Smart Answers

Establishing an Employee Retirement Plan


Along with assessing tax strategies and planning for future growth, many small business owners leave making decisions about employee benefits until the end of the year. Employment surveys indicate that after health insurance, the benefit most coveted by U.S. workers is an employee retirement plan. But Small Business Administration data show that nearly three-quarters of small employers do not sponsor retirement plans for their employees. Many entrepreneurs are clinging to outdated, negative notions about retirement plans, says Chad Parks, who founded The Online 401(k) in San Francisco in 1999.

As a certified financial planner in the 1990s, Parks says, he often advised clients to establish company retirement plans. But when he went looking for firms that specialized in administering plans for businesses with fewer than 50 employees, he often came up empty-handed. He decided to remedy that problem and founded his company to specialize in small business clients.

Even a dozen years after technology began making retirement plans available and affordable for small companies, a handful of persistent myths (described below) prompt entrepreneurs to shy away, Parks says.

Owners must make costly “matching” contributions. While matching contributions make a nice bonus for employees, they are not mandatory under many small business retirement plans. “Many [chief executive officers] have previously worked at large corporations where matching is common,” Parks says, “and so they believe they must match their employees’ contributions.”

In reality, the 401(k) and several other retirement plans make employer matches discretionary. “You can choose any formula you want—or none,” Parks says. “The basic purpose of a pension plan is to allow employees a tax-advantaged way to save their own money for retirement.”

IRS publication 3998 lists various plan options for small businesses and compares their benefits and requirements, including employer and employee-contribution guidelines. The agency also has a retirement plan FAQ page and a retirement plans navigator site.

A retirement plan is too costly to maintain. Before technology automated many retirement plan processes, it wasn’t unusual for small business owners to pay up to $4,000 annually just to administer their plans, Parks says. Today’s flat-fee administration packages and do-it-yourself options have greatly reduced the cost.

Using a third-party administrator could cost as little as $95 a month, Parks says—less than many employers spend for water coolers or office coffee service. Deciding to administer the plan yourself, or assigning the job to an employee, is another way to keep costs under control.

Setting up and maintaining a retirement plan is time-consuming. It can take less than a week to implement a new retirement plan and no more than an hour per month to keep it running, Parks says. “There are [third-party administrators] out there that cater specifically to firms with less than 100 employees,” he says. “Employers can also do everything in a Web-based environment for ease of use.”

While maintaining a plan on a do-it-yourself basis may take considerable time at first, you can choose a plan with limited reporting requirements. Tasks become easier to complete as the owner becomes familiar with them and sets up the necessary processes.

Small businesses must settle for high-fee plans and poor investment advice. Historically, top financial services firms were uninterested in working with small businesses, which typically had smaller investment savings pools and thus, less potential for profit, Parks says. This is no longer a hindrance to smaller employers.

“Scalable, objective guidance is available to small businesses and employees who need help picking their investments,” he says. “Small businesses can find low-cost, effective funds for their plans and not be stuck with poor-performing funds.”

Regulatory changes over the past five years have allowed more independent investment advisory firms to enter the small business market. Parks’s company works with several independent advisers, including Morningstar Managed Plan Solutions, a division of investment research firm Morningstar (MORN). These companies offer varying portfolio choices, based on employees’ ages and risk tolerance and charge management fees as low as .20 percent, Parks says.

“You can allow your employees to pick and manage their own investment portfolios, or offer them the services of one of these lower-cost, high-quality management options,” he says.

Karen_klein
Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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