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Brad Tinnon

What’s A 401k? Financial Basics For Small Business Owners

You’ve likely heard of what a 401k is, but exactly what does this mean for you as a small business owner? One question on your mind may be how a 401k would benefit you or your employees. Additionally, you may be thinking / wondering how much it would cost or if you can even afford to have a 401k. In today’s blog post, I will be covering these issues as well as some other 401k basics you should be aware of.


Let’s go ahead and put this issue at the front and center. One of the reasons that a small business owner may not set up a 401k is because it costs money. Some 401k providers claim to provide a plan that “doesn’t cost anything”, but ultimately you are paying in some form or fashion

When setting up a 401k plan for the first time, it is likely that you will have some associated out of pocket costs. Many factors will determine how much this could be, but as a small business, it would likely cost you somewhere around $2,000 to $3,000 annually (maybe more if you decide to also contribute to employee accounts). To avoid this out of pocket cost, many business owners will choose to initially set up a SIMPLE IRA Plan; however, this type of plan may require that you make a contribution to each employee’s account equal to approximately 2% to 3% of their salary. 

Over time as the assets in the 401k plan grow, you can switch from paying out of pocket to having the actual plan itself pay the fees. In other words, the fee is coming directly out of the assets in the plan. Or said another way, the employees all share in the costs. In my opinion, it’s usually best to do this once the assets in the plan total at least $1,000,000. At that point, your all-in costs shouldn’t exceed around 1.50% per year. 


This is an easy one. If you aren’t profitable then you probably aren’t looking into a 401k right now. However, a 401k (or possibly a SIMPLE IRA Plan) should be something to consider implementing once your business improves.


Even if you are profitable, why would you want to consider setting up a 401k? As it stands today, it’s an employee market as there are considerably more jobs today than just 1 or 2 years ago. The landscape has changed and as a business owner, you must be diligent in acquiring the talent that is out there. That means you are competing against other companies who are likely offering 401k plans to its employees. 

Studies show that financially healthy people are more productive employees. One of the ways toward that end is to offer a 401k plan to allow employees the opportunity to save money. After all, you’re employees likely don’t want to work for the rest of their lives. 

In addition to employees being able to save to a 401k, it also allows you as a business owner to do the same. It’s important for you to save outside of your business to protect against something happening to your business. And as an added bonus, you get to reduce taxes as contributions to a 401k plan can be tax deductible to you and the business. With the lower tax rates for businesses as a result of recent tax reform, deductible 401k contributions will likely only serve to reduce your taxes even further.

401k Plans are a great way to also reward employees via a Profit Sharing Plan that is attached to the 401k. A Profit Sharing Plan is a way for you to share profits with employees in a tax deductible way. The money goes directly into their 401k plan.  Along with simply just having a 401k, Profit Sharing Plans can help recruit new employees but also help to retain the talented employees that you currently have. This retention can happen via a vesting schedule that you attach to the Profit Sharing Plan. Employees would have to stay a certain number of years in order to receive the full amount in their Profit Sharing Plan.


Something important to know is that there is an administrative responsibility that comes with having a 401k plan. You will have to coordinate employer and employee contributions with your payroll company and accounting software. There’s a little bit of a learning curve, but once it’s set up it is relatively streamlined. Don’t get overwhelmed here as a good 401k provider and accountant will help you get this set up.


In summary, if you are profitable then implementing a 401k can be a great way to attract talent, retain talent, provide a tax deduction, and help employees (including yourself) reach their retirement goals. Sure it may cost some amount of money to set this up and maintain, but you must consider the cost of not doing so! 

If you would like some guidance in helping to determine what it would cost to set up a 401k plan or to even discuss if a 401k plan (or some other type of plan) is right for you, then feel free to Contact Us

Do you have a 401k for your employees? Have you considered setting up a 401k plan but haven’t quite pulled the trigger? What’s holding you back from implementing a 401k plan?      


Should You Set Up A Small Business 401k?

4 Secret Benefits Of Setting Up A 401k

SEP IRA vs Solo 401k

Are Your Company 401k Fees Too High?

SIMPLE IRA vs 401k – Which Should A Company Implement?


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Brad E.S. Tinnon

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