How to Choose the Best Retirement Plan for Your Small Business

Employer vs. State-Sponsored Retirement Plans

Key Points: 

  • Retirement plans can help you support your employees. They’re also a great way to attract and retain talent.
  • Your state may require you to offer an employee retirement plan. You have two general options: employer-sponsored and state-sponsored plans. 
  • They both have pros and cons, so what you choose depends on your business, employees, and applicable legislation. Additional related benefits can help you support employees in the wake of COVID-19.

The COVID-19 pandemic has hit older workers doubly hard. Not only are they more at risk for contracting a severe case of the virus, many are also dealing with retirement changes. Millions of Americans lack retirement savings and those with plans may need to suspend contributions or dip into their retirement accounts to ease current financial hardship. 

Retirement plans are a great way to support your employees during this difficult time. Several states, including California, have even started to mandate retirement plans. As of now, these 10 states require qualifying employers to offer retirement plans to their employees:

  • California
  • Connecticut
  • Illinois
  • Maryland
  • Massachusetts
  • New Jersey
  • New York
  • Oregon
  • Vermont
  • Washington

To meet these new requirements and help your employees, it may be time to consider your retirement plan options. 

This blog post is meant for informational purposes only. Please consult your financial advisor before taking any action.

Choosing the Best Retirement Plan for Your Small Business - Infographic

State-Sponsored Vs. Employer-Sponsored Plans

When it comes to employee retirement plans, there are two general options: employer-sponsored and state-sponsored plans. 

Employer-sponsored plans are popular with many organizations, but they simply aren’t feasible for many small businesses. As a result, about 55 million employees lack access to an employer-sponsored retirement plan. State-sponsored plans aim to give these individuals a way to save for their future without burdening you and your business with expensive costs. 

You may be required to offer a state-sponsored program if you conduct business in one of these states and don’t offer an employer-sponsored plan. Be sure to check local legislation for more information. 

California, for example, requires employers with 5 or more employees to enroll in CalSavers by June 2022. If you already offer an employer-sponsored plan, you still need to send notice of your exemption. Qualifying employers with more than 100 employees must enroll by September 30, 2020.

What are the advantages of a state-sponsored plan?

  • They aren’t expensive.
    • Many state-sponsored plans are free for employers. This means that you can help your employees save for retirement without incurring major costs on your end. 
  • Employees can opt out.
    • Even if you’re required to offer a state-sponsored program, your employees aren’t obligated to participate. They always have the option to opt out.
  • You have fewer administrative responsibilities. 
    • While you’re still responsible for basic tasks, like adding or removing employees from the program, your state manages key duties. This usually includes enrolling employees, answering employee questions, and processing distributions.

What are the disadvantages?

  • You can’t choose the plan.
    • State-sponsored plans are chosen by the state. You can’t choose the firm, the plan options, or anything else associated with the program. As a result, state-sponsored plans may benefit your state’s administration more than your employees.
  • Your employees won’t receive tax breaks and you won’t receive tax deductions.
    • State-sponsored programs tend to use after-tax dollars, so your employees won’t receive tax breaks. You usually aren’t allowed to match contributions, either, so you won’t receive any tax deductions.
  • You may incur penalties. 
    • If you miss a deadline (for registration, exemption, etc.), you may face fines and penalties. You’ll need to stay on top of the latest information to avoid unnecessary charges.

Employer-Sponsored

However, being a small business doesn’t mean you can’t offer an employer-sponsored plan. There may just be a few more things for you to consider. Employer-sponsored plans are offered by your organization to your employees. Typically, employer-sponsored retirement plans take the form of a 401(k) or Roth 401(k) plan. For more information about the different types of retirement plans, click here.

What are the advantages of an employer-sponsored plan?

  • Your employees may receive tax breaks.
    • In 401(k) plans, employee contributions are made pre-tax. This lowers the employee’s taxable income and saves them money. In Roth 401(k) plans, employee contributions are made after-tax. The employee’s taxable income isn’t lowered, but they can make qualifying tax-free withdrawals if needed.
  • You may receive tax credits and/or deductions.
    • If you’re just now setting up a plan, you may be eligible for a tax credit. This can help you cover some of the administrative and educational costs that come with a new plan. If you match your employees’ contributions, those matches will also be tax deductible. 
  • It’s easier to attract and retain employees.
    • When coupled with employer matches, employer-sponsored plans are a powerful way to attract and retain talent. Matches help employees build their savings, which makes them more likely to stay with your business.  
  • You’re in charge of the plan you choose.
    • You’re free to choose the retirement plans you offer, how much you match employee contributions (if at all), and more. 

What are the disadvantages?

  • They can be expensive, especially for small businesses.
    • From one-time startup fees to administration, investment, and single service charges, costs can add up quickly, even with tax credits and deductions. In some cases, you also bear a financial risk. It may be your responsibility to fully fund the account, even when you don’t have a well-performing year. If the pandemic has disrupted your revenue, this is certainly something to keep in mind. How will you ensure the account is funded?
  • You’re responsible for administrative tasks. 
    • Being in charge of your plan gives you the freedom to make the decisions. However, it also means that you’re responsible for any administrative tasks. This includes making contributions, covering eligible employees, and staying up-to-date with relevant legislation. 
    • An HRIS or payroll provider like SentricHR can relieve some of your burden. They can set up automatic deductions and contributions to save you time and ensure accuracy.

COVID-19 Considerations

Choosing a retirement plan can be hard enough, but the COVID-19 pandemic and uncertain economy may make your decision even harder. If you’re unable to offer a state-sponsored or employer-sponsored plan, you can provide additional resources and services that promote financial health. These include: 

Education

Provide educational resources to help your employees understand financial wellness. You can share resources for loans, subsidies, and financial planning and strategy. You may also want to encourage employees to set up an emergency savings account as a safety net for unplanned expenses.

Additional Benefits

Try to offer benefits that help employees with other expenses. This may include robust healthcare or flexible hours to help employees working two jobs.

Transitional Retirement Program

When an employee retires, the transition is usually abrupt. With a transitional retirement model, older employees gradually scale back their schedules instead. In this model, the shift to retirement may take several years, instead of a few days. This can help the retiree slowly adjust to a new lifestyle and budget. It also helps you preserve knowledge and transfer responsibilities smoothly.


Whatever you decide, offering some sort of retirement savings program can help you support your employees (and stay compliant with state mandates). 

Sentric can help you build a comprehensive benefits plan with the retirement savings program that works best for you. Contact one of our licensed benefits brokers for more information!


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