What advisors should know about SEP IRAs, SIMPLE IRAs, and 401(k)s

Financial advisors often guide small business owners through critical decisions about retirement plans. Understanding the differences between SEP IRAs, SIMPLE IRAs, and 401(k)s can help you recommend the best option based on business size, budget, and growth goals.

What advisors should know about SEP IRAs, SIMPLE IRAs, and 401(k)s
Key Points
  • Comparison Clarity: Learn to explain the core differences between SEP IRAs, SIMPLE IRAs, and 401(k)s in simple terms to help guide small business clients toward the right plan.
  • Client-Centric Approach: Position recommendations around client priorities, like simplicity, flexibility, or growth, to save time and improve retirement outcomes.
  • Actionable Guidance: Provide clear next steps and resources that help small business clients implement the right retirement plan confidently and efficiently.
Tagged Engage Clients Plan design & capabilities 401(k) IRA Article

As a financial advisor, you play a pivotal role in guiding your clients toward choosing a retirement plan that best fits their needs. For small business clients, the conversation often revolves around three options: SEP IRAs, SIMPLE IRAs, and 401(k) plans.

Each plan offers tax advantages and a path to retirement readiness, but the right choice depends on the company’s size, goals, and administrative capacity. Recognizing these distinctions allows advisors to frame recommendations around what matters most to each client: simplicity, flexibility, or long-term growth.

Comparing small business retirement plans: SEP IRA vs SIMPLE IRA vs 401(k)

Advisors often need to translate complex retirement plan details into clear, client-friendly terms. Exploring retirement plan solutions tailored to your clients’ needs ensures they have options that align with their goals. Whether discussing SEP IRAs, SIMPLE IRAs, or 401(k)s, highlighting core factors for small business owners—like cost, tax benefits, or available features—can help move the conversation from education into action.

Plan features SEP IRA SIMPLE IRA 401(k)
Employer size Any size Up to 100 employees Any size
Employee salary deferrals No Yes  Yes 
Employer contributions Required for all eligible employees Required annually (3% match or 2% nonelective) Optional; flexible designs (match, nonelective, profit sharing)
Contribution limits Employer-only, up to 25% of compensation* Lower than 401(k) Highest limits
ERISA governance Limited Limited Full
Ideal for Businesses wanting employer-only funding Small businesses wanting employee participation Businesses wanting higher limits, broad features, and scalability

*Subject to annual IRS limits. 

SEP IRA: Flexible retirement savings for small businesses

SEP IRAs could be ideal for clients seeking flexibility, simplicity, and high employer contribution potential, particularly sole proprietors or small businesses with variable income. Because contributions are employer-only and discretionary each year, SEPs allow employers to make contributions based on business performance, offering flexibility for companies with variable income.

Key advantages for clients:

  • High contribution potential—Up to 25% of compensation (subject to IRS limits).
  • Flexible contribution strategy— can vary annually based on cash flow or business performance.
  • Easy to establish and administer
  • Available to businesses of any size

Considerations to explain:

  • Employer-only contributions; employees cannot defer income
  • Equal contribution percentage required for all eligible employees
  • Contributions are optional each year for added flexibility
  • Limited fiduciary oversight and fewer participant protections

How to position a SEP IRA for clients:

SEP IRAs could be ideal for clients who want employer-only contributions, flexible annual funding, generous contribution limits, and less complexity than a 401(k).

Learn more about SEP IRAs

SIMPLE IRA: A streamlined option for small businesses

SIMPLE IRAs are designed for businesses with up to 100 employees, offering a straightforward way to provide retirement benefits without the complexity of a 401(k). Because these plans include employee salary deferrals and employer contributions, they create more participation opportunities than SEP IRAs.

A SIMPLE IRA allows clients to offer employee participation through a plan that is designed to be easy to administer and cost-effective. SIMPLE IRAs can support businesses looking for predictable annual funding and a retirement program that doesn’t require ERISA compliance, annual filings, or complex plan design decisions.

SIMPLE IRAs include two funding components:

  • Employee salary deferrals, which allow workers to save directly from their pay, and
  • Required employer contributions, either through a match or a 2 percent nonelective contribution.

This combination may appeal to businesses focused on employee engagement and retention, offering a more inclusive structure than SEP IRAs while remaining simpler and more affordable than a 401(k).

Key advantages for clients:

  • Easy to set up and maintain
  • Employee participation through salary deferrals
  • Predictable employer contributions
  • Lower administrative cost than a 401(k)
  • No Form 5500 filing

Considerations to explain:

  • Only available to employers with 100 or fewer employees
  • Cannot maintain another retirement plan alongside a SIMPLE IRA
  • Lower annual contribution limits than a 401(k)
  • Employer contributions are mandatory (match or nonelective)
  • Limited fiduciary protections

How to position a SIMPLE IRA for clients:

Position SIMPLE IRAs as a middle ground between SEP IRAs and 401(k)s; they’re more inclusive than SEP IRAs but are less complex and costly than a 401(k). Emphasize that while contribution limits are lower, SIMPLE IRAs still allow employees to save through salary deferrals, which can be a strong selling point for talent retention.

Learn more about SIMPLE IRAs

401(k): Flexibility and ERISA protections for growing businesses

401(k) plans offer the most flexible and comprehensive retirement plan option for small businesses. Unlike SEP or SIMPLE IRAs, 401(k) plans allow both employee salary deferrals and employer contributions, plus advanced features like Roth options, automatic enrollment, and profit sharing. Because 401(k)s include ERISA oversight and customizable plan design, they can support a wide range of workforce and savings priorities.

A 401(k) may be a strong option for small business clients that want higher contribution limits, broader plan design options, and a plan that can scale with their business. Advisors may recommend 401(k)s for clients focused on employee retention, long-term savings, and compliance.

Key advantages for clients:

  • Highest contribution limits (2026 limits) of all three plan options
  • Flexible plan design options (Roth contributions, safe harbor provisions, automatic enrollment, profit sharing, etc.)
  • ERISA oversight with fiduciary protections, nondiscrimination testing, and participant disclosures
  • Effective tool for employee retention and long-term savings

Considerations to explain:

  • Complex administration and higher costs compared to SEP or SIMPLE IRAs
  • Annual Form 5500 filing and nondiscrimination testing required (unless safe harbor)
  • Ongoing fiduciary responsibilities for plan sponsors
  • Possible need for third-party administration to ensure compliance

How to position a 401(k) for clients:

401(k)s could be ideal for businesses prioritizing growth, compliance, and employee engagement. Emphasize that while administration is more involved, ERISA protections and plan flexibility make 401(k)s a strategic investment for companies looking to scale.

Compare 401(k) plan options

ERISA oversight: Fiduciary safeguards and participant protections

One of the most significant differences among small business retirement plans is whether the plan is governed by the Employee Retirement Income Security Act (ERISA). Unlike SEP and SIMPLE IRAs, 401(k) plans fall under ERISA, which introduces fiduciary standards and structured safeguards designed to support plan integrity, protect participants, and create a more formal oversight framework.

For advisors, oversight is an important factor when helping clients understand how a 401(k) differs from an IRA-based plan, particularly for clients focused on long-term growth, employee engagement, and stronger operational controls.

401(k) plans (ERISA-governed)

  • Must comply with ERISA fiduciary standards
  • Require annual Form 5500 filing
  • Include participant disclosures (fee notices, plan summaries, etc.)
  • Are subject to nondiscrimination testing (unless safe harbor)
  • Offer more robust participant protections

SEP IRAs and SIMPLE IRAs (non-ERISA)

  • Do not require Form 5500 filings
  • Minimal fiduciary oversight
  • No testing requirements
  • Simpler plan maintenance

Why ERISA oversight matters

ERISA oversight creates a structured environment that supports transparency, participant understanding, and long-term plan stability. While 401(k) plans involve additional administrative steps—such as Form 5500 filing, fiduciary oversight, and testing—this governance framework can help employers maintain a well-managed retirement program as their organization grows. In contrast, SEP and SIMPLE IRAs avoid ERISA requirements and offer a lighter administrative experience, but with fewer protections and less plan structure. Understanding these distinctions can help advisors discuss how governance, complexity, and long-term expectations factor into a client’s plan selection.

Advisor takeaway: Helping small clients start a retirement plan

You’ve guided your clients through the key differences between SEP IRAs, SIMPLE IRAs, and 401(k)s. Now it’s time to turn education into action.

Small business owners often delay retirement planning because they’re overwhelmed by choices. Your expertise makes it easy for them to move forward confidently. By recommending the right plan, you help small business owners save time, reduce complexity, and achieve better retirement outcomes for themselves and their employees.

Next steps for advisors:

This content reflects known information as of the date of publication, but may be subject to change. This material is for informational purposes only and is not intended to provide tax, legal, or accounting advice.