Recent surveys of small business owners indicate that a majority of employers do not offer 401(k) retirement benefits to their employees, based on the belief that 401(k) benefits are incompatible with small business.
We also know that is typical for more than half of a small business owner's wealth is "locked" up in the business equity. While we work with clients to build equity value and liquidity, the reality for many business owners is that the best place to store wealth is outside the business that is creating it. And 401(k)s can be a great solution for small business owners.
Let's shed some light on the most common misperceptions.
Small businesses are eligible for 401(k) benefits!
Some folks think that small business can't start a 401(k), but the truth is, according to IRS section 401(k), any business- whether it is a C Corporation, S Corporation, partnership, sole proprietorship or self-employed- can establish a 401(k) plan.
Small businesses can afford 401(k) plans!
The set up has been cost prohibitive for small companies in the past, but the costs have come way down. There are simplified versions of the benefit that have been developed over the past several years that reduce the fees to get started and the cost of ongoing administration. In addition, recent tax code changes made available tax credits for small businesses that start up a new 401(k) that brings the real cost down even further.
Employees do want a 401(k)!
Recent studies show that employees very much want and even expect a retirement plan. While many small business owners still regard the 401(k) as an unnecessary perk, according to one survey, 64 percent of their employees view it as an important benefit that employers should be obligated to offer, according to a new survey. Another source suggested that the retirement benefit is second only to health insurance in benefits that attract them to a business. If your employees affect your bottom line (if they don't why do you have them?), than so can a 401(k).
You need investment diversification!
If you tapped your home equity; drained your previous employers 401(k); ran up credit cards; and passed on income while starting your business, you're not alone. Those are common, often necessary tactics to getting a business off the ground. Unfortunately it is also common that business founders forget to take care of themselves once the income starts to flow. They don't have an exit strategy formed for their business and they don't have (for the aforementioned start-up tactics) liquidity outside the business. How do you plan to get a return on your hard work? How do plan to manage risk?
It's easy to have a 401(k)!
For all the above reasons plus some, every small business should seriously consider adding a 401(k) to their benefits package. Technology has not only made the addition of retirement benefits cheaper, it's also made them simpler to implement.
Bill Heiden is the Managing Partner of Hawthorne Advisory Group, LLC. Hawthorne is a business ownership advisory firm whose principal mission is to maximize the business equity value, wealth, and satisfaction for owners of closely held companies. You can find out more about the company at www.HawthorneAdvisoryGroup.com. For a copy of a free report The Entrepreneurs Retirement Plan, or for answers to specific questions you can email billheiden@hawthorneadvisorygroup.com.
