Clearing The Air

The most common 401(k) misconceptions held by small business owners

With pensions all but gone and Social Security drying up, successfully planning for retirement lies squarely on the shoulders of individuals.

Even though small businesses are the backbone of America, when it comes to planning for retirement, their owners and employees are overwhelmingly unprepared. It’s a national crisis that, for years, has flown under the radar. In fact, the U.S. Small Business Administration found 72 percent of small business employees report having no retirement plan options available at their workplace.

Why is it that small businesses and their workers are grossly unprepared when it comes to retirement planning and saving? Oftentimes, it boils down to the fact that retirement plans — particularly 401(k)s — are confusing, foreign and misunderstood, which is why many small business owners shy away from offering them. There are many mistruths floating around, so it’s time to clear the air and set the record straight.

Here are the five most common 401(k) misconceptions that I find many entrepreneurs buy into.

1. I’m required to match contributions. In many cases, small business proprietors falsely believe they must match employee 401(k) contributions. This couldn’t be farther from the truth! In fact, an entrepreneur that offers a 401(k) plan has no requirement to match contributions — those that do match do so by choice. 401(k)s are simply a vehicle to allow individuals to save money tax-free; the maximum an individual can save is $17,000.

As a business owner, all you need to do is implement the plan. Nowadays, more employees indicate that the availability of a retirement plan is a key factor in their decision to stay with or join a place of employment. By offering a plan, your business will look attractive to talented potential employees and will serve as a way for you to retain your current valuable staff members.

2. I have to manage everything. Running a small business isn’t a nine-to-five job and there’s no such thing as a vacation. The success of your business depends largely on you. Chances are you outsource a variety of services for your business, including payroll and accounting. Well, did you know you can outsource practically every aspect of your 401(k)? Most business owners don’t realize that option is available; instead, they believe they must manage the plan and be involved in every detail. This is another misconception.

The administrative aspects of running and maintaining a plan are burdensome and time consuming, and business owners have the option of outsourcing the fiduciary responsibility of their plan, as well as investment advice. By outsourcing the fiduciary requirements, should your employees’ investments perform poorly or not up to their expectations, you won’t be held legally liable. Nor do you have to take the time to research and recommend investment options.

Quality, objective advice is available to entrepreneurs that need help picking the investments to offer. Additionally, employees can have a professional review their goals and risk tolerance and recommend investments that best fit their needs.

3. I’ll be paying an arm and a leg for this plan. Running a successful business requires a keen eye for balancing the budget sheets and some creativity in cutting costs. That’s why many small business owners shy away from offering a 401(k) plan — they’re, understandably, concerned about the financial aspects of managing such a plan.

But did you know you can offer your employees a retirement savings vehicle for less than what you pay monthly to fill the water cooler? All-inclusive plans exist that cost as a little as $95 a month and require a flat fee to maintain. Your employees can choose from low-cost investment options, while you, as a business owner, can take advantage of a tax credit covering the costs of instituting the plan. The current credit is 50 percent of costs associated with setting up and maintaining the plan, and up to $500 per year the first three years of the plan.

4. I don’t have a choice when it comes to high fees. If you take one thing away from this article, know that your small business should never be expected to settle for an inferior plan chock full of high fees. Hidden investment fees in 401(k)s have, for too long, been a dark industry secret. But a light will be shined on these fees later this year, thanks a new Department of Labor rule that will expose hidden fees and increase transparency.

However, the new rules won’t actually lower fees, which is why you should look for plans that have low fees and are designed with a small business in mind. Make sure to compare costs and ask potential 401(k) plan providers how they stack up to their competitors. Remember that you’re an employee too and can take advantage of a plan if you offer one. If nothing else, choose a plan with low fees so that your retirement plan won’t get eaten away by hidden fees.

5. I will spend too much time setting it up. The supposed time associated with implementing and managing a 401(k) is a deterrent and excuse for many small business owners. We know you’re busy, and the last thing you need is another time-consuming responsibility on your plate.

But did you know you can implement a plan for your employees in less than a week? And, once that plan is in place, it will take no more than 12 hours a year — one hour a month — to maintain. The key to finding a time-effective plan is choosing one that exists in a Web-based environment. Small businesses are frequently saddled and stuck with 401(k)s built for big businesses. But you and your business don’t have to settle anymore for incomprehensible jargon and a one-size-fits-all prototype.

Once you cut through the misconceptions and learn the truth about 401(k) plans, you’ll realize that 401(k)s are one of the easiest, most effective tools to attract and retain talent. Your employees, no doubt, will appreciate you giving them the opportunity to effectively save for retirement, and you’ll likely find that their appreciation resonates in the effort they put forth to making your business even more successful!