of Bartley Financial, grew up working many hours at his family’s restaurant. He saved the money he earned and started to invest.
The more time Robert spent managing his investments, the more convinced he became that there had to be a better way to manage his personal and family business’ finances. The CPAs and data silos headed by separate financial, insurance, and law professionals allowed too many chances for gaps in strategy and missed opportunities. Robert craved comprehensive personal and business financial planning services that promoted a coordinated effort among the many professionals it takes to run a smooth business. Being the roll up your sleeves, detailed person he is, Robert went to school and pursued the professional designations of CPA and CFP.
Now, Robert uses his personal business experience and financial acumen to guide other business owners in Massachusetts and New Hampshire toward their most successful futures. The Bartley Financial team coordinates your business and personal goals and, in the process, enhances your business’ attractiveness to employees and buyers when you want to sell. With two CPAs on staff, Bartley Financial is equipped to improve your business’ tax and cash flow strategies, tackle your company’s administrative needs, and coordinate a comprehensive approach with your business’ other financial professionals.
Finally, Bartley Financial is a fee-only fiduciary. Fiduciaries are the only professional financial advisors mandated to put your and your business’s financial needs ahead of their own. Bartley’s fee-only structure ensures that your costs are forecastable and unencumbered by commissions or other hidden, fluctuating, and unpredictable charges. You can be sure that Bartley advisors will have top-notch customer service at the top of their priority lists.