Providing 401k plans as a small business can be a terrifying thought. There's a lot to consider, especially if you're concerned that your business will sustain damage by the prospect of providing 401k plans to your employees.
However, it doesn't have to be this way it's becoming increasingly more common for small businesses to be able to provide 401k plans to their employees and there are a lot of benefits that you can enjoy from doing so. Thanks to different plan options, you and your employees can benefit a lot from setting up 401k plans that they can take advantage.
In this article will review seven of the best 401k plans that work well for small businesses, and we will rate and review them based on several factors that give you an Insider view on which ones are the best for you and your company.
What We Base Our Ratings On
There are several factors that we must consider when we are rating our products, and they are crucial elements that determine whether or not your 401k plan options are right for your company. However, you want also to make sure that not only are they good for your company, but they're good for your employees who will need these 401k plans to retire in the future.
Employee Contribution: While this might not be an immediate concern for an employer, it is an important factor when deciding which 401k plan to instill in your company. The employee contribution is how much, usually, as a percentage, the employee puts in out of their paycheck and into their 401k account.
The amount that they contribute usually determines how much the employer pays depending on the plan that they choose. Programs that offer a delicate balance between employee contribution and employer contribution will be regarded higher than those who don't.
Employer Contribution: As an employer, you'll want to make sure that the contributions that you make are both Fair and reasonable as far as your company's ability to pay it are concerned. While offering a delicate balance compared to employee contribution, you'll want to make sure that the plan that you choose to provide also has your company's best interest in heart.
As a result, 401k plans that provide an excellent balance in this regard will be rated higher than those that don't.
Vesting: The Vesting period is one of the most important features regarding employer contributions. Vesting is a term that used primarily for how quickly the ownership of contributions made by you and your company will transfer to the employee.
Many employers usually designate their offerings as 100 percent vested immediately, which means that their employees own them right away and that gives an employee the freedom to take their Investments with them if they choose to change jobs or move.
Some employers will offer incentives instead to encourage their employees to stick around longer. As a result, they will set their vesting contributions over time where more of their investment becomes theirs the longer that they stay with their company until it does reach 100 percent vested.
A lot of this depends on how your company operates but each plans vesting opportunities will be highlighted and rated accordingly.
Seven Best 401k Plans For Small Businesses
A SEP IRA account is also a great choice if you are a self-employed entrepreneur that's looking to start a retirement account for you and your spouse.
These accounts are some of the most accessible and most versatile options on the market, and you're allowed to contribute up to $56,000 a year, or 25 percent of your annual compensation, whichever is less is what will is expected to come out of your pocket.
However there is also no minimum contribution requirement, your choice can change every year, and you will not be expected to add in if you do not want to. SEP IRA accounts are good for small businesses with five to eight employees, but employers are expected to fund contributions for all of their employees proportional to what you contribute based on annual salaries.
If your employees are all part-time, this will work out in an employers favor while still contributing to their employees best interests and
Custodian fees are relatively low and, ranging from ten to $20 per employee.
Our Rating: 1 / 7
Traditional IRAs are a little different than a standard 401k plan, and aren’t grouped as retirement plans and only provided to an employer that wants to establish their account. IRA accounts are portable, so you can take them with you anywhere and still contribute to the same account as you go.
This plan would be perfect for a solo employer especially considering that the custodian fees are excessively low per year, ranging only from $10 to $20 every year which gets deducted from an employee account depending on which company you choose to go through.
If you're a small business and you choose not to offer 401k for your employees, you might suggest this plan to them since it's so easy to manage.
While employers are not expected to contribute and to their employees IRA, you may still be required to help employees that are on this plan by withholding their pre-tax payments and sending them to a mutual fund where their account is set up.
Ultimately this is a great idea for employees that want to see a retirement plan set up, but it doesn't fall on the employer's shoulders to provide that and comes at no cost to the company.
Our Rating: 2 / 7
Roth 401k Plan
Some small business employers offer Roth 401k plans which provide benefits a regular Roth IRA, but employee contributions match those of a standard 401k plan. These plans are non-tax-deductible.
However, distribution from this plan are also tax-free as long as the employee has reached 59 and a half years old and the account is older than five years.
If an employee decides to take from the plan earlier than that, then they will be subject to a 10 percent early withdrawal penalty as well as regular income tax charges. An employer does have the opportunity to offer a partial match on the Roth 401k however the employer contribution typically has to go into a regular 401k account.
Some limitations are made for the employee, but on the employer side of things this would be a reasonable plan to start with, and if the program needs to evolve with the company, the chance to transfer into a new project is easy.
Our Rating: 3 / 7
If you're a single operative small business, then you may want to take advantage of the solo 401k meant for companies that are run by a single person and their spouse. They are similar to traditional 401k accounts with similar contribution limits however what's nice about solo 401k is the fact that they are minimal if any administration costs.
With a solo 401k you can invest in real estate and alternative assets depending on the providers that you settle with, and if you decide to expand to other employees, a solo 401k easily converts into a traditional 401k.
Administration fees that come associated with a single 401k retirement plan range between $200 to $2,000 depending on who you settle with, but your investment flexibility dramatically improves as a result. You'll be able to contribute up to $56,000 each year which would amount to $62,000 every year with catch-up contributions playing their part.
These plans are scalable, efficient, and flexible for a solo operative and provide a lot of options for minimal cost.
Our Rating: 4 / 7
If your small business is a nonprofit organization, then the 403b plan would be a better bet as far as offering Retirement services to your employees. This retirement plan is nearly identical to the 401k plan, except it's specifically designed for nonprofit organizations as well as for institutions such as:
What helps employers out with these kinds of plans is that the employees primarily fund them and each contribution is tax-deductible. Employees do you have the option to match increases up to a certain extent if they so choose, and all investment earnings will accumulate on a tax-deferred basis.
Our Rating: 5 / 7
Also known as the poor man's 401k, it's important not to let the name fool you as this is an excellent option for small business owners with under a hundred employees and its roster. This plan allows employees and employers to make tax-deductible contributions and to set up this plan is relatively easy.
Some of the benefits that this plan provides are that there are no IRS filing requirements, no minimal service fees, And this is a plan that can be self-administered rather than dealing with a long line of paperwork.
This plan is an excellent plan for employers who want to contribute between $7,000 to $26,000 per year and average at about 5 to 15 employees. Companies who have more employees than 15 that want to contribute up to $65,000 per year would benefit from a traditional or Safe Harbor 401k instead.
Unfortunately, this plan also requires matching, and it can leave in players with little flexibility when they're trying to determine a match rate. This plan requires employers to match and employees deferral dollar-for-dollar up to three percent of their contribution.
While eventually, an employer will be able to lower his match to one percent over time, it will take up to two years and a five-year. To manage that and must match three percent until that point.
Another factor that employers typically don't care for when it comes to a simple IRA plan is that the contribution limits are higher than a traditional IRA but much lower than the SE PIRA or a 401k plan in general. The vesting opportunities also come limited with a simple IRA and as a result, will limit employee loyalty incentives which could leave you losing valuable employees.
Our Rating: 6 / 7
A traditional 401k plan, also known as a defined benefit pension plan, was the most common form of a 401k plan until the 1970s. While these plans are rare, they are still in use today was certain companies and the way that it works is that an employee will receive a monthly benefit when they retire and they will not be responsible for contributing to this plan.
The employer is the one that supplies all of the contributions to their plan, and most of their decisions on the matter will depend on their income and how many years of service they provided to the company. This factor can benefit a small business who is doing well because the employer rather than the employee makes decisions.
Because the employee has no say or control over the funds that they receive in retirement, this leaves a lot of room for you as the employer to reward employees who have shown a long-lasting dedication to the company and provided a lot of valuable service over the years.
However, many employees prefer to have an idea what they're going to get at retirement, and it may not be the best choice for everyone.
Our Rating: 7 / 7
The above article was researched and written by the editorial staff at WomensWealth.Money.