Help thy brother’s boat across and lo! thine own has reached the shore.   

(Hindu proverb)

The smaller the business, the less likely it is to offer a retirement plan to employees:

      ·       28% of businesses with less than 10 employees offer a plan

      ·       51% of businesses with 10 to 24 employees offer a plan

         ·       63% of businesses with 25 to 49 employees offer a plan[1] 

Many small business owners hesitate to offer a retirement plan for fear that it’s costly, complicated and present potential compliance issues for which they are ill-equipped to take on.  Additionally, some assume that a retirement plan will be undervalued and, therefore, underused by employees.  At first glance, to many small business owners, providing a retirement plan seems like a lot of work for little reward. 

Unfortunately, as their business continues to grow, it’s not uncommon for owners to build up large equity stakes in their company, but have little or no retirement savings.  Having spent a good part of their younger years building up their business, it’s not uncommon for owners to play catch-up with retirement savings.  Further complicating their decision is the fact that they have to settle on a retirement plan that needs to satisfy three stakeholders: their business, their employees, themselves. 

Signs your business may be ready to adopt a retirement plan

As with most things in life, when it comes to adopting a retirement plan, timing is critical.  Adopt a plan too early, and you risk not having the financial resources to sustain it.  Adopt a plan too late, and you risk foregoing years of tax-efficient retirement savings, compounding and diversification of wealth.  What are the signs that your company is ready to adopt a retirement plan?

      ·      Your business has consistently earned a comfortable profit (20% plus net annual return on investment) for the past 5 years or more. 

      ·      You believe that your business’s future earnings will be similar, if not, better than its past. 

      ·      You want to strengthen your business by attracting and/or retaining highly skilled, experienced employees.  

      ·      You want to diversify your wealth beyond business equity.

      ·      You want a more tax-efficient way for you and your employees to save for retirement. 

If you and your business fit this profile, then you’re probably ready to explore options for a retirement plan.  As with any major undertaking, it’s best to establish a stable, financial footing before entertaining another leap forward.

Things to consider when getting started 

Once you’ve established that you and your business are ready to adopt a retirement plan, the next step is to consider the key variables in a plan: 

      ·      Contribution: Who can contribute?  How to contribute?  How much can one contribute?  Do you want to offer employer matching?  If so, what’s the matching percentage and when does it vest?

      ·      Investment Options:  What is the best mix of investment options: mutual funds, ETFs, stocks, active funds, passive funds, US-focus, international-focus, fixed income? What are the investments performance history and expense ratio?

      ·      Cost:  How much does it cost to set up a plan?  How much does it cost to maintain a plan?  Which costs do employers pay and which do employees pay?  Does the company have the necessary cashflow to fulfill its obligations for the long-term?  Can the plan be suspended or canceled?

      ·      Compliance:  What rules and regulations must employer and retirement plan adhere to?  How to stay compliant?  What are the penalties for being non-compliant? 

Concurrently, it’s important to consider different types of retirement plans to determine which is the best fit for your business, your employees, yourself.  Below are the key types of retirement plans for small businesses.

Once you’ve determined which plan is best for your business, it’s important to do additional due diligence to determine which financial custodians are the best fit.  Below are potential financial custodians for different types of retirement plan.  

Unfortunately, it’s difficult to recommend a retirement plan type and corresponding custodian that suit most small businesses.  As with individuals, every business has its own unique characteristics and needs.   Choosing the right retirement plan for your business requires knowing yourself, your business, your employees and then marrying your needs with the most appropriate plan offering.  So, it’s important to put in the time upfront to do the necessary legwork to determine the right plan for your business.

Conclusion

As a small business owner, it’s important to survive and then thrive.  To do so requires planning for today as well as tomorrow.  Although adopting a retirement plan is a big step, it’s also not as daunting as you may think.  The critical step is the first step.  But in doing so, you’ll come to recognize the options, flexibility and value that a retirement plan can provide your business, your employees, yourself.   And, perhaps with time, you’ll come to realize that in helping others, you’ve helped yourself and vice versa.