How To Pick a Retirement Plan for Your Small Business

By Brandon Clark, CPA

These days setting-up a retirement plan can be done quickly, easily and with little to no money from your pocket as the business owner. So there! There’s no excuse for why your business shouldn’t offer one. After all, it’s the right thing to do for your employees (and yourself), and some states (including Maryland) have even instituted requirements for some small businesses to offer employees a retirement plan.

Here are the important things you should consider as a business owner and employer when selecting a plan. To make sure the relevant information is easily accessible we include a chart with the essential details you will need to decide the right plan for your business.

Costs

Costs are likely the first detail that are on your mind. Small businesses can find retirement options that are free. Often (depending on the investment institution you work with) a Simple IRA and SEP IRA account can be implemented for free.  Its important to be more specific however, because there are a few different categories or costs applicable to retirement plans. Here are a few of the costs you will face and should consider when evaluating the best plan for your business.

Setup and maintenance costs: Employer costs for the initial set-up of the plan and monthly or annual fees for accounts, administration, IRS annual filing, and record keeping. These costs can be $0 for Simple IRAs and anywhere from $0-$1,000s of dollars for 401ks

Investment fees: These are the fees paid for investments (usually mutual funds) and are generally paid by employees through the funds they choose to be invested in.  While the employer should do their best to find lower cost investment options for employees, this is not a cost the employer will have to bear.

Employer contributions to employee accounts: Employer contributions are generally the most expensive potential cost for employers, but employers have a good deal of discretion for how much they decide to offer as a contribution to employee accounts.  401k plans offer the employee the ability to not make any contribution to employee accounts. Simple IRA plans require either a match of 3% or a 2% automatic contribution (safe-harbor).  Eligibility criteria and vesting (explained below) are ways to control employer contributions and ensure that only employees with longer tenures receive contributions. 

One important note for all plans is that all employer contribution percentages must be the same for owners as for any employees. I.e. if the owner would like a 5% of salary match to their account. All employees must also receive a match to their accounts.

Employee Eligibility: Employers can limit participation to employees who’ve been at the company for a specified period of time to avoid administrative and contribution costs for employees that don’t make it past a trial period. This eligibility period differs by plan.

Vesting of employer contributions: Employers may institute a vesting schedule for employer contributions to 401k and profit sharing plans. Vesting can act as an employee retention tool, as it allows employees to earn employer contributions over a specified period of time (usually years). Vesting is not an option for Simple and SEP IRAs. All contributions to these plans are fully vested immediately.

Frequently Asked Questions About Small Business Retirement Plans

Why should small businesses offer a retirement plan?

Offering a retirement plan can help small businesses attract and retain employees, support long-term financial wellness, and provide valuable retirement savings opportunities for both employees and business owners.

Are small businesses required to offer retirement plans?

Some states, including Maryland, have implemented retirement savings requirements for certain small businesses that do not already offer employee retirement plans.

What retirement plans are available for small businesses?

Common retirement plan options for small businesses include 401(k) plans, SIMPLE IRAs, SEP IRAs, and profit-sharing plans. Each option has different contribution rules, costs, and administrative requirements.

What is the difference between a SIMPLE IRA and a SEP IRA?

A SIMPLE IRA allows employee salary deferrals with required employer contributions, while a SEP IRA is funded only by employer contributions and is often used by self-employed individuals or very small businesses.

How much does it cost to set up a small business retirement plan?

Some retirement plans, such as SIMPLE IRAs and SEP IRAs, can often be established with little or no setup cost, while 401(k) plans may involve higher administrative and maintenance expenses.

What are retirement plan administrative costs?

Administrative costs may include plan setup fees, annual maintenance fees, IRS filing costs, recordkeeping, and third-party administration expenses.

Who pays investment fees in employee retirement plans?

Investment fees are typically paid by employees through the mutual funds or investment options selected within their retirement accounts.

Do employers have to contribute to employee retirement accounts?

Contribution requirements depend on the plan type. SIMPLE IRAs require employer contributions, while many 401(k) plans allow employers flexibility in deciding whether and how much to contribute.

What is a safe harbor contribution?

A safe harbor contribution is a required employer contribution used in certain retirement plans, often allowing businesses to avoid some IRS nondiscrimination testing requirements.

Can business owners contribute more to their own retirement accounts than employees?

Employer contribution percentages generally must be applied equally across eligible employees and owners based on plan rules.

What is employee eligibility in a retirement plan?

Employee eligibility rules determine when employees can begin participating in a retirement plan, often based on age, hours worked, or length of employment.

Can employers require employees to work for a certain period before joining a retirement plan?

Yes. Many plans allow businesses to establish waiting periods or service requirements before employees become eligible to participate.

What is vesting in a retirement plan?

Vesting determines when employees gain ownership of employer contributions made to their retirement accounts. Vesting schedules are commonly used in 401(k) and profit-sharing plans.

Which retirement plans allow vesting schedules?

401(k) and profit-sharing plans may allow vesting schedules, while SIMPLE IRAs and SEP IRAs generally require employer contributions to be immediately vested.

How can retirement plans help employee retention?

Employer retirement contributions and vesting schedules can encourage employees to remain with a company longer by rewarding long-term employment.

What retirement plan is best for a small business?

The best retirement plan depends on factors like company size, budget, administrative capacity, employee count, contribution goals, and desired flexibility.

Can self-employed business owners set up retirement plans for themselves?

Yes. Self-employed professionals and small business owners commonly use SEP IRAs, SIMPLE IRAs, and Solo 401(k) plans to save for retirement with tax advantages.

Should small businesses work with a financial advisor when choosing a retirement plan?

A financial advisor can help evaluate retirement plan options, explain costs and compliance requirements, and recommend solutions tailored to the business’s goals and workforce.