Entrepreneur Insight

Yes, Small Business Owners, You Can Save for Retirement

New tools and technology to help entrepreneurs put away money for the future.

Entrepreneurs often have a tough time saving for retirement, and while it appears that they must pay heed to paying another bill, dealing with urgent employee issues, or obtaining the right vendor, the “real culprit is usually a lack of time and focus,” says David Twibell, president of Custom Portfolio Group, an Englewood, Colo.-based financial planning firm.

Even though 58 percent of business owners plan to stop working before they turn 65 years old, 34 percent said they do not have a retirement plan, according to a survey conducted by Manta, an online community for small business, which surveyed 1,960 small business owners. Other entrepreneurs said they plan to keep working even after retirement, with 64 percent of business owners agreeing with this sentiment.

But waiting too long to invest in yourself because the business is not yet profitable can damage the returns of your investments, since compounding is your greatest ally, says Grant Easterbrook, cofounder of Dream Forward 401(k), a New York-based low-cost 401(k) plan provider.

The opportunity costs of poor investments can affect your total savings over a period of time.

“Over time, bad investments and bad share classes can hurt your nest egg much more than fees,” Easterbrook says. “Even five years of letting your 401(k) sitting still because ‘it's fine and I can't deal with it right now’ adds up to a huge amount of money in lost returns. If someone told you that you were missing $50,000 in your account from the last five years, you would be upset.”

Tax-advantaged retirement plans

The ironic thing is that small business owners have “amazing” options for retirement savings, since they have several tax-advantaged retirement plans available which can help them “sock away money,” says Twibell. The main issue is that the plans are complex and highly regulated, and time-strapped owners may find it challenging to understand and set up their savings.

The strategy, which entrepreneurs need to employ, is to view it like another compelling aspect of their business and allocate sufficient time to execute it. Bringing in retirement experts will alleviate some of the burden of establishing and running a retirement plan, and investing money will expedite the process.

“Avoid the temptation to cut corners and try to set everything up yourself,” he says. “Above all else, stop putting this at the end of your ever-expanding to-do list. It sounds cliché, but the best time to start taking retirement saving seriously is right now, not down the road when things slow down, which they invariably never do.”

Entrepreneurs can choose from Simple IRAs, SEPs, and 401(k) plans, which all allow them to allocate pre-tax dollars for their retirement. The IRS explains the various plans and the contribution levels.

Some small business owners might also benefit from more specialized retirement plan options like profit sharing plans or cash balance plans, says Twibell.

"The best time to start taking retirement saving seriously is right now."

- David Twibell

(Photo credit): Gettyimages.com/JGI/Jamie Gril

“While not for everyone, these plans can provide a small business owner with the ability to sock away a large amount of money very quickly,” he adds. “When they are paired with a more traditional retirement plan option like a 401(k), they can be very powerful tools to help a business owner ramp up their retirement savings.

Fintech and AI lower costs

The costs of running retirement plans for your small business have decreased rapidly as fintech has evolved and matured.

“There are now a handful of newer 401(k) providers with lower costs, even for small businesses,” Easterbrook says.

Fintech players include Dream Forward and SaveDay, and tend to have lower fees and offer the latest in technology, such as the use of artificial intelligence so employees can find out information about the Exchange-traded funds (ETF) or asset allocation in their portfolio.

“Dream Forward is a low-cost 401(k) provider that's built new technology to reduce the administrative burden on the business and [has] a conversational artificial intelligence which looks like an online chat and can talk to the employees 24 hours a day,” Easterbrook said.

Questions to ask when shopping for a plan

Entrepreneurs should look for several factors in a plan:

• How turnkey is this solution? Is there a single point of billing, or will you have multiple points of contacts at different organizations? “Sometimes 401(k)s can be bundled solutions with companies that don't talk to each other,” Easterbrook said.
• What are the all-in fees? Are the fees pro-rated? Will it be adjusted based on the quarter? This is important because if you begin a plan in July or December, you should not be paying the full annual and per-head fee amount. “We see this come up a lot with new plans—it's good to be up front about this,” Easterbrook said.
• Are there any 12b-1 fees or similar fees embedded in the investment lineup you are offering? 12b-1fees is the legal jargon for when the 401(k) provider hides their fees by adding fees to the investment options that are available to employees.
• How do the investments in the proposed investment lineup compare to the top funds in each asset class? Some providers will give small companies institutional class shares that are reserved for large companies and mutual funds.
• Will any individual(s) receive commissions or fees from the investment options in the 401(k) plan? Brokers often sell particular 401(k) plans or particular investment options because they get a hidden cut of any money that gets put in a particular investment.

A little time goes a long way

“Many entrepreneurs underestimate the value of time when it comes to investing,” Easterbrook says. “The sooner you start investing, whether it's via a personal IRA or setting up a 401(k), the better. The returns are great the longer you have money in the market.”

Entrepreneurs often believe they will deal with retirement when their company expands or is profitable, but setting aside time once a week can easily resolve the issue.

“Being an entrepreneur is very stressful,” he says. “When you are the marketing, sales and servicing departments, the work never seems to end. Try calendar blocking—once a week, put 1-2 hours in your calendar to deal with stuff like retirement that you're putting off and hold yourself to that calendar block.”

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