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401(k) for Lawyers and Private Practice Law Firms

By Liz Sheffield

Like any other small business, sole practitioners and small law firms need a good retirement plan. Offering a 401(k) plan is a fundamental component in a competitive benefits package, and it’s a tool that savvy employers use to recruit and retain talent. But the idea of managing a 401(k) plan in addition to one’s “day job” can be overwhelming for the small business owner, including those specializing in legal services. If you’re considering 401(k) options for yourself, or for your small law firm, here are a few things to think about:

What are the options for retirement investment plans for lawyers?

The most popular plans include employer-sponsored 401(k) plans, Solo 401(k) plans, SIMPLE IRA, and Simplified Employee Pension (SEP) IRA. There are two commonalities among these types of retirement accounts:
  • These are types of accounts, not specific kinds of investments.
  • While in the account, money grows tax-free.
Here is an in-depth comparison of these options, including who they’re for, who makes contributions, and contribution limits: 401(k) vs. Solo 401(k) vs. Simple IRA vs. SEP IRA The most widely used of these is the 401(k), for its relative flexibility and tax advantages with high contribution limits.

Why should small law firms offer a retirement investment plan?

If you’re an owner of a small law firm, you’re competing against large firms for top talent. Whether you need another partner, a paralegal or legal assistant, to recruit and retain skilled workers, it’s important to offer a 401(k) plan as a benefit. As reported by CNN Money, law firms offer some of the best retirement investment plans and contribute an average of $11,023 annually to employees’ plans. Other benefits of a 401(k) include these specific tax advantages:
  • Employees and business owners can make tax-deferred contributions
  • Employers receive tax benefits when making contributions to employee accounts
  • Account growth isn’t taxed until withdrawn

How can small law firms manage a 401(k)?

Large law firms not only have teams of partners and associates who generate income, but they also employ staff members that handle administrative duties, including dedicated HR support for their lawyers. If you started or joined your small firm recently or are working as a solo practitioner, some aspects of working in a large firm probably didn’t appeal to you. At the same time, managing HR-related tasks may not be at the top of your list either. Rather than attempting to manage the complexity of a 401(k) plan on your own, look for a provider like Human Interest that specializes in helping small businesses make retirement investments a reality for their workforce. With a great provider and an easy-to-use online tool, you can automate 401(k) administration and employees can plan for the future with built-in investment advising.

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When should you consider making the investment?

Of course, your business needs to be able to handle the financial impact of paying the fees required to administer a 401(k) plan, as well as covering the cost of an employer match (if you decide to provide one). But remember: it’s always better to start saving sooner rather than later. Delays in saving for retirement will cost you in the years to come. Thanks to the power of compound interest, the younger you and your employees are when you start to save for retirement, the more power your money will have. As a business owner, it also makes sense to start taking advantage of the corporate tax breaks that come with providing this benefit for employees.

What about that law school student loan debt?

College tuition and the cost of law school aren’t cheap; chances are you and your fellow lawyers are faced with considerable debt. It’s tempting to put any discretionary income towards eliminating that debt, but when you do so that means your money isn’t going towards your future financial security. It’s important to balance current needs and priorities with your future goals. Generally, when it comes to investing in your 401(k), it’s wise to at least contribute enough so that you’re not leaving any money on the table that you could be earning via a company match. There are many advantages to setting up a 401(k) plan for your solo or small law practice. But as with any business decision, you need to be sure you’re approaching it in a fiscally responsible manner. As you begin looking at the options, discuss with your partners and employees to confirm their needs and desires around a 401(k) plan. Then start interviewing 401(k) providers that offer plans which meet your firm’s needs and charge reasonable fees for administration and account management. Talk with other small law offices to see what they offer and how they go about investing in their retirement and helping employees do the same. With the right approach, offering a 401(k) plan doesn’t have to be overwhelming or costly. Most importantly, when handled well, it’s a valuable way to prepare for your own future, cost-efficiently reward your employees, and stand out as an employer of choice. Image credit (edited): C.E. Crane