If you’re a small business owner running a business by yourself or with your spouse, you are eligible for a “solo” 401(k) plan that can cover you and your spouse (if you have one). These types of plans are usually offered through any number of platform providers using a simple “prototype.” By using this type of template, the costs for setting up a plan are significantly reduced. Most mutual fund sponsors offer such plans. Custodians for investment advisers like myself offer these plans to us to offer to small business clients as well.
These plans can be set up with just you as the employee making elective contributions. Or you can add a “Profit Sharing” component as well where the company adds money on your behalf. The choice may depend on how much you are planning on contributing in total and gauging the impact on your business and personal tax liability. (The more you can shelter, the lower your taxable income and tax liability).
The set-up costs for such plans are practically nil. The last solo 401(k) I set up through Fidelity has an annual fee of $50. As a start-up plan your plan’s assets will be below the threshold that triggers any Form 5500 reporting so you avoid that cost. As an incentive to start your company-sponsored plan, you may also be eligible for a tax credit to offset any plan set up costs.
The other costs are the costs typical for any investor. If you choose mutual funds, there will be the internal expenses related to the specific funds. Actively managed funds will have higher expense ratios than index funds. Some plans allow you to buy low-cost Exchange Traded Funds as well. (This is something that is offered through Wisdom Tree and Folio Investing, for example).
Some plans require having a Third Party Administrator (TPA) which helps in setting up and handling required reporting on the plan. The costs for such plans can range from $1000 to $4000 depending on the size and features of the plan. But the use of a TPA only comes into play when you are offering a plan to multiple employees. So while this is not an issue for you now, it’s something to keep in mind if your company grows.
You may also want to consider other low-cost options for small business which include the SEP (Simplified Employee Pension) and SIMPLE IRA (Savings Incentive Match Plan for Employees IRA).
An unbiased place to look may be the IRS. Check out Publication 560 for a comparison. IRS Publication 4333 describes the SEP in more detail.
To help you wade through these options, you may want to use a qualified financial planning professional. You can find one here on this website or by checking out the CFP Board’s search tool at www.LetsMakeaPlan.org.
