The Storefront and the Spreadsheet: A Different Way to Think About Your Company's Retirement Plan
When you decided where to locate your business, you likely didn't start by comparing lease rates. Instead, you thought about your customers, your employees, and your operational needs. Is visibility critical? Do you need a loading dock? What commute are you creating for your team? The price was a factor, but it was viewed through the lens of a larger business strategy.
Choosing a retirement plan for your small business deserves the same strategic approach. It's easy to jump ahead to comparing plan types—a SEP IRA, a SIMPLE IRA, a 401(k)—but the right fit depends entirely on what you want the plan to accomplish. The features on a spreadsheet only make sense after you've defined your goals.
This article provides a sequence for thinking through that decision. We'll outline the key questions that connect your business goals to your retirement plan options, helping you have a more productive conversation with your financial, tax, and legal professionals. For many business owners, this reframing is the most important step.
First, Clarify Your Personal Retirement Goals
A company retirement plan is a benefit for employees, but for most small business owners, it's also the primary vehicle for their own retirement savings. Your personal financial goals are a critical input.
How much do you, as the owner, want to save?
Different plan structures have different contribution possibilities. Some plans may allow you to save more for your own retirement than others. Understanding your personal savings capacity and goals helps narrow the field of potential plans considerably.
How much contribution flexibility do you need?
Is your business income steady and predictable, or does it vary from year to year? Some retirement plans require fixed employer contributions every year. For instance, with a SIMPLE IRA plan, an employer is generally required to make either matching contributions or non-elective contributions each year (U.S. Department of Labor, “Choosing a Retirement Solution for Your Small Business,” September 2018, Page 9). Other plans, such as a SEP IRA or a 401(k) with a profit-sharing component, can offer more flexibility, allowing you to contribute more in strong years and less, or nothing, in leaner ones (U.S. Department of Labor, “Choosing a Retirement Solution for Your Small Business,” September 2018, Pages 6 and 11).
Consider Your Workforce and Competitive Landscape
A retirement plan is a powerful tool for attracting, retaining, and rewarding the people who help your business succeed. Your talent strategy should directly inform your plan's design.
Is the plan for recruitment and retention?
In a competitive market for talent, a retirement plan can be a key differentiator. The U.S. Small Business Administration notes that strong benefits packages can help businesses compete with larger companies for skilled workers (U.S. Small Business Administration, “Offer employee benefits,” Last updated June 3, 2024, sba.gov). Does your plan need to be comparable to others in your industry? Will it serve as a reason for a key employee to stay and grow with your company?
Do you want to empower employees to save?
Not all plans allow for employee contributions. SEP IRA plans, for example, are funded only by employer contributions (U.S. Department of Labor, “Choosing a Retirement Solution for Your Small Business,” September 2018, Page 6). In contrast, 401(k) and SIMPLE IRA plans allow employees to contribute a portion of their own salary, which can create a more engaged savings culture (U.S. Department of Labor, “Choosing a Retirement Solution for Your Small Business,” September 2018, Pages 9 and 11). Offering a workplace financial education program can help employees understand and use this benefit effectively.
What features matter to your team?
Beyond the basic structure, some plans can offer features like participant loans or Roth (after-tax) contribution options. These features add administrative complexity and costs but can be valuable to employees. For example, a 401(k) plan can be amended to permit loans to participants, giving them access to a portion of their retirement account, and can also allow for designated Roth contributions (Internal Revenue Service, “Retirement Plans for Small Entities & Self-Employed,” Last updated June 10, 2024, Section: 401(k) Plans). Considering these options is part of a broader conversation about company retirement plans.
Align the Plan with Your Business’s Cash Flow
A retirement plan is a long-term financial commitment. The design must be sustainable through the natural cycles of your business.
As mentioned, plans with discretionary employer contributions, like a profit-sharing 401(k), offer significant flexibility. You can decide the amount, if any, to contribute each year based on the company's performance. This can be a major advantage for businesses with variable revenue streams.
In contrast, other plans have more rigid funding requirements. This predictability can be a positive, but it's important to be confident that the business can support those contributions consistently. A careful review of your business's financial health and projections is a non-negotiable step in choosing a retirement plan for a small business.
Understand Your Administrative and Fiduciary Duties
Sponsoring a retirement plan comes with important responsibilities. As the plan sponsor, you are generally considered a fiduciary. This means you have a legal duty to act solely in the interest of the plan's participants and beneficiaries (U.S. Department of Labor, “Choosing a Retirement Solution for Your Small Business,” September 2018, Page 17).
This responsibility involves several key areas:
- Selecting and monitoring plan investments: You must offer a prudent selection of investment options and regularly review their performance.
- Managing plan administration: This includes ensuring contributions are deposited in a timely manner, processing distributions, and handling other operational tasks.
- Controlling costs: You have a duty to ensure that the fees paid for investment management and plan administration are reasonable.
- Compliance and reporting: More complex plans like 401(k)s often require annual non-discrimination testing and the filing of a Form 5500 with the federal government (U.S. Department of Labor, “Choosing a Retirement Solution for Your Small Business,” September 2018, Page 12).
The administrative burden varies significantly by plan type. A SEP IRA is often cited as being one of the simplest to set up and maintain. A 401(k) offers the most design flexibility but also carries the highest administrative and fiduciary load. Many business owners work with a team of professionals, including a financial advisor and a Third-Party Administrator (TPA), to manage these duties. Rancho Wealth Management, working with Equitable Advisors, can help you understand these responsibilities and coordinate with other professionals on your team.
A Sequence for Making Your Decision
Instead of getting lost in a sea of acronyms, start by answering these strategic business questions. Your answers will create a blueprint that makes choosing the right plan structure much clearer.
- Owner Goals: What are my personal savings objectives and how much flexibility do I need?
- Workforce Strategy: What role will this plan play in attracting and retaining my ideal team? Do I want employees to contribute?
- Cash Flow: What level of financial commitment can the business comfortably and consistently sustain?
- Administrative Capacity: What level of administrative work and fiduciary responsibility am I prepared to manage, with professional support?
Once you have clarity on these points, you can have a much more focused and productive discussion with your financial, tax, and legal advisors about which plan—or combination of plans—is the right fit for your business.
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Financial decisions often connect with several other parts of your life. We can help you organize the questions and consider how the pieces may fit together.
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Sources
Internal Revenue Service, “Retirement Plans for Small Entities & Self-Employed,” Last updated June 10, 2024. Available at: https://www.irs.gov/retirement-plans/retirement-plans-for-small-entities-and-self-employed
U.S. Department of Labor, Employee Benefits Security Administration, “Choosing a Retirement Solution for Your Small Business,” September 2018. Available at: https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/publications/choosing-a-retirement-solution-for-your-small-business
U.S. Small Business Administration, “Offer employee benefits,” Last updated June 3, 2024. Available at: https://www.sba.gov/business-guide/manage-your-business/hire-manage-employees