As a small business owner, you have an opportunity now to make a positive difference not only in your current employees’ lives, but also in your recruiting efforts. How? By offering your employees a way to save for retirement. Social security is rarely enough to cover living expenses and, although Americans accrue most of their retirement funds through employer-sponsored retirement plans, only 81 million private industry employees have access to one. So as top talent weighs offers from multiple companies, those that include a retirement savings plan are going to stand out. 

If you’re a small business that either wants to start offering a retirement savings benefit to employees, or you’re unhappy with your current plan, here are your options.

Small Business Retirement Savings Plan Option 1: 401k

Here are the good things about 401ks:

  • They’re the retirement benefit most people are familiar with.
  • They enable automatic savings. Contributions are automatically withdrawn from employees’ paychecks so employees “pay themselves first” and may end up saving money they would have otherwise spent.
  • Contributions are tax deductible. Since they’re withdrawn from employees’ paychecks before income taxes are assessed, contributing to a 401k lowers employees’ tax burdens.
  • Deposits grow tax-deferred.
  • Enables employer matching. 

Here are the not-so-good things about 401ks:

  • They’re expensive. The 401k industry makes money on assets under management (AUM). That means the more people signed up for a plan and the higher the deposit amount, the more money the 401k administrators make. New plans don’t have any assets yet because they’re, well, new, so in order to make money, the 401k administrators charge companies a lot to set them up. They also charge the companies a lot of money to maintain these smaller plans and charge participants high fees which eat into their retirement savings.
  • They’re not portable. Employees can’t continue contributing to their employer-sponsored 401k once they leave their job. They either have to complete a complicated rollover to their next employer-sponsored retirement plan (if that plan even accepts rollovers), keep track of this account until they retire, cash it out or abandon it.

    The average worker today will have 12 jobs over the course of their career. If every employer offers a 401k, that’s either 12 accounts to keep track of, 12 rollovers to complete, 11 cash outs (for which they’ll pay a hefty tax penalty) or a lot of abandoned savings. It’s not exactly the ideal retirement plan for the modern workforce.
  • They come with legal risk. According to the Employment Retirement Income and Security Act (ERISA), employers that offer 401ks have a fiduciary responsibility to their employees. Those that don’t follow the letter of the law, conduct annual audits and annual rebalancing to ensure they’re not discriminating against lower wage earners in plan participation, open themselves up to lawsuits and other complicated financial hurdles.  
  • They’re complicated to navigate. The average worker doesn’t have the time or interest to read through thick plan documents to make sure their investments are inline with their retirement strategy. This makes it difficult for employees to take an active role in their financial health.

Small Business Retirement Savings Plan Option 2: Multiple Employer Plan (MEP)

In an effort to solve some of the problems small plans pose for 401k administrators (i.e. fewer AUMs), they created a plan that bundles multiple small employers together into the same 401k plan. 

Since they’re 401k plans, MEPs maintain all of the above benefits and drawbacks with the following additional rules:

  1. All companies participating in the MEP must have something in common. They must be part of the same industry or located in the same geographic location, or have some other attribute that ties them together.
  2. All companies must still maintain compliance with ERISA rules.
  3. Companies maintain fiduciary responsibility. The MEP administrator will tell you that it takes the fiduciary responsibility for the plan. But the reality is, because the retirement plan is a 401k, ERISA states the employer still maintains a fiduciary responsibility to its employees. That means you’re responsible for monitoring the MEP administrator to ensure it is actually acting in the best interests of your employees. That also means you still maintain the legal risk.

Small Business Retirement Savings Plan Option 3: State-sponsored IRA

In an effort to help bridge the retirement savings gap, some states are rolling out state-sponsored IRA retirement savings plans. The idea is that employees who work for a company that doesn’t offer access to an employer-sponsored retirement savings plan, will be automatically enrolled in the state-sponsored plan.

States with available state-run plans:

  • California (CalSavers)
  • Oregon (OregonSaves)
  • Illinois (Illinois Secure Choice)

Pending State-run plans:

  • Connecticut (MyCTSavings)
  • Maine (Maine Retirement Savings Program)
  • Maryland (MarylandSaves)
  • New Jersey (New Jersey Secure Choice Retirement Savings Program)
  • New York (New York State Secure Choice Savings Program)
  • Virginia (Virginia IRA Savings Program)

If you’re located in one of these states, it might be tempting to just let the government handle the retirement benefit for your employees. And there are upsides to these programs:

  • They’re no-cost to employers. Since these plans are run by an investment company and workers are automatically enrolled, you, as the employer, don’t have to pay anything to administer the plan. 
  • There’s no fiduciary risk. The state and investment company maintain the fiduciary responsibility to plan participants, so the legal risk to employers is removed.
  • They enable automatic saving. Like 401ks, the state-run plans require automatic payroll deductions from employees which means they enable employees to “pay themselves first”.

Here are the drawbacks of the state-run retirement savings plans:

  • They’re Roth IRAs. Roth IRAs have strict rules about who can participate and who can’t. In order to contribute to a Roth IRA you must make under $140,000 (single filers) or $208,000 (married, filing jointly) in 2021. If employees make over this amount and contribute by mistake, they have to go through the complicated process of unwinding those contributions.
  • Contributions aren’t tax deductible in the year they’re earned. Roth IRA contributions are made after income taxes are assessed. So plan participants will pay taxes on the money they contribute to their retirement plan. But they also won’t pay taxes on the disbursements they take once they retire.
  • The set-up process is cumbersome. The state-run retirement savings plans require a lot of upfront paperwork and some administrative work on the part of the employer to manage the plan.
  • They’re not portable.
  • They’re not user-friendly. Employees find the process of navigating the state-run plans to be complicated and confusing.

Small Business Retirement Savings Plan Option 4: Icon

Icon is the easiest and most affordable way to offer a retirement plan. Here’s what makes the Icon IRA so great:

  • Affordable. Icon was built to be low cost and high quality. There are no hidden fees or other costs associated with offering the plan.
  • Easy to set up and easy to use. Our modern, digital platform means it takes only minutes for employers to set up their company plan and for plan participants to get onboarded. Employees complete a short survey and receive guided portfolio options that are inline with their investment strategy. Any plan management can be done through the app on their phone. 
  • We’re portable. So when employees leave they take their plan with them with no rollover required.
  • We enable automatic savings. We’re a payroll IRA, so employees’ contributions are automatically deducted from their paycheck. This way they “pay themselves first” and those contributions are tax deductible in the year they’re earned.
  • No fiduciary responsibilities or ERISA rules. We take on the fiduciary role and because Icon is a Registered Investment Advisor, there aren’t any complicated ERISA rules to contend with.
  • We accept rollovers. Employees who have 401ks languishing in no-man’s land can roll all of their retirement savings into one plan and then never have to do that again.

Icon is the best retirement savings plan solution for small and medium businesses. We’re easy to set up and use and give your company a low-cost, low-risk way to attract the best talent benefits can buy. If you’re interested in hearing more about our retirement savings plan, let’s chat!

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