One of the benefits of a 401(k) plan is the employer is allowed to customize the matching percentage that they offer to eligible participants, which can create an affordable and flexible option for any small business. Additionally, a SIMPLE IRA is easier to set up and administer than a 401(k) and includes a matching contribution feature. The SIMPLE IRA also has fewer rules and greater contribution limits compared to a regular IRA, but the matching feature is not as flexible as a 401(k). 

With any business retirement plan there will be a tax benefit to the employer that offers the retirement option to their eligible participants.

Comparing retirement options

Outside of standard 401(k) plans, there are three popular retirement plan options for small business owners: Solo 401(k), SEP IRA, and SIMPLE IRA. 

A  Solo 401(k) is similar to the traditional 401(k) but geared towards those that are self-employed with no employees. The self-employed individual typically represents both the employee and the employer, and each party can contribute to the plan. The employee defers a percentage of their income, which provides them with a personal tax deduction; the company matches a percentage which provides a deduction to the business. Solo 401(k) plans typically have lower set-up and administrative costs as compared to a 401(k).

A SEP (Simplified Employee Pension) IRA is a retirement plan where each employee has an individual IRA associated with the SEP. These are often best suited for family businesses or businesses where there are no rank-and-file employees, such as an independent contractor or self-employed business owner (sole proprietorship, corporation, or a partnership). In this plan, if an employer contributes for themself, they must also make a contribution for all employees. Contributions aren't required every year and can vary in amount. This detail makes it a good option for start-ups or other small businesses where profits may fluctuate. With a SEP IRA, the company can contribute up to 25% of compensation (capped at $61,000). So, for a self-employed individual with high income, quite a bit can be added to the IRA each year in the form of contributions. 

The SIMPLE (Savings Incentive Match Plan for Employees) IRA is for a business entity that has 100 or fewer employees. Much like a 401(k), employees can defer a portion of their salaries and receive an employer match of up to 3%. Alternatively, employers may make non-elective contributions to all employee accounts rather than matching contributions. Once SIMPLE IRAs are funded, they are completely vested to the employee.

Below is a chart with a breakdown of these four options:

The Department of Labor provides a comprehensive breakdown of each type of retirement plan for small businesses.

Expanding investment options with self-directed IRAs

Investors are increasingly seeking options for their retirement savings — and the ability to hold alternative assets, along with traditional investments, can be appealing. SEP IRAs and SIMPLE IRAs allow plan participants greater control over their investments and their retirement portfolio with the option to hold alternative investments in a self-directed IRA (SDIRA).

Alternative investments allow investors to diversify outside of traditional stocks so they may hold assets that offer greater diversity to a retirement portfolio such as Pre-IPO companies, real estate, private stock, secured/unsecured debt, and ESG-focused investments. Because they aren't traded on the public market, alternatives can help offset stock market volatility. While there is typically more risk involved, there is also a greater potential for returns.

Every small business is unique. Fortunately, there are different retirement options available so each employer can determine the correct 'fit' for their business and their employees.

Patrick Hagen is National Director of Business Development at STRATA Trust Company. He has over 15 years of professional experience with self-directed IRAs (SDIRAs). Through his work, he helps to educate investors and financial advisors by raising awareness of SDIRAs and alternative investments. The information provided in this article is educational content and not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.