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When it Comes to Retirement, Small Businesses Are Failing Their Employees

By Maurie Backman – Feb 9, 2019 at 6:08AM

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And owners are failing themselves, too.

Social Security alone won't cut it in retirement. And thankfully, a growing number of working Americans are finally catching on to that concept and acknowledging the need to save independently for their golden years. In fact, 88% of employees think having a retirement plan at work is important, according to the first Millennium Trust Small Business Retirement Survey. Yet just 67% of small business employers think it's important to offer a retirement program for employees. And only 23% of small businesses feel that having a retirement plan would help them attract and retain talent.

Of course, the challenge in offering retirement plans is that they can be expensive for employers, especially small businesses with limited resources. Take 401(k) plans. Though a popular choice for companies of various sizes, these plans typically involve a hefty setup fee and ongoing administration fees. There's also the expectation that employers will provide some sort of 401(k) match, thereby adding to their costs.

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That said, there are less expensive options you might explore if you run a small business that lacks a retirement plan. Here are two to consider.

1. The SEP IRA

Short for simplified employee pension, SEP IRAs are designed for self-employed workers and small business owners. For the current year, small business owners can contribute up to 25% of their net business earnings (meaning, earnings minus business operating expenses, SEP contribution, and half of self-employment taxes) for a maximum of $56,000.

The benefit of SEP IRAs is that they cost very little to set up and maintain. The drawback, however, is that business owners must make the same contributions, percentage-wise, to their workers' accounts as to their own. But for a three- or four-person company, a SEP IRA might be a reasonable solution for business owners looking to not just provide the benefit of a retirement plan, but save for the future themselves.


If a SEP IRA is cost-prohibitive, a SIMPLE IRA might make more sense. Short for savings incentive match plan for employees, the SIMPLE IRA currently has an annual contribution limit of $13,000 for employees under 50, or $16,000 for those 50 and over.

Like SEP IRAs, SIMPLE IRAs cost little to nothing to open and maintain. And while employers are required to fund those accounts on their workers' behalf, it's not to the same extent that SEPs mandate. Rather, employers must match employee contributions directly up to a maximum of 3% of their compensation, or contribute a fixed 2% of their compensation to their accounts. As such, small business owners have the option to fund their own accounts at a higher level.

Saving independently for retirement is the ticket to financial security later in life, so it makes sense for employees to start demanding access to a tax-advantaged savings plan, whether it's a 401(k) or one of the options mentioned above. If your company currently lacks a retirement plan, carve out some time to explore your options -- not just for your workers' sake, but for your own sake as well.

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