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PERSONAL BUSINESS

12.3.98  
You Can't Afford Not to Offer a 401(k)
Luring and keeping top talent can hinge on this popular pension plan

The first of two parts

If you've been getting away without offering a 401(k) retirement plan to employees, you're not alone -- but you soon may be. Experts who follow the pension market say they expect the fastest growth in plans will come from small employers. "More than 90,000 new 401(k) plans will be formed in the next five years, and most will be among companies with fewer than 100 employees," predicts Jeff Close, a pension consultant for Spectrem Group in Connecticut.

That number may seem trifling in a universe of several million small businesses. But each plan covers scores of employees, and small companies that adopt such plans are likely to be the ones competing most fiercely to find and keep top talent. Right now, about one-third of small businesses offer 401(k) plans, compared with 93% of giant corporations. Recent converts include 63-year-old Belmay Inc., a Yonkers (N.Y.) manufacturer of fragrances whose clients include Glade air fresheners. Owner Ted Kesten says he already had a traditional pension plan. But he launched a 401(k) two years ago after the key members of his 170-person U.S. staff (he also has foreign workers) made it clear that they wanted one. Kesten says he set up a plan tied to profit-sharing "to maintain competitiveness within our industry and to maintain the attractiveness of our company." More than 100 employees have since signed up.

"The trend is clearly toward 401(k)s," says Patrick Cassidy, manager of the small-market 401(k) business at Merrill Lynch & Co., which in the last three years has doubled the number of plans it administers, to 32,000.

PAY LESS TO THE IRS. In its most basic form, a 401(k) allows employees to contribute a preset amount of their salary to a pension plan -- about 6% is typical. The benefit is twofold: First, the sum is deducted from your workers' pretax income, which means they pay less income tax in April. What's more, the money goes into a tax-deferred account, meaning they pay no tax on their gains until they make a withdrawal. Employees are immediately vested for their own contributions, and their money can go into a variety of investments, including mutual funds. About three-quarters of employers match some or all of their employees' contributions, making the account even more attractive to your workers.

Employers make out pretty well, too. The rules allow you to deduct salary deferrals -- the amount workers have taken out of their salaries, plus voluntary employer contributions -- of up to 15% of your payroll on your corporate tax return. Although you can match employee contributions, you don't have to. In addition, you can set vesting schedules for your share of contributions for as short as you like or as long as five years.

The limit on employee contributions is $10,000 this year, a figure that rises each year with inflation. Employers can add enough to bring that total to 25% of compensation, or a maximum of $30,000, although the amount over 15% isn't deductible. "There are so many restrictions that the chances of bringing the total that high are pretty remote," says Mark Mershon, president of Triple Check Financial Services, a planning firm in Montrose, Calif.

In most 401(k) plans, employees direct their own investments. That's great for employers, because it sharply limits your liability if something goes wrong in the retirement portfolio. In effect, it means the employee bears the consequences of bad investing decisions instead of you. With other so-called defined-contribution plans, such as profit-sharing (which involves voluntary and variable contributions) and money-purchase (where contributions are mandatory and constant), you might be forced to make employees whole if their investment choices go sour.

Next in this two-part series: What a 401(k) really costs.

By Timothy Middleton in Short Hills, N.J.

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