Investopedia: “What I’m Telling My Clients About Small-Business Retirement Plan Options”

By MARGUERITA CHENG

When small-business owners ask me about retirement plans, they’re often balancing two priorities: helping employees save and making progress toward their own retirement goals. Finding a plan that supports both can be challenging.

I tell clients the same thing: A retirement plan that works well for another business may be a poor fit for yours. Your employees, cash flow, and personal retirement goals all affect which options are worth considering.

What I’m Telling My Clients

Start with Your Goals

I begin by asking about the business’s financial circumstances and what the owner wants the plan to accomplish. To narrow the choices, I focus on four questions:

• How many employees do you have? Eligible employees help determine which plans are available and whether the business must contribute.
• Do you want employees to save through payroll deductions? Look for plans that let employees set aside part of their pay.
• How predictable is your business income? Variable revenue may make flexible employer contributions important.
• How much do you want to save for retirement? Some plans have higher contribution limits, which can help owners catch up or save more during higher-earning years.

That last question matters because many owners have substantial wealth tied to their businesses. Building savings outside the business can reduce reliance on its future value.

Consider the Plans

Here are four options I often discuss with clients:

• Solo 401(k): For self-employed individuals with no eligible employees other than a spouse. Owners can contribute as both employee and employer, making it useful for maximizing personal savings.
• SEP IRA: Offers flexibility to adjust or skip employer contributions each year. However, contributions generally must be made at the same percentage of compensation for eligible employees, which can become costly as the workforce grows.
• SIMPLE IRA: Lets employees save through payroll deductions without the administrative demands of a traditional 401(k). Employers must provide a match or fixed contribution, and employee contribution limits are lower.
• 401(k): Offers flexibility for growing teams, including employer matches and higher employee contribution limits. However, these plans typically involve more administrative work and compliance requirements.

Your choice doesn’t have to last throughout the life of your business. Hiring employees, increasing income, or changing benefits may be reasons to revisit your plan.

Look Beyond the Initial Cost

Consider the following costs:

• Administrative expenses: Recordkeeping, filings, ongoing services, and time required.
• Employer contributions: Which are required, which are optional, and their annual cost.
• Future expenses: How costs may change as the business grows.

I also encourage owners to consider whether they could afford the plan during a slower year and who will manage its administrative responsibilities.

Narrowing Your Options

Use the four questions above to narrow your choices to two or three plans. Ask providers for estimates covering ongoing costs, required employer funding, and potential savings.

Then review the options with your financial advisor and accountant. Together, they can help you weigh the tax implications and determine whether the plan supports your retirement goals without creating obligations the business may struggle to maintain.

For many owners, the decision comes down to balancing what they want to save, what they want to offer employees, and what the business can afford.

The Bottom Line

The right retirement plan should support both your clients’ long-term financial goals and the needs of their businesses. Taking the time to compare options can help them build retirement savings while offering a valuable benefit to their employees.

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