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Investor Insights Blog|Why a 401(k) May Not Be the Best Solution For Your Small Business

Small Business Plans

Why a 401(k) May Not Be the Best Solution For Your Small Business

Ask a person about the benefits they receive at their company and they’ll invariably rattle off the list of medical, dental, PTO and 401(k) retirement options.

The 401(k) is seemingly expected as the retirement plan all companies should offer. That can force many small business owners — who may be just starting or changing their retirement strategy — into believing that a conventional 401(k) should be their only consideration. Add a 401(k) and be done, right? 

Not so fast. 

Determining the right retirement plan for your business should focus on several factors. In some cases, conventional thinking will prove true and implementing a 401(k) will be the best strategy. In others, your company and its employees could see more benefits from a different plan. 

Here are a few things to consider when trying to determine which retirement plan is right for your business. 

Income and contribution limits make a difference 

Your plan should support your contribution initiatives, not the other way around. If you’re looking to contribute aggressively to your plan, you’ll want to consider a solo 401(k) or a Simplified Employee Pension (SEP) IRA. The solo 401(k) can only be used if you have no other employees (besides, perhaps, your spouse). The SEP IRA, however, has no such restriction. 

SEP IRAs are also considered easier to establish and maintain than a solo 401(k). However, because you can only contribute up to 25 percent of your adjusted gross income into a SEP IRA, it is possible the solo 401(k) plan will allow you to contribute more aggressively. 

Consider the size of your company 

In our previous section we discussed plans for companies with few — or even one — employee(s). But what if your small business has numerous employees? 

In cases like this, you may want to think simple with a SIMPLE IRA. 

A SIMPLE IRA allows companies with 100 employees or fewer to establish a SIMPLE IRA for each individual employee. Employees are then allowed to make salary-deferred contributions to the plan in 2023 until they reach $15,500. This could even be all of their income if their salary does not exceed this number. 

The plan also allows for a $3,000 catch-up mechanism for employees over 50. As an employer you will also have the opportunity to support your employees with a 3-percent dollar-for-dollar match to further grow their account.

You can also choose to contribute 2 percent of their compensation instead as a support metric. These contributions are non-elective, which means all employees receive them.  

Guide to small business retirement plans

Vesting method and employee turnover 

While you naturally want all of your employees — especially your best employees — to be with you for the long haul, employee turnover is a fact of life and of business.

If, however, your company seems to experience an exceptionally high level of employee turnover, you may want to factor this into the retirement plan you select based on its vesting qualities. 

Plans like SEP and SIMPLE IRAs as well as solo 401(k)s all have immediate vesting. Meanwhile, a conventional 401(k) will vest over time depending on the terms of the plan.

This may be a better solution for you in order to give your employees additional motivation to stick with you and your business. 


Does Equity Trust provide investment advice or act as a financial advisor?

Equity Trust Company is a directed custodian, preparing account statements for you, and reports for the IRS. Our role is to carry out an account owner’s direction, much like a bank carries out payment instructions when an account owner writes a check. We do not research or analyze your investment choices and do not offer opinion or advice on investment decisions. You should consult a trusted financial professional such as your accountant, financial planner or lawyer before making an investment.


Are there educational resources to help me be a more aware investor and protect myself against investment fraud?

In conjunction with the Retirement Industry Trust Association, we have compiled governmental and industry resources to help you, the self-directed investor, in making your investment decisions. As a reminder, all investments carry risk including loss of principal. No governmental agency or IRA custodian approves or guarantees investments.


Can I buy stocks, bonds and mutual funds with a self-directed IRA?

Yes. Some IRA custodians only allow investing in stocks, bonds and mutual funds; however a self-directed IRA custodian, such as Equity Trust, allows those types of investments in addition to real estate, notes, private placements, tax lien certificates and more.

There are plenty of options out there when trying to determine the best retirement plan for your company. If you have questions, we can help. Contact us today. 

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