Should Your Business Offer a Retirement Plan? Key Considerations for Employers

October 5, 2024

Offering a retirement plan is a major decision for any business owner. As a competitive employee benefit, retirement plans can help attract and retain top talent, boost employee morale, and even provide tax advantages for your company. However, implementing a retirement plan comes with responsibilities, costs, and long-term considerations that require thoughtful planning.

At First Western Trust, we help businesses of all sizes evaluate whether offering a retirement plan is the right move for them. In this blog, we’ll explore the key factors that employers should consider when deciding whether to offer a retirement plan benefit for their employees.

1. Attracting and Retaining Talent

One of the most significant reasons businesses offer retirement plans is to attract and retain top talent. Today’s workforce, especially mid-career professionals and those nearing retirement, prioritize financial security. Offering a retirement plan, such as a 401(k), makes your company more competitive in the job market, particularly when recruiting experienced professionals.

For small businesses, a retirement plan can set you apart from competitors who don’t offer one. In tight labor markets, this benefit can be a deciding factor for potential employees who are weighing job offers. In fact, surveys show that employees value retirement benefits nearly as much as health insurance when evaluating compensation packages.

Consideration: If your business operates in a highly competitive industry, or if you’re struggling to attract skilled employees, offering a retirement plan may be a wise investment.¹ It signals to potential hires that your company values their long-term financial well-being.

2. Enhancing Employee Satisfaction and Productivity

Retirement plans don’t just help you attract employees—they also help you keep them. Offering a retirement benefit can improve overall job satisfaction, leading to higher morale and employee retention. Employees who feel secure about their financial future are likely to be more engaged and productive at work.

Additionally, providing a structured way for employees to save for retirement can alleviate financial stress. According to a recent study, employees with access to retirement plans report less stress about their financial futures compared to those without such benefits. By offering a retirement plan, you contribute to the overall well-being of your team, which can have a direct positive impact on company culture and productivity.

Consideration: Think about your current employee turnover rates and engagement levels. If retention or morale is an issue, offering a retirement plan could improve job satisfaction and long-term loyalty among your workforce.

3. Tax Benefits for Employers

Offering a retirement plan can come with attractive tax advantages for your business. Contributions you make to employee retirement accounts are generally tax-deductible, which can help reduce your company’s taxable income. Additionally, depending on the type of plan you choose, your business may be eligible for tax credits.

For example, small businesses that start a new retirement plan, such as a 401(k) or SIMPLE IRA, may qualify for the Retirement Plans Startup Costs Credit. This credit can offset up to 50% of the plan’s startup costs, up to a maximum of $5,000 per year for the first three years.

Consideration: While the tax benefits of offering a retirement plan can be substantial, they should be weighed against the cost of administering the plan. Understanding the potential financial impact is essential to making an informed decision.

4. Costs and Administrative Requirements

Before deciding to offer a retirement plan, it’s important to understand the costs involved. The most common retirement plans, such as 401(k) plans, come with setup fees, ongoing administrative costs, and sometimes investment management fees. These costs can vary depending on the size of your business and the complexity of the plan.

Additionally, there are administrative responsibilities that come with offering a retirement plan, such as complying with the Employee Retirement Income Security Act (ERISA) regulations and filing annual reports with the Department of Labor. Many businesses choose to work with a third-party administrator (TPA) or a financial institution to help manage these requirements.

Consideration: Smaller businesses may find it more manageable to start with simpler and less costly plans, such as a SEP IRA or SIMPLE IRA, before transitioning to a more comprehensive 401(k) plan as the company grows. Weigh the costs and administrative responsibilities against the potential benefits to determine what makes sense for your business.

5. Offering Matching Contributions

Another decision to consider is whether your company will offer matching contributions as part of the retirement plan. Employer matches can significantly increase the attractiveness of your retirement benefit, incentivizing employees to contribute more to their retirement savings.

While offering a match adds to the cost, it can also serve as a powerful tool for boosting employee participation in the plan. Many employers set a matching formula, such as matching 50% of employee contributions up to 6% of their salary. This approach encourages employees to save for retirement while providing you with flexibility in managing costs.

Consideration: If your budget allows, offering a matching contribution can make your retirement plan more compelling to employees. It also demonstrates a strong commitment to their financial futures, which can enhance retention and satisfaction.

6. The Long-Term Financial Health of Your Business

Finally, consider the long-term impact of offering a retirement plan on your business’s financial health. While a retirement plan can offer immediate benefits—such as tax savings and improved employee morale—it’s essential to ensure that your business is in a strong enough financial position to commit to this benefit over time.

Starting a retirement plan requires careful planning and budgeting. Before implementing one, it’s important to have a clear understanding of your business’s cash flow and future financial projections. This will ensure that you can sustain the costs of the plan without negatively impacting your overall business operations.

Consideration: Take the time to evaluate your company’s long-term financial outlook. Offering a retirement plan is a long-term commitment, and it’s important to ensure that your business is in a position to support it for years to come.

Key Takeaways 

Deciding whether to offer a retirement plan is a significant decision for any business owner. It requires careful consideration of the benefits—such as attracting and retaining talent, tax savings, and employee satisfaction—along with the costs and administrative responsibilities. At First Western Trust, we specialize in helping businesses evaluate their options and design retirement plans that fit their unique needs and goals.

If you’re thinking about offering a retirement plan or exploring options for your existing plan, our team is here to guide you through the process and help you make the best decision for your business and employees.

¹ Investment Services are Not a deposit, Not guaranteed by the Bank, May Lose Value

Commercial banking services offered through First Western Trust Bank, Member FDIC