Benefits are an important factor in retaining top employees—especially at startups or small businesses. Retaining top talent can be tough, which means that every perk matters. When a business can demonstrate up front that it cares about its employees, it’s more likely to keep top professionals from leaving. But for small- and mid-size businesses (SMBs), funding retirement benefits can become challenging, especially on a limited budget.
What most business owners don’t realize is that you don’t have to build out a fully-fledged 401(k) plan to support your employees’ retirement. With retirement planning now more important than ever, entrepreneurs have access to numerous vehicles for helping their employees plan for the future. One category looking to change how employer-supported retirement works is online investment advisors.
We talked to Amy Ouellette of Betterment, an online financial advisor that has services for both employers and individuals. She helps companies set up retirement benefit plans while keeping costs low. There are three tools she suggests entrepreneurs take a look at.
SEP IRAs: For small businesses with an owner and up to a few business partners, Ouellette typically recommends a SEP IRA—a Simplified Employee Pension-Individual Retirement Account—where the employer is the only one who can contribute. The SEP IRA doesn’t have the startup costs seen with other plans, making it an attractive option for smaller businesses. Since only the employer contributes, it also provides a benefit to cash-strapped small business employees. These employer contributions to a SEP IRA are limited to a maximum of either $54,000 (in 2017) or 25 percent of an employee’s compensation per year, and the level of contribution is discretionary year-to-year, giving the employer more flexibility.
A SEP IRA is specifically designed for the unique savings needs of self-employed individuals and small business owners. Once a business scales, a SEP IRA becomes less beneficial to the owners, since employers will be required to contribute at the same rate for eligible employees as they contribute to their own SEP IRA, meaning that it is more expensive for business owners to save for their own retirement.
SIMPLE IRAs: If you have more than a few (but less than 100) employees, and don’t want the contribution limitations of a SEP IRA, a SIMPLE IRA might be a better option. A SIMPLE IRA stands for Savings Incentive Match Plan for Employees.
In a SIMPLE IRA, employees can contribute up to $12,500 (in 2017) of their own compensation to the plan. The employer can choose one of two options for their fixed contributions: a match of each employee’s contribution on a dollar-for-dollar basis up to three percent, or a flat two percent of each employee’s compensation up to $270,000, per the IRS. Employers who choose to contribute two percent must make this contribution for every eligible employee—not just those that contributed.
A major benefit of a SIMPLE IRA is that it lacks the extra administrative work that comes with a 401(k) plan. With a 401(k), employers deal with a large compliance burden and testing to make sure that employees are not being discriminated against.
The other thing to be aware of with SIMPLE plans, Ouellette says, is that you generally have to set it up by October 1st, and once started it must run for the full calendar year. This limits when you can convert to a 401(k) plan, since you can only terminate an existing SIMPLE plan at year-end with notice to employees by November 2nd. “You have to be always thinking ahead on these plans,” she says.
401(k)s: Geared toward larger companies, the 401(k) is an upgrade from the SIMPLE IRA, primarily because the maximum amount the employee can contribute increases to $18,000 (in 2017). This gives employees the option of “maxing out” their 401(k) to save as much as possible toward retirement. Whatever amount the employee chooses, the employer has more flexibility with a 401(k). Instead of fixed amounts, as are seen in the SIMPLE plan, with a 401(k), the employer can opt to simply let the employee contribute without matching at all.
The biggest drawback to a 401(k) is the administrative fees required of an employer. Ouellette cautions against providers who advertise “free 401(k)s.” These providers often choose funds with higher expense ratios, from which they earn a portion of the fees. Even when looking for low-fee options, Ouellette believes it’s important to conduct careful research. Employers should also consider the services the provider offers.
“There's always going to be work involved in handling a 401(k) plan,” Ouellette says. “You want to work with a provider that works to make it as easy as possible, directing you on where you can find clear information and what kind of information you need to provide your employees.”
Why user experience is so important in retirement plans: Although each type of plan comes with pros and cons, Ouellette believes the most important thing is that employers provide retirement savings options to employees. Betterment places a high priority on user experience, setting up an interface that bundles helpful advice with a business’s account. That advice includes walking employees through determining how much money one might need to contribute toward retirement.
“With our investing philosophy built in with our advice for participants, our goal is to make Betterment a great partner in operating the 401(k) plan,” Ouellette says. “Our offering removes many of the questions from the employee side of the equation and tries to make their lives much easier.”
For businesses that still have questions about retirement accounts for employees, Ouellette recommends spending some time on the IRS website. The Small Businesses Retirement Resources section of the IRS website can help walk you through some of the most common questions you’ll have.
Investing in securities involves risk and there is always the potential of losing money. Before investing, consider your investment objectives and Betterment's charges and expenses. Visit www.betterment.com for more information.