SEPs, Simples, and 401(k) - The Right Plan for Your Business

Learn about retirement plans for smaller businesses and how to select the right type for you and your employees. Compare SEP or SIMPLE IRAs vs 401(k)s.

Only a little over half of private sector workers in the United States are covered by an employer-sponsored retirement plan, and few workers save without one.1 Workers are understanding the importance of retirement savings and this topic is increasingly a concern for legislators.  As a result, many states are mandating that employers offer some type of retirement savings plan and workers are looking for job opportunities that offer this type of benefit.


According to a recent report, small firms have cited several main reasons for not offering a retirement plan.2 Some businesses claim they are not firmly established with consistent cash flow to offer a plan.  There are worries about the potential administrative responsibilities and costs associated with set up, and the theory that workers would prefer cash compensation or better health insurance in lieu of retirement benefits. With increasing pressure, however, from the government and workers to offer a retirement solution, it is important to be versed in the options available for your small business. You may be surprised to find that offering a retirement solution may not be as costly and difficult to set up as you may think.


Small businesses have several options to choose from when it comes to retirement plan benefits for their employees. This article is meant to clear up confusion about the various retirement options, whereby we will provide an overview of each type of plan and include a comparison chart outlining key features so you can make a more informed decision about the solution that fits your business needs best.

The Retirement Landscape

The three most common small business retirement plan options are:

  • 401(k)




A 401(k) plan gives employees a tax break on money they contribute. Contributions are automatically withdrawn from employee paychecks and invested. The investment options within the plan are selected by you as the employer or delegated fiduciary, and from that predetermined selection, an employee may choose the funds up to annual IRS contribution limits for their individual 401(k) plan account on a pre-tax basis. Many companies often offer what’s called a 401(k) match, in which they contribute additional money on top of the employee contributions as a benefit and incentive for employees to increase their own contributions. Employer contributions in 401(k)s are optional.





Simplified Employee Pension (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) IRA are retirement plans that allow employers to contribute to traditional IRAs set up for employees. In comparison to a 401(k), SIMPLE/SEP IRAs have fewer plan design options and features but are easier to set up and administer and offer a cost-effective way for a business to start a retirement plan. However, employees are responsible for managing their own investments in a SIMPLE/SEP IRA, so it may be a good idea for them to work with a Financial Advisor who can discuss investment choices as well as savings strategies.

Table comparison between 401(k)s, SEP IRA and Simple IRA

While you may see the value in offering a retirement solution for your employees, you may still have concerns about costs. There may be tax incentives for your business when you set up a retirement solution. If you are worried about the time spent administering the plan, some plans come with pre-selected fund lineups and service providers to oversee the performance and complete administrative tasks and responsibilities, leaving you more time to focus on running your business.


There are pros and cons of each retirement solution type, but a 401(k) may offer the most flexibility for your firm. Contribution limits are higher than SIMPLE IRA deferral limits, and you can incentivize your employees to save even more by providing a match. Furthermore, a match provides your company with a competitive advantage: According to the US Bureau of Labor Statistics report, of employers who offer 401(k) plans, 62% offer a match.3 In the current job market, benefits are becoming increasingly important to attract and retain top talent: 92% of employees view retirement planning assistance as a priority when choosing where to work.4


Morgan Stanley at Work offers small business 401(k) services to help you and your employees reach their retirement plan goals. Furthermore, working with a provider like Morgan Stanley gives you access to a Financial Advisor, who can craft a retirement plan that meets the needs of your company, your employees with diversified investment options to suit varying needs.


As a small business owner, you can help improve the financial future of your employees by providing retirement benefits and leveraging the plan as an effective tool for attracting and retaining industry talent. If you already have a SIMPLE IRA program and you are interested in converting the plan into a 401(k), the election must be done by October for the new plan to take effect in the new calendar year.


Talk to a Morgan Stanley Financial Advisor, and your legal and tax advisors about your options, and what type of retirement solution makes the most sense for your business and employees.

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