3 reasons why 401(k)s remain popular with small-business owners

J.P. Morgan Asset Management surveyed owners of businesses with between five and 50 employees and annual revenues ranging from $50,000 to $20 million about their 401(k)s.

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Small-business owners are bullish on 401(k) plans despite the financial challenges of the pandemic. Nearly half of them offer a retirement plan as an employee benefit, and most of those are 401(k)s.

J.P. Morgan Asset Management surveyed owners of businesses with between five and 50 employees and annual revenues ranging from $50,000 to $20 million. Researchers found three reasons why 401(k) plans are popular.

1. Small-business owners feel responsible for their employees. Survey results showed a clear trend of respondents wanting to help their employees across a range of issues.

The vast majority felt a high level of responsibility to provide health-care coverage, as well as to help with employees’ overall well-being and work-life balance. Most, although fewer, also reported feeling responsible to help with employees’ financial wellness and retirement savings.

Significantly more small-business owners who offered a retirement savings plan felt a high sense of responsibility to their employees compared with those who did not offer one (74 percent vs. 33 percent).

2. They see the benefits of 401(k) plans. Small-business owners who reported offering a 401(k) plan clearly see the benefits, not just for their employees but for their businesses as well. The top reason cited for offering a 401(k) plan was to encourage employees to save for retirement. Retaining and attracting employees were the close second and third reasons, respectively.

3. Employees are asking for it, and employers can benefit, too. Cost-benefit analysis is always an important part of successful business ownership. However, research has shown that 76 percent of employees believe that their employers have some degree of responsibility to help them save for retirement. Offering a 401(k) plan can be an easy way to help them invest in their future.

Research from a recent collaboration between the Employee Benefit Research Institute and J.P. Morgan Asset Management found that 401(k)s are the only savings vehicle many Americans have, underscoring the importance of employers’ role in retirement savings. In addition, offering a 401(k) plan may be more affordable than many small business owners might think, and costs have been trending even lower in the past several years.

Furthermore, companies can receive up to $5,000 per year in tax credits for the first three years after starting a 401(k) plan. In fact, 31 percent of survey respondents noted tax deductions, credits or other tax benefits as motivators for them to offer a plan.

“Our survey found small-business owners largely optimistic about their companies’ outlook, with many recognizing the importance of offering a retirement plan, both for the benefit of their employees and for their businesses as well,” the study concluded. “A 401(k) plan can help acquire and retain top talent while building stronger retirement savings for employees and owners alike. In addition, advancements in 401(k) delivery have made offering employees a defined contribution retirement plan benefit more realistic and more achievable for businesses of all sizes, with less complexity and expenses than one might think.”

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