Building a Safety Net – Small Businesses Retirement Plans

By Andy Ives, CFP®, AIF®
IRA Analyst
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By their nature, small businesses struggle in the shallows. Now they face a tsunami. However, when the shutters are removed and customers return and the employees are back on the payroll, normal day-to-day concerns will be a welcome relief. My guess is that many small business owners will create improvements, look to reward dedicated employees, and try to build a better safety net for themselves and their teams should another calamity strike. We could see this materialize in the establishment of more retirement plans.

A recent editorial suggested that plan participants be allowed to invade their workplace retirement accounts – without penalty – as a financial crutch during the coronavirus shutdown. Time will tell if this comes to fruition. While it is a creative idea, not all businesses offer a plan. Many small business owners don’t have two nickels to rub together. Regardless, the conversation around budgeting for and implementing a retirement plan – a safety net – must be held.

Obviously, no two businesses are exactly alike. Every employer has different goals, and every employee has different needs. Does a restaurant in the Florida Panhandle with young seasonal employees and high turnover require the same plan as the mature architectural firm in Uptown Charlotte? Doubtful. Will a start-up law office and a start-up landscape company require the same plan design features? Probably not. Fortunately, there are options.

But where to begin? How do you carve a path through a dense jungle? Proper questions are a machete. Ultimately, the advisor and business owner should hack their way through the overgrowth of the unknown together. Some questions to consider are: Why do you want to implement a plan? What has been your experience with plans? Have you ever participated in a plan? As the conversation evolves, points of pain and items of need will manifest on their own.

Additional questions might include: What are your goals? Are you looking to attract and retain the best talent? Is this plan for you, so you can sink as much money as possible into your own retirement, or is it for your employees? (If the business owner will not be participating, there could be concerns about the viability of the plan. Energy and enthusiasm start at the top and trickle down. Without true buy-in from ownership, workplace plans often die on the vine.) Be forewarned, “greed” can drive some small business owners to exclude as many employees as possible by adopting strict plan eligibility rules. “Need” oftentimes results in a workplace plan that employees will proudly brag about to their friends.

More detailed questions will become relevant. How much do you personally intend to contribute to the plan? Who will be the plan administrator? Liability concerns? Is creditor protection important? Would you like to allow both employer and employee contributions? Will there be a matching component? Does a profit share feature interest you? Roth? Loans?

Through the Q&A process, the most appropriate type of plan will reveal itself. Maybe a SIMPLE is best, maybe a SEP. Possibly a 401(k) is a better fit. The retirement plan jungle is thick, but you can get through it. I suggest a small business owner seek out and partner with a knowledgeable advisor, who can in turn introduce a helpful TPA and a trusted record keeper. Ask questions, keep an open mind, and start the search for the best plan for your small business!

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