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Does Your Business Need a Vanguard Small Business 401(k)?

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Small businesses don’t have small goals and to accomplish those goals, they’re often going up against larger companies to compete for talented employees. “One of the top priorities of a small business owner is attracting the right people to the firm,” said Steve Holman, principal and head of Vanguard Retirement Plan Access.

How can a small business set itself apart to attract potential employees? Aside from salary, benefits are a good way to draw in prospective employees. In particular, the ability to offer a 401K retirement plan can help your business acquire top talent.

Offering a 401(k) plan isn’t without some hurdles. They can require ongoing maintenance to administer and setting them up can be expensive because of account service fees. But Vanguard has helped to change the landscape on small business 401(k) plans by making them more accessible to small companies.

The benefits of providing a 401(k)

For almost every employee, looking to the future will mean needing to plan for retirement. Offering a 401(k) and retirement benefits to employees promote healthy savings habits and financial stability at your company.

Offering a 401(k) plan isn’t just good for your employees, it can be good for your business as well. There may be special tax incentives, such as the ability to claim a tax credit for some of the costs of setting up SEP, Simple IRA or qualified plan. The credit is 50% of your eligible startup costs up to a maximum of $500 per year. Eligible startup costs include those needed to set up and administer the plan and to educate your employees about the plan.

How Vanguard makes providing a 401(k) easier

So why isn’t every small business offering a 401(k) option if they attract the best talent? The top reason: Cost. As many as 7 in 10 small- and medium-sized employers said retirement plans were “too expensive to set up,” with more than a third reporting that as the main reason the company didn’t offer the benefit, according to In a 2017 Pew Trust study.

Vanguard’s solution: The company charges very few fees for setup or maintenance of their 401(k) and retirement plans. The fees are almost solely based on the number of employees participating in the program.

Almost two-thirds of business owners in the Pew Trust study said they don’t have the resources to administer such a plan with 22% listing this as the primary reason why they don’t offer a retirement plan.

Vanguard’s solution: It has teamed up with Ascensus, a recordkeeping firm, to help small businesses is its fiduciary and reporting responsibility. Vanguard takes the reins and educates a company’s employees and helps them take control of their retirement funds, including communicating news and information on their accounts.

Types of Vanguard Small Business 401(k) plans

Not every small business has the same needs which is why not every small business needs the same type of 401(k) retirement plan. Vanguard rolled out its Small Business 401(k) plans in 2011 because the company saw a need for affordable 401(k) options, Holman said.

“In the same way that we’ve been an advocate for individual investors, we want to be an advocate for employers,” Holman said.

At the end of 2017, Vanguard had 9,000 Small Business 401(k) plans which meant about 400,000 small business employees had a 401(k) through Vanguard, Holman said. The point of Vanguard’s Small Business 401(k) options is to make it not only affordable but also provide simple retirement solutions for businesses whose sole focus is not investing.

Vanguard offers a variety of options to meet individual business needs. It even goes so far as to offer more than 12,000 non-Vanguard funds outside of its regular investment portfolio for smaller businesses, Holman said.

Small plan 401(k):

This option offers a ton of customizable features for a company’s employees and is great for a small business looking to offer all the retirement benefits of a typical 401(k) including the tax and savings benefits.

  • Employees can individually decide how much to contribute to a Small Plan 401(k). Per the IRS, for the 2018 tax year, this can’t exceed $18,500 (or $24,500 for employees age 50 or older). It also can’t exceed 100% of total compensation from the employer.
  • With a Small Plan 401(k), an employer can set up contributions in a variety of ways. This can include matching programs. For the 2018 tax year, the IRS limits the employer contribution to 100% of compensation with a maximum of $55,000.

Individual 401(k):

An individual 401(k) is best if your company has no employees apart from the sole proprietors or partners.

  • The employer contribution is $55,000 for the 2018 tax year and the maximum tax-deductible employer contribution is 25% of compensation.
  • The employee contribution as either pre-tax or Roth 401 (k) employee contributions (those made after the employer withholds taxes) can be made for up to $18,500 for the 2018 tax year or $24,500 for employees age 50 or older. Contributions can’t exceed 100% of compensation.
  • For an Individual 401(k) the combined employer/employee contributions can’t exceed $55,000 for the 2018 tax year or $61,000 for employees age 50 or older.


Contributions to the Simplified Employee Pension plan can only be made by the employer.

  • The employer contribution for a SEP-IRA can be broken down as follows: The maximum contribution can’t exceed the lesser of 25% of the employee’s total compensation or $55,000 for the 2018 tax year.
  • The small business’ employees must be allowed to participate if they’re 21 or older, earn at least $600 annually and have worked for the same employer in at least three of the past five years.
  • The fee is $20 per year for each Vanguard fund with an account balance less than $10,000.

Simple IRA:

A Simple IRA is an option for businesses with 100 or fewer employees. And there are two options for setting up the Simple IRA systems. The first option available is to match up to 3% of each eligible employee’s compensation (which can be reduced to as low as 1% in any two out of five years).

The amount, however, can’t exceed $12,500 in the 2018 tax year. The second option is to contribute 2% of each eligible employee’s compensation. But the amount can’t exceed $5,500 in the 2018 tax year.

  • Employees aren’t required to contribute to the Simple IRA but they may contribute up to $12,500 for the 2018 tax year or $15,500 if age 50 or older.
  • There are no age restrictions.
  • Employees must earn a minimum amount specified by the employer during any two preceding years and expect to earn at least $5,000 in the current year.
  • The fee is $25 a year per account but can be waived with the purchase of certain Vanguard products.

How to choose the right plan for your business

When choosing the right 401(k) plan for your company, there are five questions you should answer first:

What am I trying to accomplish?

The answer to this might seem straightforward: You’re trying to help your employees plan for the future. But you need to figure out how best to do that. Holman recommended businesses consider how they can help the greatest amount of their employees meet their retirement goals. That could mean offering a broad range of investment options or maybe just a select few that will suit the needs of your employees.

Are your employees educated enough in retirement savings to make an informed decision given the options you are providing? Can you educate them appropriately to make these decisions? Less might be more if you are dealing with a less informed workforce. Offering too many fund options can be overwhelming, Holman said.

In addition, Holman said about 75% of Vanguard Retirement Plan participants choose to participate in a target date fund where the only real decision for the employee is how much they will contribute to the fund. In this situation, an employee puts down an anticipated retirement day and Vanguard manages the account accordingly, switching the account to lower risk funds as the retirement date nears. Holman said this is low maintenance for a small business while still being comprehensive.

Have you talked to an advisor about your options?

Because each company’s needs are a little different, it might make sense to talk to financial advisors who specialize in retirement planning. “Those are the folks that have the expertise and can guide small business owners,” Holman said.

Can you afford to maintain what you’ve set up?

To fully benefit your employees, you want to make sure you’re in a financial situation to maintain the status of the 401(k) you set up. For example, if you want to offer matching contributions, you must ensure that the business can extend that benefit to all eligible employees. “If you create an inconsistent experience for your employees, it’s not going to be the benefit you hoped it would be,” said Holman.

What will this cost your business?

Expenses can pile up in a variety of ways for a business looking to set up a 401(k). One is in administrative fees. Vanguard charges a flat fee, but some companies that specialize in retirement options for small businesses charge an asset-based fee which could inflate the administrative costs.

Holman also suggested that small businesses make sure they’re not paying for services they don’t need and should just focus on what gives them the result they want. Many companies offer features that sound fancy but cost a premium, he said, and don’t get the results the employer is looking for.

How is the service?

Customer service is always key in any business transaction. The same is true for 401(k)s. Make sure the investment company will educate your employees and your business on what they need to do to best optimize their 401(k). “What is the experience when an employee wants to check the account balance? Or they need to take out a loan?” asked Holman.


Looking for business funding? Learn more about small business loans here.

The bottom line

Vanguard is a respected name in the financial services industry that offers a cost-effective way for small businesses to offer retirement services to their employees. It doesn’t matter what stage your businesses is in – if you have 100 employees or about to hire your first – offering retirement savings for your company will be an attractive selling point.

Growing or even sustaining a successful business requires top talent. And top talent wants benefits that will help them succeed not only professional but personally as well. A 401(k) could be just what you need to keep talented individuals happy at your company.


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