The 401(k) provides amazing benefits to both employers and employees, who both pick up big taxon contributions. The 401(k) also boosts employee loyalty and satisfaction, and creates a path for millions of American workers to save for retirement.
Those benefits have driven participation and contribution rates in the past 12 years, with total domestic 401(k) assets more than doubling to $3.6 trillion at the end of 2012 from $1.7 trillion in 2000.
But even though the 401(k) is a great investment for both employers and employees, it doesn’t come without drawbacks -- and one of the biggest is cost. Not only are 401(k) plans expensive for companies to administer, they are expensive for participants.
According to a report from Demos, a public policy organization, "an ordinary median-income, two-earner householdpay nearly $155,000 over the course of their lifetime in 401(k) fees that consume nearly one-third of their investment returns."
This flies in the face of investors who think 401(k) participation is free. Whereas the median expense ratio for plans with more than 10,000 participants is 0.43%, the expense ratio for plans with fewer than 100 participants is 1.29%, a sharp premium. Having fewer employees to absorb fixed expenses makes 401(k) participation more expensive for both employees and employers, and that creates barriers for small companies that want to provide tax-deferred benefits to their employees.
That is why one low-cost alternative to the 401(k) is gaining in popularity.
The SIMPLE IRA ( Incentive Match Plan for Employees Individual Retirement Account) is an employee-sponsored plan that enables employees to invest in a tax-deferred account to save for retirement. The SIMPLE IRA offers simpler and less costly administration rules, but it's exempt from federal regulations that protect Americans' retirement assets.
The SIMPLE IRA is available to small businesses with fewer than 100 employees and can be funded with pretax salary taxes., but those contributions are still subject to , and federal
There are a number of reasons why the SIMPLE IRA is an excellent alternative to the 401(k) for small businesses looking for value.
Easy To Set Up
The SIMPLE IRA is easy to set up and administer. The brokerage firm provides all the documents and materials needed for sponsors and participants to enroll. Applications can be completed within days. And with a universe of brokerage firmscompeting plans, plan sponsors have the opportunity to choose from different levels of and service.
Setting up a 401(k) plan usually requires a big down payment and then high annual maintenance fees -- not to mention the fees paid by the plan's participants -- which can be cost prohibitive for a small business. In contrast, the SIMPLE IRA is low cost, with no fees. Maintenance costs are low, too: For instance, Vanguard charges SIMPLE IRA participants with accounts of less than $10,000 an annual fee of $10, which is waived for accounts of more than $10,000. Those savings can add up to thousands of dollars a for participants against the high expense ratios of the small-business 401(k).
More Investment Options
The SIMPLE IRA offers more variety. Most 401(k) plans equity and mutual . Not only does that severely limit access to a broader array of securities and markets, are also expensive compared with low-cost funds, adding another weight to its draining fee structure. But with a SIMPLE IRA, plan participants have access to individual , currencies, commodities, exchange-traded funds and international markets.a fairly limited selection of
Comparable Contribution Limits
Here, the 401(k) comes in ahead of the SIMPLE IRA. The annual contribution limit this year for a 401(k) is $17,500, compared with a $12,000 limit for the SIMPLE IRA and the $5,000 limit of a regular IRA. For participants over the age of 50, the contribution limits for both jump, to $23,000 for the 401(k) and $14,500 for the SIMPLE IRA.
Similar Withdrawal Schedules
The withdrawal schedules for the 401(k) and SIMPLE IRA are similar: Participants become eligible for qualified withdrawals at the age of 59.5. But the two plans handle early withdrawals differently. The 401(k) carries a 10% penalty for an early withdrawal, while the SIMPLE IRA can carry up to a 25% penalty for ineligible withdrawals in the first two years before falling to 10%. Both plans require minimum distributions at the age of 70.5.
Employer-Friendly Tax Requirements
Employers tax benefits from both by making employee contributions. But the reporting requirements for the SIMPLE IRA are more flexible -- 500 Series form reporting is not required. Companies running a SIMPLE IRA simply take a on their business tax returns for employee contributions, reducing reporting and administrative work for plan sponsors. Participants in both the 401(k) and SIMPLE IRA are allowed to deduct contributions from .401(k) plans and SIMPLE IRAs
The support as a premium service, but if not, it’s a great idea to consult with an to help guide the investment process.Answer: Getting started with a SIMPLE IRA is easy and quick. Accounts for both sponsors and participants are free to , and most brokerage firms onboarding and service. The brokerage firms may investment