Employees know having a 401(k) is one of their best ways to save for retirement. But why do business owners want to offer a 401(k) and what are the advantages for them?

“Most business owners hope to provide a great benefit for their employees and help them save money,” said Ben Harvey, a wealth management advisor for Northwestern Mutual and principal owner of The Harvey Financial Group. “They also do it to attract and retain great people for their company; it’s a great tool for that. Plus, it’s a great way to save on taxes for the employer.”

A company usually wants to have about $500,000 in payroll expense before implementing a tax-deferred 401(k) program, he said.

“That seems to be the critical mass where business owners tip over when it comes to a 401(k),” he said. “We’ll see some do it with less but that seems to be the point where you get enough bang for your buck to swallow up administrative costs.”

There are different but similar options for business owners, he said.

“A SIMPLE IRA [Savings Incentive Match Plan for Employees Individual Retirement Account] is sometimes a better fit, and the administrative costs are very minimal,” Harvey said. “There are lots of options and some of those are easier than a 401(k).”

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A SIMPLE IRA is a type of tax-deferred employer-provided retirement plan for small businesses and self-employed individuals that allows employees to set aside money and invest it to grow for retirement. Many businesses offer a matching program for 401(k) and SIMPLE IRA accounts.

It can be more complex to set up a 401(k) program for a business, and it requires a trustee and separate tax filing, plus up-front costs, Harvey said.

“There are usually three components: the employer, the investment platform and a third-party administrator,” Harvey said. “A business owner considering this just has to be mindful of payroll, how many employees they have and how many they think will participate.”

According to Fidelity Investments’ most recent quarterly analysis, the average balance in its 401(k) accounts grew to $97,700, a 9.7 percent increase from last year’s second quarter total of $89,100. That still doesn’t mean most people will have enough money to cover their costs in retirement — especially if they don’t have an employer pension or some other guaranteed income source to add to their Social Security benefits.

“Experts mostly agree that you’ll need about 80 percent of your pre-retirement salary to maintain the lifestyle you hope to have in retirement,” Peter J. D’Arruda, president of Capital Financial & Insurance LLC and author of six books on finance, said in a news release.

“Social Security is meant to replace about 40 percent of your income. The rest has to come from other sources — and for many Americans, their 401(k) is their only savings.”

Yet many treat that account as an afterthought.

“Those automatic payroll deductions are a blessing and a curse,” D’Arruda says. “They help savers build a nest egg, but people tend not to pay much heed to how the money is handled or what kind of fees they’re paying.”

That’s a mistake any time, he says, but in retirement, that inattention could cost you dearly.

D’Arruda urges retirees and soon-to-be-retirees to become proactive about managing their workplace accounts, including dealing with these challenges:

  • Taxes: Savers tend to think of the total balance in their 401(k) as the amount they’ll have to work with in retirement, D’Arruda says, “They forget a good chunk of that tax-deferred money will go to the IRS.” Not understanding the impact of taxes is one of the biggest errors retirees make, he says. “Before you do anything with the money in your 401(k), make sure your financial advisor or CPA clearly explains the tax impact to your overall retirement plan.”
  • Investment choices and flexibility: “Your old 401(k) will likely have limited investment options compared with a traditional or Roth IRA,” D’Arruda says, so a rollover may be a good choice if you want more control over your choices. A good advisor can walk you through the pros and cons of choosing a rollover vs. sticking with your 401(k), including costs, access, consolidating accounts and creditor protection.
  • Getting help: In the accumulation phase of your investment life, you may have gotten by without much professional advice. But in retirement, D’Arruda says, you’ll benefit from working with a retirement specialist who can provide you with a blueprint that covers everything from budgeting to long-term care and estate planning. “You won’t get this kind of help from your 401(k) plan administrator or an investment-only advisor,” D’Arruda says. “This area requires special training and advanced planning skills.”

No doubt you’re looking forward to kicking back and enjoying a relaxing retirement, free of the everyday worries you had when you were working. But when your paycheck stops, D’Arruda says, it’s crucial that you have enough income to last the rest of your life. And that takes effort.

“It’s time to ask your money to go to work for you,” he says. “Don’t leave anything to chance in this process; do your homework and get good guidance.”