How to Set Up a Retirement Plan for Small Business Employees

Running a small business is no small feat. Between managing cash flow, taking care of your team, and navigating market challenges, you have a lot on your plate. Given these demands, setting up a retirement plan can sound overwhelming. However, it can provide powerful benefits when done right.

Not only can a well-designed retirement plan help you attract and retain top talent, but it can also reduce your tax liability and enhance your company’s credibility. And thanks to legislative updates and simplified options, retirement plans are more accessible than ever, even for small teams.

In this comprehensive guide, we’ll walk you through everything you need to know about setting up a retirement plan for your small business. We’ll also show you how to minimize your administrative workload and ensure compliance along the way.

Why Should Small Businesses Offer Retirement Plans?

While nearly half of U.S. employees work for small businesses, only 34% of these employers offer retirement plans. Companies that haven’t implemented a plan yet often cite the following obstacles:

• 48% don’t think they can afford a retirement plan.
• 22% say they’re too busy running their company to focus on it.
• 21% say they don’t know how to get started.

If you share these hesitations, you’re not alone. However, forgoing a retirement plan means missing out on the following benefits:

• Attracting and retaining top talent – When paired with competitive salaries and a positive workplace culture, retirement benefits can bolster your company’s appeal in the job market and reduce employee turnover. After all, the overwhelming majority (94%) of business owners say retirement plans help drive recruitment. Meanwhile, 48% of departing employees say the absence of a retirement plan influenced their decision to quit.
• Boosting employee engagement – After attracting skilled workers to your team, you need to keep them engaged. Offering a retirement plan shows employees that you’re invested in their future. As a result, nearly half (47%) of small business owners who offer retirement plans report higher employee engagement, leading to greater loyalty, productivity, and job satisfaction.
• Providing tax advantages – Retirement plans don’t just benefit your employees—they can also offer significant tax advantages for your business. Thanks to the SECURE Act 2.0, eligible small businesses can claim up to $5,000 per year for three years in startup tax credits, with additional incentives for automatic enrollment features. What’s more, employer contributions are fully tax-deductible.
• Supporting employees’ long-term financial security – Workers without employer-sponsored retirement plans often reach the end of their careers with little to no savings. By setting up a retirement plan, you empower your valued employees to build long-term financial stability and peace of mind. It also shows that you care about their well-being and reinforces your reputation as a people-first employer.

Understanding Your Retirement Plan Options

Now that you understand the benefits of setting up a retirement plan, you may be wondering what options are available for small businesses. Here are six retirement plans you can choose from:

#1 Traditional 401(k) Plans

Traditional 401(k) plans are one of the most popular and flexible retirement options available. They allow employees to defer a portion of their paycheck while benefiting from employer contributions, which can accelerate their savings and strengthen their loyalty to your company.

In 2025, employees can contribute up to $23,500 in pre-tax salary deferrals, with an additional $7,500 in catch-up contributions for those aged 50 and over. You can choose to match their contributions, offer profit sharing, or both.

Key benefits of the best small company 401(k) plans include:

• High contribution limits that support meaningful retirement savings for your employees.
• Flexible employer contribution options, which you can adjust based on your small business’s performance.
• Strong recruitment and retention appeal, particularly among mid-career and senior talent.

While traditional 401(k)s offer robust advantages, they also come with notable administrative responsibilities, such as annual nondiscrimination testing and other complex compliance requirements.

#2 Safe Harbor 401(k) Plans

Safe Harbor 401(k) plans are designed to take the stress out of compliance by automatically meeting key IRS nondiscrimination rules. This means that every employee, regardless of their salary or role, is guaranteed a minimum benefit.

Employees can defer up to the same contribution limits as a traditional 401(k), making this plan a competitive option for building retirement savings. To qualify for this plan, you must also make mandatory contributions on their behalf. You can choose between the following options:

• Matching contributions, including a dollar-for-dollar match on the first 3% of an employee’s salary, plus a 50% match on the next 2%.
• Non-elective contributions of at least 3% of their compensation for all eligible employees, regardless of their own contributions.

Thanks to these mandatory contributions, Safe Harbor 401(k) plans provide equitable benefits to your entire workforce. Meanwhile, you can enjoy simplified compliance and reduce your risk of costly IRS penalties by eliminating the need for nondiscrimination testing.

#3 Automatic Enrollment 401(k) Plans

Automatic Enrollment 401(k) plans help eliminate one of the biggest barriers to retirement savings: encouraging employee participation. That’s because these plans automatically enroll your eligible employees, contributing a set percentage of their paycheck unless they actively choose to opt out.

Automatic enrollment 401(k) contribution limits follow the same guidelines as traditional 401(k) plans, and you can structure your employer contributions using traditional matching rules or Safe Harbor provisions.

This plan requires you to notify your employees of your chosen default contribution rates, investment options, and opt-out rights to ensure compliance with Internal Revenue Service (IRS) and Employee Retirement Income Security Act (ERISA) regulations.

#4 SEP IRA (Simplified Employee Pension)

A SEP IRA is one of the simplest retirement plans available. It’s ideal for self-employed individuals or small business owners who want a low-maintenance option. With this plan, only employers make contributions, eliminating the need to manage employee deferrals or complex administration.

Your employer contributions are completely discretionary, so you can choose how much to contribute each year based on your business performance. In 2025, you can contribute up to 25% of each eligible employee’s compensation, or $69,000—whichever is less. These contributions are fully tax-deductible.

While SEP IRAs are simple and cost-effective, they don’t permit employee contributions, potentially limiting their appeal as a recruitment and engagement tool.

#5 SIMPLE IRA (Savings Incentive Match Plan for Employees)

A SIMPLE IRA offers small businesses an easy, affordable way to provide retirement benefits without the complexity of managing a full 401(k). It’s designed for companies with 100 or fewer employees and allows for both employer and employee contributions.

In 2025, employees can contribute up to $16,000, along with $3,500 in catch-up contributions. As the employer, you’re generally required to contribute in one of two ways:

1. Match employee contributions dollar-for-dollar up to 3% of their compensation.
2. Make a 2% non-elective contribution for all eligible employees, whether or not they contribute.

Note: Employers can reduce the match to as low as 1%, but only for two out of every five years, and they must notify employees in advance.

Key benefits of this plan include minimal paperwork, low administrative costs, and a straightforward setup process. While contribution limits are lower than those of traditional 401(k)s, SIMPLE IRAs are an excellent choice for small teams that prioritize simplicity, flexibility, and affordability.

#6 Pooled Employer Plans

Pooled Employer Plans (PEPs) are a modern retirement solution that allows multiple unrelated businesses to participate in a single, professionally managed 401(k). Rather than setting up your own plan from scratch, PEPs let you join a larger, established pooled structure, streamlining your costs, risk, and administrative burdens.

With a PEP, your employees can contribute up to the same limits as a traditional 401(k), while you retain the flexibility to offer matching contributions, profit sharing, or both. Additional benefits of these plans include:

• Streamlined administration – Most day-to-day plan management is outsourced to the plan provider, reducing your workload.
• Reduced fiduciary liability – The pooled plan provider also assumes fiduciary responsibility for your plan’s investments and administration, minimizing your legal risk.
• Lower costs – PEPs’ economies of scale help drive down investment and administrative fees.
• Robust investment options – Your employees will enjoy a wide range of diversified, low-cost investment options.
• Scalability – If your small business grows over time, a PEP plan can easily accommodate additional employees and evolving needs without requiring a full redesign.

While joining a PEP may limit your ability to customize certain plan features, this tradeoff can be worth it if you’re seeking a low-risk, turnkey solution.

6 Steps to Set Up Your Small Business Retirement Plan

Now that you’re familiar with your options, you may be wondering how to establish a retirement plan for your small business. Fortunately, it’s easier than you might think—just follow these six steps:

#1 Define Your Business Goals

Start by asking yourself what you want your retirement plan to accomplish. Do you want to:

• Attract and retain top talent?
• Reduce your business’s tax liability?
• Help your team build long-term financial security?
• Prepare for your own retirement?

By clarifying your priorities, you can align your plan selection with your business objectives and budget.

#2 Reflect on Your Workforce

Next, consider the current makeup of your team:

• How many employees do you have? 
• What’s their average age and tenure? 
• What’s your current turnover rate?

Your answers to these questions can help you select a plan that resonates with your workforce and drive stronger participation. For instance, if you have a lot of younger employees, they may appreciate features like automatic enrollment and flexible investment options. In contrast, if your team is made up of more experienced workers, they may prefer a plan with higher employer contributions.

#3 Choose the Right Plan Type

With your goals and workforce in mind, it’s time to carefully compare your options:

• SIMPLE or SEP IRAs may stand out if you have fewer employees or limited administrative capacity.
• Traditional or Safe Harbor 401(k)s may be well-suited if you want to maximize your employees’ contribution limits and enjoy ample flexibility.
• Automatic enrollment 401(k)s or PEPs may win out if you want to optimize participation and reduce your administrative and compliance burdens.

#4 Select a Plan Provider

After you pick your preferred retirement plan, look for a provider who understands the nuanced needs of small businesses. A good plan provider should also assist with:

• Plan administration and compliance
• Investment oversight
• Employee education and support

Some PEP providers, like Alden Investment Group, also offer features like digital employee portals, transparent reporting, and robust fiduciary services, enabling you to focus on running your business while they handle the heavy lifting.

#5 Determine Your Contribution Strategy

Depending on your chosen retirement plan, you’ll need to choose how you want to structure your contributions. These questions can help you clarify your strategy:

• Will you match employee contributions, offer profit sharing, or both?
  
• Do you prefer a fixed annual contribution or a more flexible, performance-based approach?
• How will your contribution strategy align with your cash flow and compensation structure?

#6 Educate and Enroll Your Employees

Once the setup work is complete, you can officially start enrolling your employees. But keep in mind, even the most robust retirement plan won’t make an impact if your team doesn’t understand how it works or what it offers.

You can bring them up to speed by hosting an onboarding meeting and sharing educational materials that explain:

• How the plan works
• Its investment options and contribution limits
• The benefits of participating
• Your employer contributions
• How to get started and make changes

Encourage your employees to schedule one-on-one meetings with you to address any questions or concerns. By fostering open communication and offering ongoing support, you can increase participation and ensure your employees’ satisfaction.

Simplify Your Small Business Retirement Plan with Alden Investment Group

Setting up a retirement plan for small businesses is easier than it seems. By aligning your plan with your business goals and workforce’s needs, you can unlock powerful benefits, ranging from improved employee retention to valuable tax savings.

Considering a PEP? Alden Investment Group can help you set up an employee retirement plan. As a Registered Investment Advisor (RIA), our PEP combines the benefits of a large employer plan with the simplicity of a turnkey platform. It allows you to:

• Outsource complex administrative and compliance tasks to our dedicated team of experts. As a 3(38) fiduciary, our team assumes full responsibility for investment oversight and ensures ongoing compliance with ERISA and IRS regulations.
• Leverage economies of scale to lower plan costs while providing your employees with access to a broad range of investment options, convenient online portals, and innovative support tools.

Beyond our PEP retirement plan, we also offer comprehensive workforce solutions that can help support your team’s financial health, including executive benefits, health insurance consulting, and financial wellness programs. Reach out to Alden Investment Group today to learn more!

Sources:

Senate.gov. SECURE 2.0 Act of 2022.
https://www.finance.senate.gov/imo/media/doc/Secure%202.0_Section%20by%20Section%20Summary%2012-19-22%20FINAL.pdf

Fidelity. Fidelity Study: Despite Concerns About the Future, Two-Thirds of Small Businesses Do Not Currently Offer Retirement Savings Benefits.
https://newsroom.fidelity.com/pressreleases/fidelity-study–despite-concerns-about-the-future–two-thirds-of-small-businesses-do-not-currently-o/s/72432825-233e-4a33-a470-3bed305b2f04

PR Newswire. One-Third of Small Business Owners Lack a Retirement Savings Plan.
https://www.prnewswire.com/news-releases/one-third-of-small-business-owners-lack-a-retirement-savings-plan-300833644.html

Score. Infographic: Small Business Retirement – Investing in Your Future.
https://www.score.org/resource/infographic/infographic-small-business-retirement-investing-your-future

CBS News. Millions of older Americans are nearing retirement without a penny in savings.
https://www.cbsnews.com/news/retirement-baby-boomers-with-no-retirement-savings/

IRS. 401(k) limit increases to $23,500 for 2025, IRA limit remains $7,000.
https://www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000

Investopedia. What Is a Safe Harbor 401(k) Plan?
https://www.investopedia.com/safe-harbor-401k-plan-8620915

U.S. Department of Labor. Automatic Enrollment 401(k) Plans for Small Businesses.
https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/publications/automatic-enrollment-401k-plans-for-small-businesses

IRS. Simplified Employee Pension plan (SEP).
https://www.irs.gov/retirement-plans/plan-sponsor/simplified-employee-pension-plan-sep

IRS. SIMPLE IRA plan.
https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan