As a finance expert, I often get asked about the best retirement plan options for small businesses. American Funds, a trusted name in the investment world, offers several retirement solutions tailored for small businesses. In this guide, I break down everything you need to know—from plan types and tax advantages to investment strategies and cost comparisons.
Table of Contents
Why Small Businesses Need Retirement Plans
Small business owners face unique challenges when planning for retirement. Unlike employees of large corporations, they don’t have access to employer-sponsored 401(k) plans unless they set one up themselves. A well-structured retirement plan helps attract and retain talent, provides tax benefits, and ensures long-term financial security.
According to the U.S. Bureau of Labor Statistics, only 53% of small businesses with fewer than 100 employees offer retirement benefits. This gap presents an opportunity for business owners to gain a competitive edge while securing their own future.
Types of Small Business Retirement Plans Offered by American Funds
American Funds provides several retirement plan options, each with distinct features. Below, I compare the most popular choices:
1. SEP IRA (Simplified Employee Pension)
A SEP IRA allows employers to contribute directly to their employees’ retirement accounts. Contributions are tax-deductible, and earnings grow tax-deferred.
Key Features:
- Only employers contribute (employees cannot).
- High contribution limits—up to 25% of compensation or $66,000 (2023 limit), whichever is less.
- Easy to set up and maintain.
Example Calculation:
If a business owner earns $100,000, the maximum contribution is:
2. SIMPLE IRA (Savings Incentive Match Plan for Employees)
Designed for businesses with 100 or fewer employees, a SIMPLE IRA allows both employer and employee contributions.
Key Features:
- Employees can contribute up to $15,500 (2023 limit) with a $3,500 catch-up for those 50+.
- Employers must either:
- Match employee contributions dollar-for-dollar up to 3% of salary, or
- Contribute 2% of compensation for all eligible employees.
Example Calculation:
If an employee earns $50,000 and contributes $5,000, the employer must match:
3. Individual 401(k) (Solo 401k)
Ideal for self-employed individuals or business owners with no employees (except a spouse).
Key Features:
- Higher contribution limits than SEP or SIMPLE IRAs.
- Allows employee deferrals up to $22,500 (2023) plus employer profit-sharing contributions up to 25% of compensation.
- Total contributions cannot exceed $66,000 (2023).
Example Calculation:
If a sole proprietor earns $150,000:
- Employee contribution: $22,500
- Employer contribution: 0.25 \times \$150,000 = \$37,500
- Total contribution: \$22,500 + \$37,500 = \$60,000
4. Small Business 401(k) Plans
For businesses with employees, American Funds offers traditional 401(k) plans with flexible contribution structures.
Key Features:
- Employees contribute via payroll deductions.
- Employers can match contributions (e.g., 50% up to 6% of salary).
- Vesting schedules apply.
Comparing American Funds Retirement Plans
| Plan Type | Best For | Contribution Limits (2023) | Employer Mandate? | Employee Contributions? |
|---|---|---|---|---|
| SEP IRA | Self-employed, small teams | $66,000 or 25% of comp | No | No |
| SIMPLE IRA | Businesses <100 employees | $15,500 (+$3,500 catch-up) | Yes (match/2%) | Yes |
| Solo 401(k) | Sole proprietors, spouses | $66,000 (combined) | Optional | Yes |
| Small Business 401(k) | Growing businesses | $22,500 (+$7,500 catch-up) | Optional match | Yes |
Investment Options and Performance
American Funds is known for its actively managed mutual funds, which historically outperform index funds in certain market conditions. Some top-performing funds include:
- The Growth Fund of America (AGTHX) – Strong long-term returns.
- The Income Fund of America (AMECX) – Focuses on dividends and stability.
- The Bond Fund of America (ABNDX) – Lower risk, fixed-income focus.
Historical Performance Comparison (10-Year Annualized Returns as of 2023):
| Fund Name | Return (%) | Expense Ratio |
|---|---|---|
| Growth Fund of America | 12.5% | 0.62% |
| S&P 500 Index Fund | 10.7% | 0.03% |
| Bond Fund of America | 4.2% | 0.57% |
While actively managed funds have higher fees, their potential for excess returns may justify the cost for some investors.
Tax Advantages of American Funds Retirement Plans
One major benefit of these plans is tax deferral. Contributions reduce taxable income, and investments grow tax-free until withdrawal.
Example Tax Savings:
If a business owner in the 24% tax bracket contributes $25,000 to a SEP IRA:
Setting Up an American Funds Retirement Plan
- Choose the Right Plan – Assess business size, employee count, and contribution flexibility.
- Complete Paperwork – American Funds provides setup documents.
- Select Investments – Diversify across stocks, bonds, and other assets.
- Monitor and Adjust – Rebalance annually based on performance.
Common Pitfalls to Avoid
- Failing to Meet Employer Contribution Requirements – SIMPLE IRAs mandate employer contributions.
- Ignoring Fees – Expense ratios can erode returns over time.
- Not Informing Employees – If offering a 401(k), clear communication is key.
Final Thoughts
American Funds offers robust retirement solutions for small businesses. Whether you’re a solopreneur or have a growing team, there’s a plan that fits. The key is to start early, maximize contributions, and stay informed about tax laws and investment performance.
