When most small business owners get their companies started, the last thing on their mind is retirement planning. They’re too busy building funds and claiming market share to put together a succession plan or even hire employees, let alone think about how they might fund a retirement plan for their employees.

But once the business has gained some ground — during what Joe Skarda, retirement plans specialist and training director at Sapient Financial Group calls the “mature stage” of the business — the owner needs to plan for what will happen to his business after he retires, and if he has employees, he will likely want a plan that provides for his employees while also funding his own retirement.

The right plan

Small businesses have unique needs and challenges that larger companies don’t face, so they are uniquely placed to take advantage of some of the retirement plans available.

Michael A. Masiello, a financial advisor with Masiello & Associates, said his company has seen a lot of interest in SIMPLE IRAs among small business owners.

SIMPLE IRAs are designed for employers with fewer than 100 employees. This option allows the owner and any plan participant to save up to $10,000 annually; if an employee is older than 50, an additional $2,500 contribution is allowed.

“It’s a pretty simple plan, and very attractive,” Masiello said. “It’s only about $15 per employee, so you’re not breaking the bank to put together a plan for them.”

Masiello added that, with the SIMPLE IRAs, employers can participate with employees and make a choice of how much they’d like to contribute; 2 percent of each employees’ compensation across the board or a match of up to 3 percent.

Skarda agrees that the SIMPLE IRAs are a popular and valuable choice for small business owners.

“There are no administrative costs above and beyond the expenses of the fund, no tax return to file, no compliance testing to be done,” he said. “That all reduces the cost of maintaing the fund, so every dollar that is put into the plan goes directly to the employees and the employer themselves.”

401(k)s can also be a good option for the right business, Skarda said, because of the flexibility the plan allows. However, there are some drawbacks.

“It comes with a great deal of accountability on the part of the employer, and if the employer is very small sometimes when you figure in the accounting costs and the administrative costs on the 401(k), it makes the costs too high for the employee,” he said, adding that many 401(k) sellers had reduced their fees over the years.

For small business owners with no employees who are trying to play catch up, a solo defined benefit plan might be the right option, according to Masiello.

“We’ve seen some defined benefit plans allow well over $100,000 in contributions, depending on the circumstances,” he said.

But the plans are sophisticated and only right in certain circumstances, Masiello said.

Walter Joly, a registered investment advisor at Compass Capital Corporation, says defined contribution plans are a popular choice for small businesses. Profit-sharing plans are one type of defined contribution plan which are increasing in favor. The plans are typically employer funded, and have a 25 percent contribution limit.

However, with a profit-sharing plan, contributions do not have to vest immediately, so if an employee leaves the company before a certain period of time, the employee won’t receive the contributions made to the plan on their behalf.

Joly said this plan is beneficial because there’s more flexibility in the plan design and choosing how the profit can be shared. In other words, it’s easier to design a plan that’s more beneficial to the business owner than to the rank-and-file employees.

Succession planning: the biggest challenge

The biggest issue to consider when helping a small business owner prepare for retirement, though, is the succession plan.

“For small business owners, the largest single asset that they own would be their business,” Joly said. “They may or may not be operating as a single proprietorship, and unless they have some sort of succession plan, the most important thing they have to consider is how to sell their business when they prepare for retirement.”

Jeff Stern, a principal with Eagle Business Solutions, believes every small business owner should sit down with a CPA or someone who specializes in valuation to get a real idea of what their business is worth. For some companies, the value might only lie in the physical property, but if the business has a reputation and substantial customer base, there may be value there, as well.

Once the valuation is completed in writing, the next step in succession planning is to draft a buy-sell agreement, answering questions such as who will take the business over if the owner dies, becomes disabled, or retires?

“More often than not many businesses don’t transfer to the next generation,” Masiello said. “So business succession is critical because it’s one of the ways that a business owner gets their life’s value out of their business: by selling it to a third party or a business partner.

“A small business owner typically might have a competitor or a person in a similar industry who’s a good fit work out an agreement to buy the business, as well.”

Masiello admitted that succession planning can be a hard discussion; but it’s a necessary one.

“As humans, most people don’t want to look at their mortality or their morbidity,” he said. “But it’s not an if I die business, it’s a when I die business. Our preference is to make sure your business and your family is ready. Most people pour their heart and soul into their business but they don’t protect it, so we want to help them do that, because they’ve done a great job on the surface providing for their family because of the business.”

Instant Insights /

How to help small business owners plan for retirement

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