Why small businesses should offer a retirement plan as a benefit to employees

You’ve probably seen the TV ads with the big red “Easy” button. If only we could take that red button and put it in front of all business owners who don’t have retirement plans for their companies. “Just hit the button,” we would say. And voila! They’d have their retirement plans.

Okay, so maybe establishing a retirement plan isn’t THAT easy—but it’s close. Offering a retirement plan to employees is not only simple, but it’s valuable as well. Although offering a company-sponsored retirement plan is not required in most states, many small business owners have started offering employer-sponsored retirement plans as a benefit to employees. But what exactly are the advantages of doing so?

What are the benefits of offering a retirement plan to employees as a small business owner?

· It attracts and keeps employees

A recent study by the Society for Human Resource Management showed that retirement savings and planning benefits are the second most important employer-sponsored benefit to the majority of American employees [1]. Additionally, 57 percent of HR professionals reported that retirement savings and planning benefits will increase in importance to retain employees in the next three to five years [2].

By offering these benefits, business owners create an enticing and powerful incentive. Take it one step further by offering a company match, and the scales could be tipped even further! Offering a retirement savings plan also shows that business owners really care about their employees, and that speaks volumes. Word will get around, and the owner and the company will be better off for it. Plus, in some states, like Oregon, California, New Jersey, and Illinois, offering some type of retirement plans to employees may be required.

· It’s affordable

Many business owners think a 401(k) retirement savings plan is cost-prohibitive, or very expensive at the very least. On the contrary, a 401(k) plan is one of the lowest cost, highest benefits an employer can offer.

There are also multiple tax benefits a company can receive by offering a 401(k). If a business is establishing a plan for the first time, it can receive a three-year tax credit for 50 percent of the startup cost, up to $500 per year. This tax credit can help offset setup and administrative fees of the plan. In addition, if an employer makes contributions to the plan, they can deduct it on the company’s federal income tax return.

· Minimal time and attention is required

Business owners want to concentrate on their businesses, not manage a retirement savings plan. Plus, unless you’re an investment professional, the sheer number of investment opportunities and portfolio options may seem overwhelming.

Working with a service provider that has the expertise you’re looking for and offers plan management tools can go a long way to reduce the your oversight burden as a business owner.

· Flexible 401(k) plans fit the culture and goals of the company

Flexible plan options give business owners more opportunities to align a retirement savings plan with company core values and culture. Employers can enforce eligibility restrictions, select a vesting schedule, and offer matching contributions if they so choose. Additionally, profit sharing and automatic enrollment features can be utilized, and employers can decide if the plan will allow participants to take out loans against their 401(k) savings.

What to make the whole process even simpler? Utilize payroll integration, a snap-on service for many 401(k) plans, which makes it even easier to report employee salary deferrals to a 401(k) plan to your payroll provider. And thanks to an automatic 360-degree exchange of data, the process is easy and seamless for you, the employer.

One of the biggest barriers between small business owners and realizing the true benefits of offering a 401(k) plan to employees is education. While the benefits are numerous, employers need to first understand the ease and the advantages of introducing a retirement savings plan in the workplace.

Options small business have when saving for retirement

According to a recent report by Alight Solutions, the majority of American workers think their employers should provide help saving for retirement—and 84 percent of employers agree [3].

Why is that important? Well, it means that selecting a retirement savings plan that balances employee needs with business objectives is paramount for small business owners. There are a variety of viable options out there, so it’s vitally important to understand the key benefits—and differences—between common retirement savings plans before making a final decision on which savings avenue to utilize.

Types of retirement savings plans small businesses can implement

1. Payroll Deduction IRA

To utilize a Payroll Deduction IRA savings account, employees must establish an IRA—either a Traditional or Roth—with a financial institution, then authorize payroll deduction. The Payroll Deduction IRA is one of the simplest retirement arrangements that a business can have. 


  • Minimal work for employers to set up and the employer has no filing requirements

  • Only employees make the contributions

  • A business of any size, even self-employed, can establish a Payroll Deduction IRA program

Things to Consider: 

  • Low contribution maximums may not be enough to meet participants’ retirement goals

  • No deductions for the business

  • Depending on the type of IRA the employee has set up, they may (or may not) be able to deduct their contributions

2. Simplified Employee Pension (SEP) IRA

Simplified Employee Pension (SEP) IRA plans allow employers to set aside money in a retirement account for themselves and their employees. A SEP does not have the operating and startup costs of conventional retirement plans, and the plans also allow for contributions up to 25 percent of each employee’s pay.


  • More flexibility than Payroll Deduction IRA plans; easy to set up and operate

  • Flexible annual contributions allow the employer to make larger contributions in good years and smaller contributions in hard times

  • No IRS reporting and certain plan testing is not required

Things to Consider:

  • Employer must contribute equally for all eligible employees

  • Employees can’t contribute to their accounts; only the employer can

  • No participant loans permitted and assets can’t be used as collateral

  • Funds are vested immediately


Unlike SEP IRA plans, SIMPLE (Savings Incentive Match Plan for Employees) IRA plans give both employers and employees the opportunity to set aside money in retirement accounts. SIMPLE IRA plans do not have the startup and operating costs of a conventional retirement plans, either. 


  • Employers and employees can share the responsibility for their retirement; employees may elect to contribute

  • Plan sponsors can implement a SIMPLE IRA at low cost and are not subject to IRS reporting

  • Plans are available to any small business, generally with 100 or fewer employees

Things to Consider: 

  • Lack of flexibility in employer contributions. Employer is required to contribute each year with either a matching contribution (up to 3 percent of compensation) or contribute a flat 2 percent of compensation

  • Generally have lower contribution limits than some other retirement plans

  • Employer can not have any other retirement savings plan

  • Like SEP IRAs, funds are vested immediately

4. 401(k)

A 401(k) retirement savings plan is a cost-effective way to offer flexibility to both the employer and the employee, though owner-only businesses do have the option for a solo 401(k). Employees can invest in their retirement through convenient salary deferrals that are generally not taxed until funds are distributed. Flexible plan options give small businesses more opportunities to align a retirement savings plan with company values and culture. 


  • Employers have more flexibility

    • Can enforce eligibility restrictions, select a vesting schedule, and allow participants to take out loans against their 401(k) savings

  • Employees may contribute higher amounts to this plan than IRA plans

  • Businesses can better compete in the workplace to attract and retain talented employees

  • Employer contributions are deductible on the employer’s federal income tax return

  • A 401(k) plan can have an automatic enrollment feature

Things to Consider: 

  • Administrative costs may be higher than under more basic arrangements

  • Plan sponsors must perform IRS filing and are subject to non-discrimination testing

  • Employer chooses a vesting schedule for matching contributions that fits business needs

    • Employees are always 100 percent vested in their salary deferrals

As an employer, you can play an integral role in your employee’s retirement readiness, but where do you even start? Your first steps start with understanding and comparing the various options out there to find a cost-effective plan that is flexible enough to grow with your business and meet your employees’ needs. Once you’ve picked a plan and implemented it across your company, you and your employees have officially taken your first steps on the path to retirement readiness.

Why small businesses should offer professional advice for retirement planning

As awareness regarding retirement readiness increases, American employees are becoming more and more conscious that they may not be as financially literate as they once thought. When surveyed, a whopping 80 percent of adults reported that they would benefit from advice or answers to everyday financial questions from a professional [4].

What’s more—a recent report by TIAA found that 70 percent of employers think it would be useful to provide financial education to employees, yet only one-third actually do it [5]. So why the disconnect? Most employers probably don’t consider themselves to be financial gurus or experts, knowledgeable enough to provide helpful advice or education. Some employers may also be concerned about the true value of financial wellness education.

Why employers should offer professional 401(k) portfolio advice

Getting professional advice for 401(k) investments can have a significant impact on retirement outcomes, making professional advice a high-value benefit to employees. According to another study conducted by TIAA, 68 percent of plan participants who take advantage of advice offerings choose to save more, revisit their portfolio allocations, or rebalance their portfolio [6]. Clearly, professional advice can change poor financial behaviors. Advice and education force participants to think about their retirement goals and look at what they could be doing differently to reach those goals. So, the benefit of professional advice and education for the employee is obvious, but why take on that responsibility as an employer?

For starters, nearly one in three employees report that personal finance issues have been a distraction for them at work. And nearly half of that group say they spend three hours or more per week thinking about or dealing with those personal finance issues [7]. These distracted employees are not only less productive while they’re on the clock, but they’re also more likely to take time off of work to deal with their financial issues, directly affecting you, the employer [6]. If you’re wondering about the return on investment you’ll get by offering financial wellness education or personalized advice, that statistic alone should convince you of its value.

You may have decided now that providing educational resources to prepare employees for retirement is worth it, but where do you even start? The financial industry can be tough to navigate, with meticulous rules and regulations for what you can say and what you can’t say when it comes to retirement advice and education. Luckily, there are a variety of ways you can provide professional education to employees without switching career paths to become an economic expert.

Benefits of offering professional advice from a financial advisor to retirement plan participants

While you may not be knowledgeable enough about the financial industry to provide your employees with professional advice and take on a fiduciary role, someone you likely already have a relationship with is. Many plan sponsors work with financial advisors to set up their retirement plan in the first place, and financial advisors are perfect candidates for providing professional advice to participants down the road.

How financial advisors can ease retirement plan participant stress

· Keep savings on track

Only one in five non-retirees have done detailed calculations to determine how much income they’ll need in retirement versus how much money their retirement account(s) could potentially generate. Financial advisors can help bridge that gap, forcing employees to think critically about what they need to do to become more retirement ready. How long is the plan participant’s desired retirement? Do they envision frequent travel in retirement? Are they willing or able to work part-time while retired? After answering these questions, financial advisors can help employees align their retirement goals with their current savings plan.

· Construct and manage a portfolio

Most retirement plan participants aren’t experts on investments, stocks, and bonds, and with a huge variety of portfolio options and models, it’s easy to get overwhelmed and confused. Enter the financial advisor. Sitting down one-on-one with a financial advisor can help employees determine if their model portfolios too aggressive, not aggressive enough, or just right. Education about how 401(k) assets fit in with other portfolio assets can help employees meet their overall objectives and better understand what is going on in the market.

· Keep emotions in check

There’s no such thing as a perfect retirement portfolio. The element of risk can never be completely eliminated, and emotions can run high if the market begins to tank. As plan participants watch their assets fall in a plummeting market, they may decide it’s time to sell. One of the many values an advisor can provide is talking stressed employees off the ledge, reminding them that the market frequently fluctuates and selling off assets isn’t necessarily the way to go. Whether it’s a bear market or bull market, financial advisors can act as a voice of reason.

· Diversify the portfolio*

Creating and maintaining an appropriately diversified portfolio is important for 401(k) participants. With professional advice, employees can diversify assets and assume a suitable level of risk, which can ultimately help grow their retirement nest egg. Building a portfolio that addresses unique risks, like inflation rate and interest rates—while maintaining adequate exposure to portfolio growth—can help plan participants manage risk.

· Know when to begin withdrawing

Participants that have access to a financial advisor during their working years can make sure their money continues working for them—even after they’ve quit working themselves. While there may be a lot of stress on accumulating assets, advisors can help participants figure out the most effect strategy for withdrawing 401(k) funds, utilizing personal savings, and collecting Social Security benefits.

Everyone’s retirement needs will be different; that’s why professional advice to participants matters. Simply put, personalized advice and service can make the difference between stressed-out, financially illiterate employees and productive workers well on their way to retirement readiness.

*Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.