Beyond the 401(k)

Few start-ups make it. New retirement plan options can help hedge your risk -- without breaking the bank.

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In the 18 months since she launched her own publicity firm in Los Angeles, Samantha Slaven has focused almost entirely on the task at hand: landing clients and building the business. She puts in 60-hour weeks and has taken a major salary cut, paying herself just one-third of what she used to make. Revenue at her four-person shop, Samantha Slaven Publicity, has tripled over the past 12 months, and no wonder why: "When I have a surplus of cash," Slaven says, "it goes right back into the business." Like many entrepreneurs when they're starting out, Slaven, 33, isn't giving much thought to things -- such as retirement planning -- that don't matter right now. "I haven't had time," she says. "My clients' needs come first."

When you're busy drumming up sales and getting orders out the door, retirement can seem a far-off concern. And what entrepreneur isn't counting on the windfall that will make retirement planning unnecessary? Perhaps that's why less than 25% of companies with fewer than 100 employees offer a defined-contribution retirement plan, such as a 401(k), according to the Chicago market research firm Spectrum Group.

You may think you can't afford to start saving just yet. But if putting off planning for the future is problematic for anyone, it's especially risky for entrepreneurs. Unlike the average salaried employee, entrepreneurs, especially those running start-ups, often have the bulk of their assets wrapped up in their venture. Should that venture fail, you could be left with nothing. You might even be forced to liquidate personal assets to pay off creditors. And the odds are not in your favor: The U.S. Small Business Administration estimates that only 5% of start-ups make it to their fifth birthday.

Fortunately, there is a range of retirement planning options that can help you hedge that risk. Just ask Steve Marinak, president of Midrange Support & Service Inc., an IBM computer reseller in Delray Beach, Fla. Marinak worked without a retirement plan for eight years. Like Slaven, he was in survival mode and assumed he could not afford it. Then his company switched accounting firms, and the new CPA set up a 401(k) plan that costs just $1,000 a year to administer. Marinak, 40, has since saved a hefty $40,000 a year. Just as important, by stashing away pretax dollars, his company has been able to reduce its business tax bill by about $15,000 a year. "We can put away a good amount of money pretax," Marinak says.

The 401(k), of course, is the best-known and most common retirement plan. But it's not necessarily the one best-suited to a start-up. For one thing, such plans require a fair amount of administration and paperwork and often require the help of a CPA. If you're a sole proprietor, you might consider a solo 401(k), which typically requires less paperwork, and virtually none until your plan assets exceed $100,000. In 2004, such plans cap contributions at $41,000 (or $44,000 if you're over the age of 50). And though solo 401(k) plans are geared to the self-employed, they can also work if you employ your spouse or if your business is set up as a partnership.

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