Small businesses employ greater than 47% of U.S. private sector workers and are a major part of our nation’s economic engine. Unlike the businesses with over 500 employees that provide retirement benefits, the vast majority of small businesses do not offer a 401(k).
In fact, our latest research* on businesses with less than 50 employees shows that only about 26% offer a 401(k) plan. While we know many American workers are not saving enough for retirement, the research also shows many small business owners are in the same boat as their employees (37% aren’t confident they are saving enough for retirement and 38% are only somewhat confident).
And while there are great reasons for small businesses to start a retirement plan, myths are the biggest blockers. The following are three of the most-commonly cited myths from our research to know along with the real facts.
1. Our business is too small to offer a 401(k) plan.
Myth buster: any size business including a self-employed person can offer a 401(k) plan. The fact is 401(k) plans offer big benefits no matter the size of the business. High contribution limits, tax benefits, emergency access to funds through a loan, Roth 401(k) options, and other opportunities and benefits can make a big difference for even the smallest business.
2. I shouldn’t offer a plan because we can’t afford to match contributions.
Myth buster: Matching is not required by businesses offering a 401(k) plan, and the business (and their employees) can still reap many benefits without a match. An employer is not required to contribute a penny to employees’ accounts. Still, there are many mutually beneficial reasons for owners to offer a match or profit sharing to their employees. Also, employer 401(k) contributions are tax deductible for the firm. It’s more of a cash flow consideration for the business on whether to offer a match or not.
3. 401(k) plans are too expensive to setup and manage.
Myth Buster: There are low-cost solutions and providers that specialize in servicing small businesses — and that do a good job. For example, a business of 10 employees can pay less than $100 per month in administrative, plus these costs are tax deductible for the firm. If it’s the first plan for the business, and it has 1-100 employees, the company qualifies for tax credits of up to $5,000 per year for the first three years of the plan.
The best plan providers will control the costs paid from employees’ account balances and keep investment expenses under one percent all-in (fund expense ratios, recordkeeping, asset management, etc.) This is a good benchmark to consider as there is really no reason to pay more than one percent.
When you dispel these myths, it’s much easier to see how any size business with about any size budget can offer a 401(k) plan and help more Americans get on track for retirement.
*METHODOLOGICAL NOTES. The ShareBuilder 401k Small Business Retirement Survey was conducted by Wakefield Research (www.wakefieldresearch.com) among 500 U.S. Small Business Owners at companies of 1-50 employees, between March 25th and March 31st, 2022, using an email invitation and an online survey. ShareBuilder 401k has fielded regular research on the small business marketplace since 2006. Results of any sample are subject to sampling variation. The magnitude of the variation is measurable and is affected by the number of interviews and the level of the percentages expressing the results. For the interviews conducted in this study, the chances are 95 in 100 that a survey result does not vary, plus or minus, by more than 4.4 percentage points from the result that would be obtained if interviews had been conducted with all persons in the universe represented by the sample.