Invest in Your Future
Take a drive around your neighborhood and take note of all of the help wanted signs. Chances are, it’s more common than not. Now, add a technician shortage on top of that and it’s definitely a job seeker’s market. So, how do you make a top candidate choose your shop over the one down the street that’s also hiring? A quality retirement plan is a good place to start.
“A lot of shops, the retirement plan is: You retire when you die. I wanted to break the mold of being a low benefit type of industry,” Steve Roberts, owner of North East Auto and Truck Service in Ocala, Florida, says of deciding to offer a SIMPLE IRA plan to his employees.
For Jeff O’Claire, the idea of retirement planning didn’t occur to him until a young job candidate asked about it. O’Claire, co-owner with his father Mike Bittner of Mike’s Muffex and Repair LLC in Iron River, Michigan, never had a retirement plan himself, so he never thought about offering one. Upon becoming aware that it was an enticing benefit, he began looking into it and has offered both 401(k) and SIMPLE IRA plans.
If you want to hire the best employees, you need to offer the best benefits, which include retirement planning options. That being said, it can be overwhelming for a small business owner to decide which plan is right for them. Ratchet+Wrench breaks down two of the most common plans for small businesses—a SIMPLE IRA and a 401(k)—and the pros and cons of each.
Find a Financial Advisor
First things first, you need an expert in the field who can answer all of your questions and help steer you in the right direction. O’Claire says you should interview potential financial advisors like you would an employee because the right one can make or break you. His first financial advisor set him up with the 401(k) and he admits that he and his employees didn’t really have a grasp of what was going on.
After moving on from that advisor, he found a much better match in both his advisor and plan with a SIMPLE IRA. Jeff Kline, director of corporate retirement plan services for Stonebridge Financial Group, says anyone can sell a plan, but finding the right person to help you evaluate what plan makes the most sense for your business—and be there to assist you with any questions—is just as important as the plan you ultimately choose.
SIMPLE IRA stands for Savings Incentive Match Plan for Employees. The plan allows for both employees and employers to contribute to traditional IRAs and, according to the IRS website, is a good option for small employers that do not currently have a plan in place and are looking for a start-up retirement plan. It’s available to any business with 100 or fewer employees.
Pros: One of the advantages of this plan is the ease and the cost of setup. According to Kline, it’s a low-cost way to offer a retirement plan because it doesn’t require a lot of administrative expenses. But, if the plan grows, it can actually become more expensive because each person on the plan is priced on their own account value. So, for smaller businesses, like O’Claire’s two-bay shop with three full-time and one part-time employee, it’s a good option, which is why he ended up switching from the 401(k).
Roberts, who runs a business with fewer than 10 employees, loves how easy the SIMPLE IRA is to manage. Each month, he has a spreadsheet where he enters his employees' wages and calculates the 3 percent taken out (the maximum contribution employees and employers can make) and he drops the check off at his financial advisor’s office.
Cons: This plan has a lower contribution limit than the 401(k). In 2021, the limit for this plan was $14,000 per year, with an additional $3,000 for employees over 50. The 401(k) has a limit of $20,500 per year and an additional $6,500 after the age of 50.
There’s also a mandatory matching contribution up to 3 percent for employers or a 2 percent nonelective contribution for each eligible employee, according to the IRS. So, if you have a bad year, you’re stuck with this obligation, says Kline.
The other downside, he adds, is that money is put in pre-tax.
Under a 401(k), an employee contributes from his or her paycheck (before or after tax, depending on the chosen plan) to a 401(k) account, according to the IRS. An employer can choose to make contributions up to a certain percentage if he or she wishes.
One of the main advantages to this plan is that it’s more customizable and you can contribute more, Kline explains. Roberts says if he could go back in time, he would have gone with the 401(k) because of the higher contribution limit. However, he was just starting out and because of the cost, it wasn’t an option for him at the time.
Another advantage, especially for a shop that has high turnover, is the option for a vesting schedule up to six years. So, if you want to wait and see if an employee is going to last, Kline says, you can wait a year before offering the 401(k).
Initially, the cost is higher to offer a 401(k) and setting it up is more in-depth, Kline says. According to the IRS website, the flexibility of the plan creates more work for the employer and it can be confusing, a fact that O’Claire can attest to.
O’Claire explains that the 401(k) took him a couple of weeks to set up and there was more paperwork involved, with the SIMPLE IRA, it’s a short form. O’Claire adds that he was confused about where the money was going and that he had an employee who, unknowingly, was contributing 7 percent of his paycheck. This is probably more of an issue with the lack of help from the financial advisor, but he adds that the plan seems better suited for larger companies.
The Bottom Line
Looking back, both O’Claire and Roberts would have set up their retirement plan differently. The best advice that they could give someone just starting out is to find someone that you trust to help you find the best plan for your business.