Many businesses may think they are too small to offer a retirement plan or that they won't be able to afford it. However, most employees nowadays expect retirement plans as part of their benefits packages.

Thankfully, “the cost of running a retirement plan has come down quite a bit over the years,” said Jim Marx, Director of the Retirement Plans Division at Edelman Financial Engines. If you’re considering implementing a retirement savings plan for yourself and/or your employees, here are some important considerations and how to decide the right plan for your small business.

[Read more: How to Set Up an Employee Retirement Plan]

Best retirement plans for small business owners and their employees

“There are all different types of plans depending on what the business owners are trying to achieve,” Marx said. “ Just as saving for retirement is crucial to your own financial independence, offering a retirement plan to your employees is also an important part of your overall benefits package.”

There are various types of retirement plans small business owners can offer their employees, including:

  • Individual Retirement Account (IRA)-based plans: This is the most common type of retirement plan, which involves three options: a payroll deduction, Simplified Employee Pension (SEP), and SIMPLE IRA.
  • Defined contribution plans: Employers can establish defined contribution plans that allow the employee and employer to contribute to employees’ individual accounts. Some examples of such plan types include profit-sharing, traditional 401(k)s, safe harbor 401(k)s, and automatic enrollment 401(k)s.
  • Defined benefit plans: Employers can contribute more to defined benefit plans, thus deducting more on taxes. Two types of defined benefit plans include pension benefits at retirement and cash-balance plans.

Marx stressed the importance of working with an expert who understands retirement plans and can help you choose the right option for your business and employees.

Did you know some states, such as California, Connecticut, Illinois, and Massachusetts, now have specific laws requiring retirement plan offerings for companies of certain sizes? In fact, over 30 states considered enacting state-mandated retirement plan legislation, and 13 have signed programs into law as of 2022.

Requirements for state-mandated retirement benefits depend on various factors, including the size and age of your business, as well as individual jurisdictions. If you do not offer a retirement plan to your employees, you’ll most likely have to enroll your workers in a state-sponsored program.

Most of the state-sponsored plans offer Roth individual retirement accounts (IRAs), with investments chosen by the respective state. Yet Marx explained that for some business owners, there are benefits to working with a retirement plan advisor to create a custom plan (such as a defined contribution plan) — allowing the owner to implement their own plan design, such as offering a company match and selecting investments.

[Read more: Understanding Employee Retirement Plan Options]

Maybe [business owners] want to have a competitive benefits program for their employees from a retention perspective or an attraction perspective. It really depends on what that business owner is trying to achieve, and that will really dovetail and play into the type of retirement plan.

Jim Marx, Director of the Retirement Plans Division, Edelman Financial Engines

How to decide which plan to offer

Evaluate costs

Marx recommended looking at the various types of retirement plans offered with an understanding of what you want to achieve from a benefits perspective as a business owner and employer. Then, weigh the costs to decide which is the best fit.

“Maybe [business owners] want to have a competitive benefits program for their employees from a retention perspective or an attraction perspective,” Marx said. “It really depends on what that business owner is trying to achieve, and that will really dovetail and play into the type of retirement plan.”

Marx noted that his company will typically offer its clients a few types of plans and break down the associated costs/potential savings on a per-year basis. As a business owner, take your time to evaluate these costs in relation to the plans’ benefits so you understand which would make the most sense for your business.

Ensure compliance with ERISA

The Employee Retirement Income Security Act of 1974 (ERISA) sets standards for retirement and health plans in private industries to protect the covered individuals. To ensure compliance with ERISA, a company must provide plan participants with important information about their plan, set minimum standards for participation, vesting, benefit accrual, and funding, establish a grievance and appeals process for participants, and more. Working with a retirement plan advisor can help you comply with ERISA, avoid potential legal trouble, and save you time

Choose the right partner

Working with the right partner is essential to choosing the right retirement plan, as retirement experts will use their insight to guide you through your decision-making process. Whether you’re considering starting your search for a retirement advisor or you’ve been working with one for years, there are several questions you should ask to help ensure you are maximizing your employees’ retirement benefits, including your own, such as taking full advantage of the IRS limits. These questions include:

  • Has there been a recent assessment of my company’s retirement plan?
  • Are you an independent advisor, and can you explain the current fee structure of my plan?
  • Can you help me maximize my individual savings rate and corporate deductions as outlined by the IRS?
  • Can you provide additional in-house wealth planning resources?
  • Are you a fiduciary who is legally and ethically bound to act in my and my employees' best interest?

“Make sure you're speaking to somebody who has knowledge in this area [and] who understands and listens to what you're trying to achieve,” Marx told CO—. “You want a person … or entity that's acting in your best interest and advocating for you and your employees.”

To learn more about your options for offering a small business retirement savings plan, contact Edelman Financial Engines to speak with a retirement plan advisor and receive a complimentary retirement plan review.