Six myths about retirement plans for small businesses—debunked!

Small business owners wear a lot of hats. Sales. Marketing. Finance. HR. Operations. It’s easy to feel like there’s no room for another hat—even for a retirement plan. We’ll debunk the myths that keep many small business owners from offering a retirement plan.

Retirement plans are popular benefits

Employer-sponsored retirement plans are not only a popular benefit, they can help play a critical part in attracting and retaining employees. Looking across businesses and state and local governments, 67% of U.S. workers have access to an employer-sponsored plan. But that access isn’t evenly spread, as only 49% of workers in small organizations (with fewer than 50 employees) are offered a plan at work, compared to 88% of workers in large ones.1

But with 68% of Americans afraid they won’t have enough money to last through their retirement years,2 companies that offer a retirement plan may have a competitive edge in hiring and keeping key talent. 

We’d like to debunk six myths that keep many small business owners from offering a retirement plan.3

Six retirement plan myths for small businesses 

1 Too expensive to set up a retirement plan

Did you know the IRS offers tax breaks for employers that offer a qualified retirement plan, such as a 401(k)?

Start-up tax credit—For plan sponsors who start up a new qualified retirement plan, such as a 401(k) plan, the IRS may offer eligible employers a tax credit of up to $5,000 for three years.4

Tax-deductible employer contributions—The employer can deduct contributions to employee accounts on its federal income-tax return—within the limits given in Section 404 of the Internal Revenue Code.

2 Focused on day-to-day operations, no resource to maintain a plan

It’s true that offering a retirement plan comes with administrative tasks and fiduciary duties. But that doesn’t mean the employer has to take them all on, as almost all can be outsourced. Many retirement plan providers, financial professionals, third-party administrators, payroll providers, and others team up to offer plans and take on most of the responsibilities—even the fiduciary duties.

Look for a plan—or a team of plan professionals—that takes on the following administrative duties: 

402(a) named fiduciary—This is the main named fiduciary and decision maker for the plan. The 402(a) fiduciary monitors all other fiduciaries. This role can be outsourced to help reduce your duty and your risk.

3(16) plan administrator fiduciary—This key administrative role can be outsourced. This means that you won’t have to do the vast majority of administrative tasks involved with offering a plan—the 3(16) fiduciary even prepares, signs, and files the Form 5500.

Additional options have been enabled by the Setting Every Community Up for Retirement Enhancement (SECURE) Act. As of January 2021, employers without any common affiliation may join a pooled employer plan (PEP), giving business owners access to the benefits of offering a retirement plan but without adding much of the administrative burden and fiduciary risk.5

3 Prioritize other employee benefits/employees wouldn’t want to participate

With 93% of employers offering a 401(k) plan, the only benefit more popular than a retirement plan is paid vacation.6 The reason? Very few Americans of any age feel they’re on track with saving for retirement, and many have no savings at all. Even at retirement age, the numbers are discouraging, with only 51% of people age 60 and older reporting they’re on track with their retirement savings7 and 13% having no retirement savings.8

Percentage of Americans on track with their retirement savings

Source: “Retirement in America: Time to rethink and retool,” PricewaterhouseCoopers, 2021.

4 Waiting for the business to grow larger

There’s no need to wait, as retirement plans come in all shapes and sizes. 401(k)s, for example, have no minimum requirements and can grow with your business. There’s even a category of retirement plans called micro plans—plans that have less than $1 million up to $5 million in assets—and they account for 88.7% of all corporate defined contribution (DC) plans.3 This illustrates that even a small business with a few employees can offer a competitive retirement plan.

Small and micro DC plans

Size of plan Number of corporate DC plans Percentage of corporate DC plans Percentage of corporate DC assets
<$1 million 391,241 58.5% 2.0%
$1 million—$5 million 202,112 30.2% 7.5%

Source: “U.S. Retirement Markets 2020, Exploring Opportunities in the Small Plan Market,” The Cerulli Report, Cerulli Associates, 2021.

5 Don’t want to make employer contributions

Employers aren’t required to make contributions to the 401(k) they offer employees. Even without employer contributions, a 401(k) still offers employees a powerful way to save for retirement, with automatic payroll deductions that make it easy and tax benefits that make it more attractive than saving in a savings account.  

6 Selecting and monitoring investments are too challenging

Investments can be a complicated topic to tackle, and it's a task you can outsource. You can outsource some or all of the plan’s investment-related duties.

3(38) investment fiduciary—You may choose a financial professional to select and monitor the plan’s investments.

3(21) fiduciary support—You may choose a financial professional to recommend investments for the plan, but you’d maintain the duty to actually select and monitor the plan’s investments.

A trusted partner can help you sort retirement plan fact from fiction

Some myths are relatively harmless—Bigfoot and the Loch Ness Monster. But deciding whether or not to offer your employees a retirement plan is a complex decision, and one that should be taken seriously. As with anything, it’s important to know the facts. Working with a trusted financial professional, consultant, and retirement plan provider can help you figure out whether you can offer a plan, which type of plan is right for your business, and how much of the administrative and fiduciary duties you can outsource.

1 “Exploring Opportunities in the Small Plan Market.”, Cerulli Associates, Q1 2021. 2 “Almost 70% of Americans Worry They Won't Have Enough to Retire,” The Motley Fool, June 2020. 3 “Exploring Opportunities in the Small Plan Market.”, Cerulli Associates, Q1 2021. 4 Retirement Plans Startup Costs Tax Credit,"  Internal Revenue Service. 5 Text - H.R.1994 - 116th Congress (2019-2020): Setting Every Community Up for Retirement Enhancement Act of 2019," congress.gov,  Library of Congress, 2020. 6The 16 most popular employee perks,” Employee Benefit News, March 2021. 7 “Report on the Economic Well-Being of U.S. Households in 2019 – May 2020,” Board of Governors of the Federal Reserve System, June 2020. 8 "Retirement in America: Time to rethink and retool,” PricewaterhouseCoopers, 2021.

The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.

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Gary Tankersley

Gary Tankersley, 

National Sales Manager

John Hancock Retirement

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