Small Businesses Increasing Retirement Savings Efforts

Fidelity Investments latest Small Business Retirement Savings Analysis reveals increases in average balances and contributions in small businesses’ retirement benefits plans for the third consecutive year. According to the analysis, average balances in Simplified Employee Pension Plans (SEP-IRAs) increased by 92% to $84,410 from 2008 to 2013. Average balances in Savings Incentive Match Plans for Employees (SIMPLE-IRAs) increased 100.8% to $36,235. 

In addition to contributing to their own retirement, small business owners are contributing more to employees’ accounts, Brian Hogan, director of small business retirement products at Fidelity in Smithfield, Rhode Island, tells PLANADVISER. From 2008 to 2013, the employer contributions for employees to SEP-IRAs increased 17%, and SIMPLE-IRAs saw an increase of 13.3% in employer contributions to employees’ accounts, he says. 

Hogan explains that SEP-IRAs are funded only by employer contributions, they do not allow for employee deferrals, and they have higher statutory contribution limits than other defined contribution plans. These tend to be offered by very small, mostly family-owned companies. SIMPLE-IRAs, however, are structured more like 401(k)s, where employees are allowed to contribute to their own accounts.

Offering these plans provides tax benefits for small businesses, Hogan notes. Mainly, they get to deduct any contribution made on behalf of employees from taxable income. In addition, if a small business starts a new plan, it can get a tax credit for start-up costs up to $500. SIMPLE-IRAs also allow employees to save income pre-tax, reducing their current taxable income.

For small businesses deciding to offer a retirement plan to employees, which type of plan to offer depends on the number of employees, how much administrative responsibility employers want, and what contribution limits they would like for themselves and employees, according to Hogan. Also, small business owners should determine whether employees want to make their own contributions to their accounts.

He notes that if a small business owner offers a SEP-IRA, the contribution made to employees’ accounts must be the same, in percentage or formula, as what the owner contributes to his or her own account. “If they don’t want to do that, or if they have a higher number of employees or employees want to contribute to the plan themselves, a SIMPLE-IRA is the best choice,” Hogan says.

He adds that with a SIMPLE-IRA, plan sponsors do not have the same fiduciary responsibility as they would with a 401(k) plan. They do not have to select an investment lineup for the plan; they choose a provider, and participants set up their own accounts and decide on investments. Hogan notes that if a business has more than 100 employees, it may not offer a SIMPLE-IRA, and will have to choose another plan type.

“It was encouraging to see the results [of our analysis],” says Hogan. “We’ve seen, as the economy turns around, small business owners are becoming more confident in their businesses and in making contributions to [their own and employees’] retirement.”