Is your small business making a major mistake with your retirement plan—one that could have huge repercussions for not only your business, but also the U.S. economy? If your immediate answer is, “What retirement plan?” then you’re certainly not alone, but you might be part of the problem, says a survey by the Main Street Alliance.
Just one-third (33 percent) of small companies currently offer a retirement plan to their employees, the study found. But there’s a disconnect, because small-business owners overwhelmingly believe retirement security is important for boosting business and the national economy. In fact, some 70 percent say that the lack of retirement security undermines older Americans’ confidence and willingness to spend, and 64 percent say it hurts business and the economy because the current generation of workers has to spend time and money providing support for their aging parents.
The smaller the company, the less likely it is to offer a retirement plan. Fifty percent of businesses with 20 or more employees offer a plan, while just 23 percent of businesses with two to four employees do.
If entrepreneurs believe retirement plans are so important, why aren’t they offering them to their own employees? (More than one-fourth of employers who don’t currently offer a retirement plan are interested in doing so.) Concerns about cost are the major factor, cited by 63 percent as the reason for not providing a plan. The other reasons—“legal and regulatory requirements,” “concern about liability” or “other”—were far behind, at 8 percent each, while 6 percent say “complexity” is the biggest hurdle.
Wake-Up Call
Here’s the reality: Starting a retirement plan doesn’t have to cost a ton of money, and you can do it even if you have only a few employees. An SEP, IRA or SIMPLE IRA can be started with as little as one employee (including you). One-participant, or “solo” 401(k) plans, are made to cover business owners who don’t have employees, or the business owner and his or her spouse.
Yes, there will be some costs for administration and the professional advice you’ll need to get started and manage the plan. However, for most small-business owners, the benefits will outweigh the costs. Consider this tidbit from the Main Street Alliance study: In 2007 (and that was before the Great Recession), half of U.S. households with members aged 55 to 64 years had financial assets of $72,400 or less. If that’s you—and you think $72,400 is going to hold you in retirement—then you need a wake-up call.
Are you counting on your business to fund your retirement? This is a common plan for many small-business owners. But if your retirement is 10, 20 or 30 years away, can you be sure your business will survive and continue to build value so that it’s “sellable” when you’re ready to retire? Can your business operate without you, or does its value depend on your continued presence? Will there still be a market for what you do in 10, 20 or 30 years? All of these hard-to-predict factors are reasons why having a backup retirement plan is a good idea.
Side Benefits
If that’s not enough to convince you, consider this: Retirement plans are a great way to attract and retain key workers. They can help you compete with big companies for the best employees. And they ensure your employees can feel secure about their futures so their minds can be on their work today (instead of on that second job they had to take to try to sock away some savings).
Do your business, your employees and the economy a favor and look into your retirement plan options. You’ll be surprised at what’s out there. Start with the IRS website’s resources, including this overview of retirement plan options; check out the Department of Labor’s comprehensive guide to SEP plans; and talk to your accountant about the plan that’s best for your business.
Read more articles on small-business finance.
Photo: Thinkstock