Navigating the 401(k) Maze: Why SIMPLE IRAs Shine for Small Business Owners
By Trent Derrick, CMT®
For small business owners looking to start an understandable and relatively inexpensive retirement program for themselves and their employees, the SIMPLE IRA plan is hard to beat. Compared to a typical 401(k) plan, SIMPLE IRAs have low start-up and plan expenses, less complex rules and administration, and are well-suited for small businesses. (1)
If these benefits weren’t enough, there are less evident reasons to choose a SIMPLE IRA for your employees. 401(k) plans have several administrative and advisory parties involved whose competing interests may not be favorable to retirement plan employee-participants. In addition, most employee-participants in a 401(k) plan find themselves underserved and neglected, both by the plan provider (recordkeeper) and the advisor to the plan.
Help for the Small Investor Participant
While many 401(k) plan providers offer inexpensive programs on financial wellness, retirement planning, and other topics via their website, these features are either confusing for the participants or underutilized. Lack of regular access to the advisor is also a common complaint among participants. The fact that 401(k) plan rules require the participant, not the advisor, to select or change the investments within their account places a greater burden on the unsophisticated participant to navigate and make sense of the system.
Another problem arises when it comes time for the participant to leave the employer for another job or retirement. Both the provider and the advisor to the plan would like to keep the participant as a client; the provider will want the participant to keep the money with them (even as a rollover IRA), and the advisor may wish to offer other programs or proprietary products and services. How will the unsophisticated employer or employees know how to choose between these competing options where there may be conflicts of interest?
Gatekeeper to the Money
Making contributions to a 401(k) account isn’t hard, but withdrawing the money may be a whole different reality. Due to government restrictions (ERISA), it is a complicated process to withdraw or rollover a 401(k) account out of a plan. Complex forms may have to be completed, vesting schedules checked, and third-party administrators need to approve the transaction first. This creates a stressful situation for the participant to get access to their money unless they receive considerable help.
A provider’s customer service department also may not be all that accessible (much less helpful). The advisor to the plan may not be so willing to assist in the 401(k) transfer if the assets won’t remain under their guidance or if they won’t have the opportunity to earn additional revenue from the participant in the future.
SIMPLE IRAs Are, Well, Simpler
Choosing a SIMPLE IRA for your company’s plan may eliminate many of these issues. SIMPLE IRA plan recordkeepers/providers are now providing many of the same self-help features for participants on their websites as 401(k) providers. As a plan specifically designed for small businesses and fewer participants, there are fewer rules or restrictions to hamper the employer or the employee participant.
Due to the smaller size, both employers and employee-participants may have greater access to (and a better relationship with) the advisor. Rollovers may often require just a signed form, and other than early-withdrawal rules, the process is less complex and restrictive. For most small businesses and their employees, the annual contribution and employer match limits are high enough to accommodate nearly every participant’s capability to save for retirement.
A Better Choice for Small Business Employers
For all practical purposes, a SIMPLE IRA plan is just a better choice for a small business. If you are a small business owner with less than 100 employees, I can help implement a program that may be the right choice for you.
To get in touch, email me at trent@legacywm.com. I look forward to hearing from you!
About Trent
Trent Derrick is a financial advisor and Chief Market Technician at Legacy Wealth Management. He is passionate about the value small businesses bring to their communities and specializes in serving small business owners by providing seamless financial advisory services tailored to their financial needs, including tax planning strategies, cash flow management, and retirement planning. Trent obtained his bachelor’s degree from the College of Charleston, studied economics at the University of South Carolina, Columbia, and is a Chartered Market Technician® (CMT®) professional. Outside of the office, he serves as a guest lecturer for the College of Charleston’s MBA program and acts as chairman of the Market Technician Association’s Charleston chapter. To learn more about Trent, connect with him on LinkedIn.
The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.
Legacy Wealth Management and LPL Financial do not offer tax advice or services.
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(1) https://legacywm.com/small-business-focus/how-to-set-up-a-simple-ira-plan-today