What is a 401(k) and Why Get One?

By ShareBuilder 401k

When you’re a small business, the thought of offering a 401(k) plan can often be intimidating.

Is it worth the time and energy?
Are we big enough to even have one?
Do we need to be investment experts?
Does it cost much?

The questions are many, and much of the hesitation around setting up a 401(k) for your small business can stem from not fully understanding all that 401(k) offers and what it really is. Here’s a simple way to remember the key points. A 401(k) is:

For your retirement saving and tax management
It’s a retirement savings plan sponsored by your business. You choose how much you want to contribute to an investment each payroll period, so your money is invested automatically. The savings can be made tax-deferred or after-tax (Roth) to help best manage for your saving and tax needs.

For you and your employees
Both you and your staff can put money away for the future, and contrary to a popular myth, you don’t need to provide an employer match to have a 401(k) plan. That’s totally optional.

The details of how a 401(k) works are simple, too, and the benefits of having one are pretty great. For example, a 401(k) allows you to:

  • Save more money each year with significantly higher contribution limits than IRAs ($19,500 for a 401(k), as opposed to only $6,500 with an IRA). If your company chooses to match or profit share into the 401(k), top earners may be able to sock away $58,000 per year.

  • Get tax breaks, credits and deductions for you and your business, as most operational costs and plan contributions can be deducted at tax time. Maybe bigger are the tax credits a business starting their first 401(k) that has 1-100 employees qualifies. Credits can be up to $5,000 per year for the first three years.

  • Money is typically protected from creditors and you take the money with you. If your business faces tough times, your savings are protected from creditors. And, you can roll your plan over if you decide to start another company, retire, or convert to an IRA if/when you leave the business.

  • Recruit and keep top-performing employees by offering a competitive retirement benefit, an awesome incentive.

  • Access your money in emergencies when you really need it with no penalties or high interest rates (unlike IRAs, which doesn’t allow you to access funds) to take a 401(k) loan from your savings. However, there can be added tax consequences on the unpaid loan balance if you leave your company.

  • Needn’t cost much to offer a plan as there are providers that focus on affordable 401(k) plans that keep costs low (like us) for most any size budget. Plus tax credits and deductions take out even more costs. And some have high-value, responsive service too!

  • Some plans come with investment expertise that provides professional oversight and models to monitor your investment options, so you needn’t be a financial expert to ensure you have great fund options from which to select.

Those are some of the compelling reasons why to start a plan and why it’s worth it.

So, what about the questions at the beginning of this article? Here are the short and sweet answers:

Is it worth the time and energy?
Short answer: Yes.
401(k) plans can help you build your retirement nest egg while also helping you save on taxes. Those providers that offer digital ease and great services teams can make it turnkey for your company to manage.

Are we big enough to afford one?
Short answer: Yes.
A business of any size can have an affordable 401(k) plan, even if you’re self-employed.

Do we need to be financial experts?
Short answer: No.
You can rely on your provider’s financial experts (such as ShareBuilder 401k’s Investment Committee) to manage your plan investment options. It’s called an ERISA 3(38) advisor if you want to ensure you are getting what you want.

Does it cost much?
No. A business of 10 can offer a plan for <$100 per month in administration cost for the business. With tax credit and deductions, it becomes pretty minimal expense fast! Plans that use low-expense funds (index funds), we believe help put your team in a better position to have a bigger nest egg (by removing the drag of higher fund expense ratios).

For more detailed answers on these and other questions, check out the 7 myths about 401(k)s.

And here’s more info you may find helpful:

How to Know You’re Ready for a 401(k)
How to Select the Right 401(k) Provider
Why Choose ShareBuilder 401k?

Meet the Author

Our low-cost 401k plans are easy to setup online and are supported by our 401k advisors and specialists. ShareBuilder 401k serves small business and medium-sized companies, as well as the self-employed. We offer Roth 401k, Safe Harbor 401k, Traditional 401k, and Solo 401k options. Your 401k plan is paired with investment management expertise and employee education to help you save more.