Should a Small Business Offer a Retirement Plan for Their Employees?

After holding on by a string during the COVID lockdowns, businesses are ready to forge ahead with plans to grow and prosper. But now, they’re facing another challenge: Finding the right caliber of people who want to work. They’re out there but, with a million more jobs available than people to fill them, job seekers are becoming much more discerning about their choice of jobs and employers. And those that do take on a job are often quick to bolt as soon as they find a better one.

Businesses are more challenged than ever to find high-quality employees and keep them. It costs money to recruit, hire, and train good employees, and it’s even costlier to replace them. It can be far more profitable to incentivize employees to stay by offering them a chance to secure their future with an employer-sponsored retirement plan.

Offering employees a retirement plan does not come without added expenses. You just must ask yourself, is it less expensive to provide your employees with a highly desirable benefit that can impact their lives, or constantly having to replace them because they have no real incentive to stay. It’s an even easier choice when you consider all the benefits realized by your employees, yourself, and the business.

Benefits for Employees

Employees feel better about their jobs. A MetLife study found that financial health is the top concern among employees, with nearly half concerned about their ability to retire on schedule. Anxiety over their future is a leading contributor to poor mental health, which often leads to reduced productivity.

When businesses offer retirement benefits to their employees, it’s an expression of commitment to their happiness and well-being. They feel valued. That commitment is reciprocated through greater productivity and a desire to progress with the company.

Benefits for Business Owners

Business owners need to save for retirement too: Many business owners believe their business is their retirement plan, with visions of eventually selling it and riding off into the sunset. However, if they’re serious about securing their financial future, they should diversify their assets to mitigate their risks. The best way to do that is by investing in securities and other investments through a qualified retirement plan.

Business owners can enjoy significant tax savings: Business owners can use more tax savings. Some employer-sponsored plans allow for substantial tax-deductible contributions. In 2022, the maximum contribution to a 401(k) plan is $20,500 ($26,500 if aged 50 or older). It can be much higher if you combine it with a profit-sharing plan.

Benefits for the Business

Tax credits: Under the SECURE Act passed in 2019, businesses that start a 401(k) plan can receive up to $5,000 in annual tax credits for the first three years of the plan. That can offset any administrative costs.

Tax savings: Although businesses are not required to provide matching contributions as an additional benefit for employees, the ones that do receive a tax deduction. Employers can choose to match dollar-for-dollar up to a certain limit or institute a profit-sharing option. The ultimate benefit to employers who make matching employee contributions is higher employee retention.

Higher employee productivity, retention, and attraction: This brings us full circle as to the impact a retirement plan can have on employee happiness and commitment, which turns out to be a win-win for the business and its employees. Achieving higher productivity and retention is essential to its profitability and, ultimately, survival. It’s well documented that employees who feel better about their financial future are more productive.

Productive employees are happy employees, which translates to higher retention. Employers who can point to highly satisfied employees have a much easier time attracting quality candidates who want the same for themselves. It’s the circle of life for small businesses with ambitions of growing their bottom lines.

Fortunately for small businesses, between lower employee turnover costs, higher profits, and tax savings, offering employees a valuable benefit such as a retirement savings plan generates a net gain in the long run.

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