Experts: How Small Businesses Can Get Started Offering Retirement Benefits

Smiling young woman sitting at her workplace.
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Setting up retirement plans for employees is a daunting prospect for small businesses because of the cost — so much so that nearly half (48%) of small business owners believe they can’t afford to offer retirement plans, according to a new study from Fidelity Investments.

Fidelity’s 2023 Small Business Retirement Index, released on May 11, found that only about one-third (34%) of small employers currently offer retirement savings to their employees.

In addition to the cost of setting up retirement plans, small business owners cited a couple of other main barriers. About one-fifth (22%) said they are too busy running their companies to focus on retirement plans, while a similar percentage (21%) said they don’t know how to start the process of offering retirement plans.

The result is that a large number of Americans could be financially unprepared for their senior years, especially when you consider that nearly half of U.S. employees work for small businesses. At the same time, small businesses that don’t offer retirement plans to employees will have a hard time competing for the best workers in a tight labor market.

Despite perceptions of difficulty establishing retirement plans, the process doesn’t have to be that hard.

“While offering a retirement benefit can feel like a potentially expensive and overwhelming task, there are many retirement saving solutions available for companies of all sizes,” Andrew Schreiner, Fidelity’s senior vice president of small business retirement, said in a news release. “In addition to helping their employees establish a secure financial future, a retirement benefit also can have an enormous impact in attracting and retaining top talent.”

Make Your Money Work Better for You

The U.S. Department of Labor’s publication “Choosing a Retirement Solution for Your Small Business” noted that starting a retirement savings plan “can be easier than most business owners think.” Not only that, but setting up a retirement plan has several tax advantages, including the following:

  • Employer contributions are deductible from the employer’s income.
  • Employee contributions (other than Roth contributions) are not taxed until distributed to the employee.
  • Money in the plan grows tax-free.
  • Distributions could be eligible for tax-favored rollovers or transfers into other retirement programs.

If you’re a small business owner considering offering retirement plans, your first step is to familiarize yourself with different options. This can be as easy as doing research online or consulting with a small business expert. Here’s a look at some of the options for small businesses with employees, according to Fidelity:

  • SEP IRAs: These accounts work best for small-business owners with only a few employees and are funded solely by employer contributions.
  • SIMPLE IRAs: SIMPLE IRAs are funded by a combination of employee deferrals and employer contributions. They are designed to help small-business owners gain access to a tax-deferred benefit while saving for retirement.
  • Pooled Employer Plans (PEPs): PEPs are a good way to start offering retirement plans for employees because they allow multiple unrelated employers to participate in a single 401(k) plan. This reduces many of the costs and hurdles small businesses face when offering 401(k)s.

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