About half of private sector workers did not participate
in a workplace retirement savings program in 2012, and a recent report by
the Government Accountability Office (GAO) found that most workers who did
not have coverage lacked access to such programs. While there are many reasons
that might account for those individual decisions, among those not
participating, the majority worked for an employer that did not offer a program
or they were not eligible for the programs that were offered. In particular,
lower income workers and those employed by smaller firms were much less likely
to have access to programs, after controlling for other factors. However, the
majority of these workers participated when they had workplace access. Here’s
why small businesses should provide that access.
To attract and retain workers. Okay,
every time somebody talks about the reasons to offer a retirement plan,
“attract and retain qualified workers” is on, if not at the top of, that list.
But it’s a bit more complicated than that. The reality is that a larger
employer that does not offer a retirement plan benefit sticks out like a sore
thumb. However, among smaller employers, the situation is almost a mirror
image. In fact, the GAO reports that only 14% of small employers with fewer
than 100 employees sponsor a plan in which workers can save for retirement. The
opportunity for smaller employers then, is to stand out from your competition
precisely because you do offer a workplace retirement plan. And to use
plan design features such as vesting and an employer match to keep the good
workers you’ve attracted, and maintain that competitive edge.
Your workers will use it. This may
seem obvious, but among the more intriguing rationales offered by small
businesses for not offering a workplace retirement plan was one put forth in a
2003 Small Employer Retirement Survey by the Employee Benefit Research
Institute (EBRI) — that their employees are “not interested” in having a
retirement plan. And I have actually had plan sponsors say to me “nobody has
ever asked about a 401(k).” Well, I’ll grant you that workers are probably more
concerned about their paycheck, and perhaps health care. And they may just be
glad to have a paying job, and don’t want to rock the boat by pressing for
benefits.
Your workers need it. You may well
employ a workforce that has alternative sources of retirement income — a legacy
from that rich uncle everyone’s so fond of, or maybe they have a surefire
lottery strategy. Or perhaps their pension or savings from a prior employer,
combined with Social Security, will be “enough.” But EBRI’s 2014 Retirement
Confidence Survey suggests that retirement confidence — and the retirement
savings that ostensibly underpin that confidence are at least somewhat
connected. There’s a growing body of research that suggests that financial
concerns take a toll on productivity. That’s not just retirement, of course — but
it’s a big part of it.
You need it (too). It’s not unusual
for a small business owner to invest heavily in the enterprise, including
sinking some of their own personal retirement savings into “the business.”
Whether you have or not, and no matter how much you are now able to pursue your
passion, you’ll want to provide for a retirement at some point that doesn’t
necessarily require liquidating your business to fund it. That’s when the
benefits that your employees appreciate can pay off for you as well, including:
- the availability of pre-tax contributions that
can reduce your current taxable income;
- deferral of taxes on pre-tax contributions and
investment gains until you take a distribution;
- the flexibility of a Roth 401(k) (if offered);
and
- the “magic” of compounding returns over time.
Oh, and there are tax
advantages. Despite all the compelling reasons outlined above, for some it
still (rightly) comes down to the bottom line. And, in addition to the benefits
of offering a plan, there are some tax advantages designed to encourage you to
do so. Any employer matching contributions will be tax-deductible, as will any
costs incurred by the employer in connection with offering the plan. Better
yet, you may be able to claim a tax credit for some of the ordinary and
necessary costs of starting a SEP, SIMPLE IRA or qualified plan.
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