Let’s take them one at a time.
The bad: According to a recent Gallup Pew Research Center survey, 67% of small business owners worry they won’t be able to put away enough money for retirement.
Moreover, a recent report by Jules Lichtenstein, Senior Economist with the Small Business Administration, Financial Viability and Retirement Assets: A Look at Small Business Owners and Private Sector Workers, finds that business owners are less likely to have a retirement plan than people who work for them.
Here are some of the findings:
- Only 36% of business owners own IRAs.
- Only 2% of self-employed individuals have retirement plans.
- Only 18% of business owners participate in a 401(k) plan.
You can see that “only” is a lonely number.
So why haven’t business owners done a better job preparing for retirement? The reasons are many, but one factor is the misconceptions business owners have about retirement plans.
Here are some of the objections I hear from business owners – with an appropriate response:
- “Retirement plans are too expensive to set-up and administer.” The 401(k) marketplace provides a wide range of choices, business models, and delivery methods. The business owner has a choice to have a plan is both cost-effective and easy to maintain.
- “I have to make a contribution every year.” Not exactly. A 401(k)/profit sharing by its very nature generally allows the business owner to make contributions determined each year on a discretionary basis.
- “I have to provide the same contribution to the employees as for me.” Not necessarily. There are allocation methods such as New Comparability which may permit a larger contribution for the owner than for the other employees.
- “The tax laws will limit my ability to maximize my 401(k) contribution if not enough employees participate.” Again, not necessarily. A 401(k) Safe Harbor Plan may permit the business owner to automatically meet the 401(k) test at a reasonable cost for the other employee.
Here’s the really good part: You can help!
Jerry Kalish is President of National Benefit Services, Inc., a Chicago-based third party administrator. He also publishes The Retirement Plan Blog. He can be reached at firstname.lastname@example.org.
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