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Online 401(K) Plans Warrant Consideratoin By Small Companies

Written By: Mark Gutrich
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Since you are reading this article on Resource Nation, you’re  most likely a small business leader who is comfortable looking to the Internet for business assistance. Retirement, and more specifically retirement plans for you and your employees is one aspect of your business in which the Internet can play a significant and beneficial role.

If you manage a small business without an organized retirement plan, you’re not alone. There are an estimated 6.3 billion small companies with between a few and 500 employees in the U.S. in the same situation. Yet there is a growing realization that you and your employees must accept  sole responsibility for building up your own retirement savings.  According to several recent surveys there is a lot of room for improvement on the part of owners and workers alike.

A Wells Fargo/Gallup Small Business Index survey conducted earlier this year revealed that more than 40 percent of small business owners are worried about having enough money to retire. A whopping 90 percent of them no longer plan a traditional “stop working” retirement - but wills choose to simply reduce their work hours. Maybe you are among the 30 percent in a survey conducted by the ShareBuilder group who hope to generate a substantial share of your retirement income by selling your company. Your success depends on whether there are parties with the interest and financing to buy it and how much they are willing to pay.

Your employees are in the same bind. The Center for Retirement Research says more than 60 percent of workers may not be able to maintain their standard of living in retirement – due to their lack of retirement savings. More than half of all working Americans have less than $50,000 saved for retirement and 40 percent of GenXers (age 27-42) have saved less than $25,000 - with another 20 percent reporting no savings at all. So as the adage goes, “failure to plan is a plan to fail.”

Are you one of the small business owners who have dismissed 401 (k) plans because you feared they would be too costly, too difficult to administer and would saddle you with unwanted liability? The online resolution to the cost and administrative problem is already at hand and recent legislation has addressed potential liabilities.

For several years now, a growing number of small businesses have utilized online 401 (k) plans to provide retirement funding opportunities for their owners and employees.  These plans have been created by retirement plan providers who recognized the power of the Internet to address the concerns regarding out of pocket expenses as well as soft costs such as administration. These new providers have developed proprietary, web-based software that they use to create online plans for small businesses.  Via the Internet, they perform all of the required set-up, administration, calculation, reporting and record keeping services. As a result they ensure that your plan stays in full compliance with all applicable laws rules and regulations covering 401 (k) plans.  Because a single online provider can administer plans for a large number of companies, the initial set up costs and annual administration fees are very low. A full featured online 401(k) plan can be offered for as little as $1,000/year, with no required employer contributions. 

The liability issues worrying many small companies were effectively removed by the Pension Protection Act passed in 2006 (PPA) which provided a variety of “safe harbors” designed to limit an employer’s potential liability related to plan design, allowable contributions and investment options.

Employees have responded very well to 401 (k) plans.  A Retirement Made Simple study revealed that 98 percent of respondents enrolled in a 401(k) plan are glad their companies offered it.  An AARP survey showed that retirement plans are among the top ten reasons why people chose their employer. According to a separate 2007 Fidelity study, half of the people working for a company with a retirement plan would not move to a company that does not offer one. Conversely, 40 percent of the people working for a company without a plan indicated they would leave for a company that did provide one.

Writing about retirement plans today without acknowledging the financial and employment concerns the country is facing would be imprudent.  Stories abound about the diminishing value of many people’s retirement accounts and a small number of companies that have opted to reduce or eliminate their corporate contributions at the present time. People who have 401 (k) plans are certainly among those we read about that are being laid off. When the markets and employment levels are consistently going up, it is easier to see that tax-deferred growth can pay enormous “dividends.”  But, even in a flat market, the inherent tax advantages of qualified retirement plans still provide a tremendous incentive for the use of such tax preferred vehicles and as noted above, the need to rely on organized retirement tools is never going away. Even 401 (k) plan participants who are laid off still have those retirement funds.

A small company establishing an online plan will quickly see the advantages of doing so. It can be set up in minutes using fill-in-the-blank templates. An employer representative can enter company information - plus specific provisions regarding employer and employee contribution levels, vesting schedules and investment options to be offered. Equally user-friendly software is used to enter employee census information, track employee eligibility, enroll employees and process scheduled contributions. Most online providers also have staff available to provide assistance by telephone or web chat if needed to guide businesses through this process

The majority of online providers do not actually market their plans directly to businesses. Their primary role is to develop private-labeled online products for other businesses that already serve the small company marketplace. These include as banks, credit unions, financial advisory firms, insurance companies, and even trade associations.  Because participant contributions are deducted from each paycheck, an increasing number of payroll service companies are now offering online 401k plans that are integrated into their payroll services.

Installing a 401 (k) plan is not the final step in getting your employees to take advantage of it. Many of them may not be familiar with such plans or how to use them to build retirement wealth. In fact the  U.S. Department of Labor reports that one third of all eligible employees haven’t joined their employers’ 401(k) plans. A recent Watson Wyatt survey showed that half of all employees of firms with 401(k) plans who earned between $10,000 and $25,000 do not participate.

There are steps you can take to increase employee participation. One option is to go ahead and enroll all employees in the plan  through an automatic enrollment election.  This is encouraged by the recent PPA legislation and with an online plan it can be accomplished quickly by uploading a standard employee census through a web interface, and setting up a default participation level for all employees. The positive results of this have been shown in the Retirement Survey Project which reports that companies with automatic enrollment have 80 to 90 percent participation compared to less than 70% for elective enrollment plans. 

Don’t fret about employees who still may not want to take part. Under the PPA’s automatic enrollment rules, they have a 90-day period after they have been enrolled to withdraw from the plan with absolutely no tax implications.  Online 401 (k) online providers are uniquely positioned to provide easy automatic enrollment solutions as well as the standard elective enrollment.
No matter whether employees electively join their 401(k) plan or are automatically enrolled, they can use the Internet or a telephone voice response system to set up their accounts and make their initial and ongoing investment selections.  Once conventional 401 (k) plans are installed, employees may need to submit a request to someone within the company to make or change an investment. Those in online plans have immediate 24/7 online access to review their accounts and make investment changes as they wish.

Success in building a sufficient retirement nest egg means you and your employees should increase your 401(k) contributions every year. To accomplish this, the PPA  allows you to create what is called a Qualified Automatic Contribution Arrangement (QACA) through which every participant’s deferral rates are automatically increased each year according to a schedule determined  when the plan is set up. Online plan providers use their software to automatically calculate these deferrals every year, and implement the scheduled changes for every employee. 

Your employees are probably very good at their jobs but that does not mean they have sufficient investment experience to manage the investments in their 401 (k) plan. As a matter of fact, The Scarborough Group found in a 2006 survey that 90 percent of 401 (k) plan  participants interviewed were categorized as naive to some extent about investing. A spectrum group survey shows that more than 40 percent of them primarily rely on family and friends for investment advice. The PPA created another safe harbor that allows an employer to assist them by appointing a financial professional to serve as a Fiduciary Advisor to meet with participants. These advisors can explain the plan, the investment options offered and how each employee might structure their individual portfolios to meet their retirement objectives. Spectrum reports that nearly half of those meeting with an advisor were very satisfied with the experience.   

You may also find that a surprising number of participants avoid making their own investment decisions and instead rely on you to do it for them. In the past you might have considered this an unwanted responsibility or even feared that it created some form of liability.  But thanks to the PPA, this is no longer the case. Companies can place its employees’ contributions in any investment designated as a Qualified Default Investment Alternative (QDIA), and be provided yet another safe harbor to remove the potential for legal liability.

So as a small business owner, it makes sense for your own and your employees long term financial security to investigate how an online 401 (k) plan might better prepare you for that day when retirement arrives. But regardless of whether you choose a 401 (k) or other type of retirement plan, the most important thing is that you start to plan for retirement now and enable your employees to do the same. 

Mark Gutrich is president of ePlan Services, a Denver-based company that develops Internet-based 401 (k) plans for financial institutions and their small business clients

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