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4 Misconceptions Small-Business Owners Have About 401(k) Plans

May 19, 2015
Small Business
4 Misconceptions Small-Business Owners Have About 401(k) Plans Story
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You want the best benefits you can afford if you’re a small-business owner who appreciates having loyal, committed employees.

That could include offering a 401(k) retirement plan like those available to employees of big corporations.

But maybe you’re thinking: Aren’t 401(k) plans just for the big guys, not for a small operator like me?

Andrew Meadows Story

Andrew Meadows, a brand ambassador at Ubiquity Retirement & Savings.


That’s just one of the small-business worries that Andrew Meadows, a brand ambassador at Ubiquity Retirement & Savings, an online retirement plan service company, says are baseless.

He talks about four common misconceptions small-business owners have about 401(k) plans:

1. They’re just for big businesses.

This is “one of the biggest misconceptions,” Meadows tells NerdWallet, citing small-business owners who decide not to offer a plan, saying, “Oh, I only have seven people.”

In fact, about 51% to 71% of about 42 million people who work for small businesses don’t have access to “work-based plan to save for retirement,” including 401(k) plans, according to a July 2014 U.S. General Accountability Office report.

But that’s slowly changing with the rise of low-cost retirement plan providers. For example, Ubiquity has steadily expanded and now works with 7,500 small businesses and owner-only companies, including dental clinics and law and financial advisory firms, Meadows says.

2. They’re too expensive.

Many retirement plan providers charge an annual fee of 1.5% to 2% of  total assets, which can eat up a substantial amount for a plan with tens of thousands of dollars. But as a small-business owner, you now have other options.

For example, you can have a plan set up with Ubiquity for a flat fee of $105 a month.You do have to pay a set-up fee of about $500, plus other transaction service charges. But “whether you have a dollar or ten million dollars, it doesn’t matter to us,” Meadows says.

Another company, Employee Fiduciary, charges a flat fee of $1,500 a year, which translates to $125 a month, for a company with fewer than 30 employees. Companies with more than 30 workers have to pay an additional $30 a year for every eligible employee. The company does charge a fee of 0.08% of the plan assets a year, less than most plans.

3. They’re too complicated.

“We actually agree with that one,” Meadows says, although companies like Ubiquity and Employee Fiduciary are looking for ways to simplify the plans they offer small businesses.

Meadows noted that some companies have complicated rules on vesting and other aspects of a plan, saying, “The more provisions, the more specific rules, the more complicated it is to keep track of those.”

Which is why Ubiquity offers what it calls Express (k) Plan with fairly simple, straightforward rules. That plan, Meadows says, “only requests you make one decision: Do you want to make contributions for your employee? Other than that, employees are 100% eligible and immediately vested.”

Greg Carpenter, chief executive and founder of Employee Fiduciary, said keeping sales pitches uncomplicated is also important. In a blog post, he said, “Small business clients like simple… They are wary of fast talk and sales pitches that tend to complicate and confuse, resulting in a ‘Just trust me’ bottom line.”

4. They’re hard to manage.

Dealing with the paperwork and making sure their small business is following all the rules has also discouraged some small-business owners from offering a 401(k) plan, Meadows says. “If you’re a small business, your office manager is also your payroll person,” he says. So many small businesses are naturally reluctant to pile on even more tasks, especially one perceived to be as frustratingly complicated as a 401(k) plan.

But plan providers have been trying to keep that process simple. For example, Meadows says that with the Ubiquity system, it takes just a few minutes every month to record contributions. The process can even be automated for small businesses that work with payroll services providers with a relationship with Ubiquity.

Of course, having a 401(k) plan is no guarantee your employees will participate.

But Meadows says giving small-business employees that option is “phenomenally better than doing nothing,” especially given the millions of people “who don’t have a way to save.”

For more information about how to start and run a business, visit NerdWallet’s Small Business Guide. For free, personalized answers to questions about starting and financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.

Benjamin Pimentel is a staff writer covering small business for NerdWallet. Follow him on Twitter @benpimentel, on Google+ and on LinkedIn.

Top image via iStock, and photo of Andrew Meadows via Heather Hryciw.