In talking to physicians and other professional service providers, there are a few misconceptions about 401k plans, and these misconceptions not only prevent companies from offering a 401k, they end up costing these companies money.
The two biggest misconceptions regarding 401k’s are that they are only for larger companies, and that they are too costly. Neither of these are true, and in the text that follows, we’ll dispel them while also giving you five solid reasons to offer a 401k, no matter how small (or large) your business is.
REASON #1 – THEY ATTRACT AND RETAIN BETTER EMPLOYEES
If your business has employees, it’s an unavoidable fact that you need more than just “warm bodies”. You need competent, motivated employees who will stay. Offering a 401k is, without question, an employee magnet. It attracts better people to your company, and it keeps them there longer. Employee turnover is astoundingly expensive*, and detrimental to growth. A 401k is a hedge against this.
Listen, if your business is beyond the “one-person” stage, you simply cannot succeed long term without smart, inspired employees who know their way around your company and your industry. Once an employee reaches a point where you really depend on them, they typically begin to truly understand their worth not only to you, but to the marketplace in general (including your competition) as well. So you need to make certain that the grass stays green right under their feet.
REASON #2 – BUSINESS OWNERS NEED THEM TOO. EVEN SOLOPRENEURS.
According to this article in Fortune**, more than a third of entrepreneurs have no retirement savings or defined retirement plan at all. This is why a 401k makes sense, even for a one-person business. A 401k can mean the difference between a good retirement, and one where you struggle. Yes, even the boss can contribute and benefit from a 401k.
REASON #3 – A 401K IS VERY COST EFFECTIVE (AND EVEN PROFITABLE).
A huge misconception is that 401k’s are expensive. The reality is, they can be if you aren’t careful. The best thing to do is hire a 401k specialist that knows the industry that can guide and direct you. I am not just talking about a financial advisor who can help you select investments, you will need a specialist that can help design and monitor the plan to save you taxes and reduce employee turnover.
Here are a few other tidbits that may interest you – most businesses who decide to offer a 401k will qualify for a $500 tax credit for the first three years. This can help offset (or perhaps even exceed) annual administration costs. Again, these are not complicated to set up and run.
Another large benefit is company funds used to match employee contributions is tax deductible. Combine this with the tax credit and the savings from not having to replace people every few months, and it becomes very clear that a 401k is nowhere near as expensive as some business owners think it is. In fact, I’ve had businesses owners literally shocked at how cost effective a 401k is.
REASON #4 – IF YOU DON’T, YOU ARE FALLING BEHIND
I hate to bring up something like “keeping up with the Joneses”, but in this case, it makes a lot of sense. It’s a competitive business landscape out there, and currently, companies large and small are boosting their 401k offerings***. You wouldn’t be the only store on the street without a sign, would you? Or the only one who didn’t take credit cards? Well, that’s about where you are in not offering a 401k – it’s become a standard.
TrueNorth Retirement Services is a fee-only financial services firm that helps businesses get the most out of their retirement benefit plans. They provide clients a fee-only Fiduciary approach, and offer unrivaled expertise on an array of plan options ranging from 401k, Defined Benefit, Cash Balance, and Tax Exempt Plans.