Choosing a retirement plan for your small business can be intimidating, requiring you to choose an IRS structure, an administrating recordkeeper, and investment options.
Choosing an IRS structure is the first step, and you likely already have one selected. If not, the IRS provides an introductory pamphlet. If the pamphlet seems overwhelming, just be aware that while as much as 70 percent of employer-sponsored retirement moneys are in 401(k) plans, 401(k) plans can be burdensome for small businesses. Consider starting with either the Simplified Employee Pension Plan (SEP) or the SIMPLE IRA. For somewhat more complex but somewhat more flexible options, you might also consider the SIMPLE 401(k) and the Roth 401(k).
Sometimes choosing an IRS structure distracts small businesses from considering the other important considerations, sometimes with disastrous effect. Even the worst tax plan can be beneficial if it’s administered and invested well. Even the best tax plan can be nearly worthless if it’s administered or invested poorly.
These considerations should be made during the second step, choosing a provider and recordkeeper. Your provider is the one who sells you the plan, and their recordkeeper is the one who manages it. Knowing the name of your provider’s recordkeeper is essential. Here is a look at the largest recordkeepers.
The third step is to compare the complete recordkeeping packages offered by providers. The remainder of this article considers five essentials to consider when conducting your research.
The number one most prevalent problem with retirement plans is excessive fees. Fees can take the form of middleman reseller fees, provider administration fees, recordkeeping management fees, investment load fees, investment expense ratios, etc. For a good plan, look for a total fee percentage of no higher than 1 percent.
The importance of low fees is difficult to overstate. Although the US stock market has increased at a rate of 7 percent to 9 percent, the average rate of return of most investors is closer to 2 percent. At that rate, your employees’ investments will only double every 36 years, making it difficult to prepare for retirement. That difference is largely because of excessive fees.
Quality of Service
Not all of that difference is from excessive fees, and poor investing accounts for the rest. Much of bad investing happens because untrained investors buy when stocks are at all-time highs and sell when stocks are at all-time lows. The provider you select can discourage that kind of investing with good education, guidance, and advice.
Since many employees will be temporary, good education, guidance, and advice may affect their lifelong retirement success more than any other factor. Good education will stay with your (former) employees, shaping their investments for years after they have resigned or you have fired them.
Whether your employees need that kind of education or are more inclined to sensibly invest their money and forget about it, they still need to make a smart fund selection upfront. Even more important than good advice, good investment options must exist. And good investment options must be easy to find.
Since your employees are unlikely to be qualified in investment analysis, you have a responsibility to ensure that the recommended options include sensible asset allocation and run parallel to standard indices. Your employees need to be able to find these options easily. They also need open architecture that allows them to transfer to another provider.
Much of your employees’ financial future depends on your selected provider, and failure of your provider to look out for their best interest can cause severe hardship in your employees’ lives. Since your employees lack both training and power, they are a vulnerable group. Ensuring that your employees are not taken advantage of may be your most important duty.
To ensure fiduciary integrity, you may be inclined to simply sign on with a big brand, but big brands may trust that their brand is enough to earn trust while providing plans with high fees, poor investment management, and poor service. Another problem area is all-inclusive human resources solutions that distract or discourage employers from analyzing the underlying retirement plan. Most importantly, resist any temptation to select a plan that benefits you instead of your employees. That includes any plan that includes a “revenue sharing” kickback to your company or is chosen as a way trade favors.
IRS audits can be costly in terms of time, hassle, and potential fines. Your provider should provide support in the eventuality of an audit, and should have a good track record in dealing with past audits. Ask about history of compliance issues, especially compliance issues as a result of the providers’ products or lack of products. Loan products get special attention from the IRS, so examine those closely.
Choosing an appropriate company retirement plan is a decision that will affect your employees’ future, your recruiting ability, and your reputation. If you do not have a qualified financial officer on staff, consider outsourcing to a company with experience. That may means a temporary CFO, part-time CFO, or complete outsourced CFO. The cost is low, and the benefits are high.
Please contact us with any questions.