Many Reasons to Offer 401(k)s (Including Owner’s Retirement)
Soon after Sabina Gault got her public relations firm up and running in 2008, she asked for a show of hands from employees interested in having a company 401(k) plan. The consensus? “Nobody wanted it,” said Ms. Gault, whose firm, Konnect Public Relations, based in Los Angeles, had just a few employees at the time.
Two years later, with eight people on her payroll, she raised the question a second time. Again, the response was lukewarm. So she waited.
Finally, in 2013, she made an executive decision about the 401(k): “I said, ‘We’re going to do it no matter what, even if it’s just a few of us.’ ”
While the share of small businesses offering 401(k) plans has picked up since 2008 — when just 10 percent offered the benefit — 401(k) plans are still the exception at small companies. Just one in four firms with 50 or fewer employees has such a plan in place, according to Capital One’s ShareBuilder 401k.
Employers point to a lack of interest among employees coupled with the costs of setting up and administering the plans. That is one reason Ms. Gault waited as long as she did. “It didn’t make sense to pay for something people wouldn’t use,” she said, noting that most of her employees are in their early 20s. Had they been a little older, she said, it might have been more of a priority.
Retirement plans typically take a back seat to salary, benefits like health insurance and other more immediate perks, said Sabrina Parsons, chief executive of Palo Alto Software, a 55-employee business planning software company based in Eugene, Ore. Yet when it comes to recruiting and retaining employees over the long term, “not having a retirement plan is a glaring hole,” she said. “It’s like restrooms in the office; you can’t not have them.”
What’s more, a company-sponsored plan is also the most effective way for small-business owners to save for their own retirements, said Leon LaBrecque, chief strategist and founder of LJPR, a wealth management firm in Troy, Mich. Owners can contribute to individual retirement accounts or to a Roth I.R.A., but the contribution limit for these plans is just $5,500 a year ($6,500 for anyone 50 and older). That is one third the maximum allowed for a 401(k) plan. SEP I.R.A.s, while popular among the self-employed and very small businesses, are generally not a good bet for growing companies; they can be costly, and they require owners to contribute the same percentage to employee plans that they contribute to their own plans.
Fortunately, setting up a 401(k) plan is considerably easier and cheaper than it was just a decade ago. Setup and administrative costs vary from one provider to the next — and increase if the plan offers more customized investment options, hands-on advice and other bells and whistles. Many 401(k) providers, including Sharebuilder 401k, offer basic plans that start around $1,000 a year. And there are tax incentives. Companies with fewer than 100 employees can claim up to $500 in tax credits to offset administrative costs for each of the first three years of a first-time plan.
Owners shopping for a plan will want to balance investment options and services with costs paid by the company and fees paid by the employee. Many providers charge a management fee — to employers or employees — on top of fixed administrative fees. Employers should be wary if fees creep above 1 percent of employee assets. (Additional management fees are charged by the mutual funds or other exchange-traded funds used in 401(k) plans.)
One exception, according to Ms. Parsons: It may be worth paying more to bring in a financial adviser to help select investment options and to give employees hands-on investment advice. “Our thinking is, if you take the time to set up a plan, you want to make sure employees are getting the most out of it,” she said. “We work with a planner who does an informational meeting with the company every quarter and also meets with employees individually.”
Having worked in the financial services industry for much of his career, Darius Mirshahzadeh, president of Endeavor America Loan Services, was particularly aware of fees when it came time to set up a 401(k) for his one-year-old business. The plan, which will be available to employees beginning in August, is administered by the Online 401k, a 15-year-old company with more than 7,000 small businesses on its platform. Its most popular option, the Express(k), charges employers with 50 or fewer employees about $1,200 for the year; employees pay an additional flat fee of $4 a month.
For some employers, though, administrative fees are just the beginning of the expense. The bigger concern for many small businesses is the cost of matching benefits. “The biggest misconception is that employers have to do a match,” said Neil Smith, executive vice president at Ascensus, one of the nation’s largest independent record keepers and administrators for retirement plans. “A match is completely optional in a traditional plan.”
Why the confusion? A provision in the Employee Retirement Income Security Act prohibits companies from allowing the highest-paid employees to contribute disproportionately more than the rest of the work force. Specifically, the average contribution of the highly paid group cannot be more than 2 percentage points higher than the average for rank-and-file employees. If the average employee contributes 5 percent of salary to the plan, for example, the average for the highest-paid employees cannot exceed 7 percent.
Nevertheless, to avoid the administrative inconvenience of complying with this rule, many companies choose so-called safe harbor plans. These plans do require an employer contribution — most common is a dollar-for-dollar match, up to 4 percent — but they give all employees carte blanche to contribute as much as they want to the plan, up to the standard limits.
The standard advice is that most companies that can afford to match probably should. A generous retirement package can be an asset for recruiting and retaining employees, said Mr. LaBrecque, who uses a safe harbor plan for his employees. “I always emphasize that this is part of their compensation package,” he said. “When employees look at it that way, they’re more likely to take full advantage of that match.”
Small businesses that are not quite ready to make that commitment, however, can start with the traditional plan. “You can always switch over to a safe harbor plan once you have more consistent revenue coming in the door,” he added.
For now, Ms. Gault is sticking with a traditional plan — though she does offer employees a 10 percent match on contributions of up to 5 percent of their salary. The perk has proved to be more popular than she expected. Today, she said, roughly half of her 30 employees use the plan to save for their retirement years.
By Sarah Max for the New York Times Small Business