On Their Behalf

Choose the best retirement plan for your employees

Only 18% of small business owners participate in a 401(k) or thrift plans according to a study by the Small Business Administration (www.sba.gov).

Cost is the major obstacle, says David Wray, president of the Profit Sharing/401k Council of America (www.psca.org), a Chicago-based nonprofit that sponsors defined contribution plans.

“There will be money coming out of the corporate cash flow to put the retirement plan in place,” he says. There’s a time cost too, adds Wray. With the owner overseeing virtually every aspect of the business, taking time to research and establish a retirement plan can fall by the wayside. But identifying a hassle-free, best- of-the-bunch plan that’s beneficial to your employees is doable. Here’s how.

  1. Size does matter. It’s important to consider your current size and future growth, says Kevin Crain, head of institutional client relationships at Bank of America Merrill Lynch. Some plans that work for a company with 1 to 5 employees may not work for a company with 10 to 15 employees. For smaller companies with fewer than 10 employees, a Simplified Employee Pension plan, or SEP, may be more efficient, suggests Wray. While only employers are allowed to contribute to a SEP, “the benefit for the employer is if contributions come out of company profit, there will be no FICA tax,” a substantial savings for businesses.
  2. Determine your commitment. The level of a plan’s complexity will determine how much administrative help you’ll need in implementing and maintaining the plan. There are also state and federal compliance rules. “These rules intimidate small business owners who are already swamped with other regulatory requirements from the government,” says Wray. “For example, a ‘nondiscrimination testing’ will need to be performed by companies that implement a 401(k) plan.” With this, maximum contribution of highly paid employees is conditioned on the participation of lower paid employees.
  3. Understand the fees. No matter what plan you select, you must figure in setup costs. Typically, for most plans, Wray says small businesses will see an upfront conversion cost to set up the plan—that could cost a few hundred to a few thousand dollars depending on the plan and size of the company—a set cost per person enrolled, and an annual fee. The good news, says Crain, is many companies scale this out based on the size of the business.
  4. Consider employee participation. It’s important to determine how much responsibility your employees will assume. “We found if you completely leave it to the employees many of them just don’t engage,” says Crain. He says auto enrollment and automatic deduction programs such as company IRAs tend to have high participation rates because of their ease. Retirement plan participation rates are higher at smaller companies than at larger organizations because of the employer’s ability to talk to employees individually. Crain adds, “There’s nothing more effective than having a boss personally talk to them about the plan.”
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