By STUART ROBERTSON
There are a lot of amazing benefits to working for a small business. Quick decision making. Being your own boss. And of course, going fishing instead of going to the office from time-to-time. But what is commonly missing is, well, the employee benefits. In fact, it's estimated that only about 15-20 percent of businesses with less than 50 employees have a retirement plan. Why the resistance?
You might think cost. This is a common myth, but it's definitely not one of the biggest roadblocks especially as retirement plan costs continue to drop. Misperceptions and just being aware of the facts are bigger issues. With this in-mind, it's time to debunk the five most common myths about small business 401(k)s:
Myth #1: As a small business, we don't have enough employees: Actually, any size business can have a 401(k), even the self-employed. Any owner-only business can qualify for a type of 401(k) often referred to as an Individual 401(k) or Solo 401(k).
Myth #2: We can't afford to offer a company match: No worries as matching is not required when offering a 401(k) plan. Not matching can reduce the amount higher earning employees including the owner can contribute to their 401(k) account (below the $16,500 2011 limit), but that's about it. Still, matching is making its way back as many larger companies are re-adding matches as the economy picks up.
Myth #3: The tax benefits just aren't that big of a deal: In reality, the tax benefits of a 401(k) can significantly improve a business owner's tax situation. There are several unique advantages that can make a real difference. Let's break them down:
Saving limits are higher versus most any other retirement tax advantaged option. In 2011, individuals can contribute up to $16,500 tax-deferred as an employee ($22,000 if 50 years of age) plus receive employer contributions up to $49,000 limit or $54,500 if you are 50 . These limits are inclusive of both employee and employer contributions.
When a small business starts its first 401(k) plan, the business can receive a $500 IRS tax credit each year for the first three years (assumes you have less than 100 employees and $1,000 or more in costs. Sorry, solo(k) plans don't qualify for this credit);
Any employer contributions to a 401(k) (match or profit share) is deductible for the business; and
Myth #4: 401(k)s are too hard to administer: Setting up a 401(k) plan is now probably easier to setup than your voice mail. How does 20 minutes of online setup and 5-10 minutes each payroll thereafter sound? Online and paper-free is not only easier, but also simpler to manage.
Myth #5: 401(k)s are just too darn expensive: Not any more. Companies can get set-up at a fraction of the cost from what they might think. Couple that with the tax credits offered by the government mentioned earlier and the tax-deferred savings that can help pad your nest egg and the plan nearly pays for itself.
Has one or several of these myths been stopping you from adding a retirement plan for your business? If so, which one(s)? If not, what is your biggest obstacle?
By Emily Brandon
Posted: February 23, 2011
Americans are increasingly making an effort to save for retirement, but they're finding it difficult to build a significant nest egg. "There are indications that many Americans are trying to meet the challenge of saving for their future," says Dallas Salisbury, president of the Employee Benefit Research Institute. However, less than half (47 percent) of current workers say they are saving enough to have a desirable standard of living in retirement, according to a new America Saves and American Savings Education Council survey conducted by Opinion Research Corp. Here's a look at why most workers aren't on track to retire comfortably.
Living beyond our means. The first step toward saving for retirement is to spend less than what you earn. But a quarter of workers say they are not saving because they spend all of their income. Most people say they are saving between 1 and 10 percent of their income (47 percent) or more than 10 percent (25 percent).
Little employer help. Only about half (54 percent) of those surveyed save for retirement at work using a 401(k) or other retirement account. Many middle class workers are not gaining pay increases, while they are being asked to increase their health insurance contributions and receiving lower retirement account contributions from their employer, says Stephen Brobeck, executive director of the Consumer Federation of America. "Compared to last year, more Americans are finding it difficult to achieve savings progress."
Not saving automatically. Even fewer workers (44 percent) save automatically outside of a workplace retirement account by making regular preauthorized transfers from their checking account to a savings or investment account. "Many people find that once they set up an automatic savings plan that puts a small portion of their income directly into a separate account, they never miss it, and the savings helps them build the future they want," says Nancy Register, director of America Saves.
Too much debt. It's even more difficult to save for the future when you are still paying off past purchases. Only about a third (37 percent) of those surveyed are completely debt free. Most Americans are working on reducing their debt (42 percent) or have debt that they are unable to reduce or that is still growing (20 percent). About two-thirds of the survey respondents own property, typically with a mortgage (42 percent). Most people with mortgage debt (75 percent) plan to pay it off before retirement.
Savings isn't a priority. Many current expenses and debts are prioritized above saving for retirement. Just over half (57 percent) of Americans say they have a specific savings goal. And only 54 percent of those surveyed know their net worth.
No emergency fund. An emergency fund of cash outside your retirement account is essential to avoid dipping into your nest egg and paying the resulting taxes and fees when you experience a sudden large expense. However, 30 percent of those surveyed say they don't have sufficient emergency savings to pay for unexpected expenses such as car repairs or a doctor visit. "You don't have to make a lot of money to have the ability to save," says James McIntire, Washington's State Treasurer. 'Saving $5 each and every week over time can help provide the financial security needed for the future.'
Spending windfalls. About half of Americans say they sometimes receive financial windfalls, including tax refunds, gifts, and bonuses. Most people who receive a cash windfall (39 percent) save at least part of it, but 10 percent generally spend it all. Catherine Smith, CEO of ING U.S. Retirement Services, says workers should save the 2 percent reduction in Social Security taxes in 2011 for retirement. "We're encouraging employees to give themselves a retirement raise by saving this extra income in their retirement plan," she says. "Even a 1 or 2 percent increase can help grow your savings account significantly over time."
By David R. Dacey, CPA, Partner, Practice Leader, WS B Employee Benefit Plan Services Group
Protecting the children's money! In listening to presentations made by the U.S. Department of Labor (DOL), protecting the interest of 401(k) plan participants is also protecting the interest of their families. One expectation from the DOL in this regard is that plan sponsors remit 401(k) participant deposits on a timely basis. How do plan sponsors meet this requirement? Let's start by reviewing the written rule by the DOL.
March 25, 2011 (PLANSPONSOR.com) The adoption of new cash balance plans had slowed to a trickle since the passage of the Pension Protection Act of 2006 (PPA'06) because of the absence of clear regulations, according to Sibson Consulting, a division of Segal.
However, employers received much of the clarity they were waiting for about the design and structure of cash balance plans when the Internal Revenue Service (IRS) issued proposed and final regulations (see IRS Corrects Hybrid DB Plan Rule), and Sibson says the hybrid appeal is worth another look in light of this legal clarity (see Bright Future Seen for Cash Balance Programs).
In a Spotlight report, Sibson says the potentially compelling reasons for employers to consider a cash balance plan are:
Financial Efficiency A traditional DC plan is the approach to follow for employers that want to "set it, and forget it" because the cost of the plan is fixed: x percent of pay. However, in a simple cash balance plan the apparent cost of the plan is x percent of payroll, but the expected economic cost of the plan can be much less. The source of this savings is the differential between the rate that a plan will credit on employee accounts (which is often the 10-year or 30-year Treasury rate) and the discount rate. Under funding and accounting rules, the discount rate is based on corporate investment grade bonds. Given recent market conditions, this differential can result in a 1 to 2 percent spread, potentially saving as much as 2% of payroll each year (or more, if emerging investment performance exceeds the rate earned on corporate bonds).
Mitigating a Significant Financial Risk Compared to a Traditional DB Plan A traditional DB plan is exposed to both an investment risk (through its assets) and an interest-rate risk (through its liabilities). When the two risks go the wrong way - assets going down while liabilities increase - plan sponsors have experienced a "perfect storm." And, while a cash balance plan is a DB plan, under a typical feature where the annual interest credit is set at a market rate (e.g., 30-year Treasuries), the interest-rate risk on the liabilities is significantly muted without needing to introduce complex interest rate hedging techniques that one would need in a traditional DB plan. The reason for this is simply that whereas lower discount rates drive up a typical DB plan's present value of future benefits (i.e., the plan's liability), lower discount rates usually reduce a typical cash balance plan's interest crediting rate, thereby offsetting the increase in the liability due to lower discount rates.
Universal Coverage If employers shift the primary retirement vehicle from a traditional DB plan to a traditional 401(k) plan, one group of employees is left out in the cold: those employees who are unable to save money in the 401(k) plan and, therefore, receive no employer match. Although typically not a substantial portion of the population, it is nevertheless a group about which the human resources department is often concerned. A cash balance plan fills this gap because, like a traditional DB plan, it covers all employees.
Balance of Risk Many employers believe that their assumption of 100% of the financial risks of the retirement program is too far to one extreme. However, a growing number of employers think that having employees assume 100% of the risks goes too far in the other direction. A cash balance plan operating in tandem with a DC plan provides a reasonable middle ground.
Benefit Design Flexibility Because a cash balance plan is a DB plan, it can be used to meet employers personnel goals in ways that are not available to DC plans. For example, they can be (although not often are) the basis for providing early retirement windows and spousal benefits.
Passing Non-Discrimination Testing Many DB plan sponsors closed their DB program to new hires in the past few years. If this has not already created non-discrimination problems, it is likely to do so in the future as the DB population ages and becomes higher paid. Redirecting a portion of current DC accruals into a cash balance feature in the DB plan (effectively allowing new participants into the DB plan) may make it easier to pass the non-discrimination test for the closed DB plan.
Advantages of Cash Balance for Employees
In its Spotlight report, Sibson Consulting said from the employees' point of view, there are two main advantages of a cash balance plan:
Preservation of Investment Principal Cash balance plans typically provide a feature that DC plans do not provide under the commonly elected investment options: account values that can only increase from year to year. Essentially, cash balance plans act like stable-value funds providing a dependable floor of protection. Further, although the interest credit in a cash balance plan might seem conservative compared to traditional DC investments, participants could compensate for this conservatism by allocating a larger portion of their DC accumulation to equities.
Longevity Protection Surveys have shown that one of the two major fears of employees who are about to retire is outliving their money. (The other is a medical catastrophe that wipes out savings.) Because a cash balance plan is a DB plan, it must offer the option of receiving a lifetime payout rather than a lump sum. To some extent, this also serves as a floor of protection against outliving one's money.
BOSTON (TheStreet) -- If you've learned the many advantages of a Roth IRA and the importance of saving, even during these economically challenging times, it's worth hearing about a lesser-known plan: the solo 401(k), possibly the best way for a young business owner or self-employed person to save for retirement.
With the job market weak over the past couple of years, many of you may have chosen to start your own business or become self-employed. If so, the solo 401(k), also known as the individual 401(k), is a plan worth looking into if your goal is to maximize your retirement savings.
If you have a sole proprietorship, partnership, LLC or corporation, you would qualify for a solo 401(k) as long as you have with no employees other than yourself or a spouse. For a young married couple, this is a tremendous advantage, and the potential for retirement savings is significant.
The biggest advantage of the solo 401(k) is the contribution limits, which are generally much higher than other qualified retirement plans, such as a Simple IRA or SEP IRA, due to the way the contribution amount is calculated. Similar to a regular 401(k), you can elect to defer up to $16,500 of your pretax income to the plan ($22,000 if you are 50 or older). In addition, as the employer of the company, you can make a profit-sharing contribution based upon a percentage of your earnings, for a total maximum contribution of $49,000 annually (or $54,500 if age 50 or older).
Let's say you are a sole owner of an incorporated business with net earnings of $25,000 and self-employment income of $23,249. In this case, you would be able defer the maximum of $16,500 to a solo 401(k). You also would be able to make a profit-sharing contribution of up to 20% of your self-employment income, or $4,650. The result would be a total annual contribution of $21,150 for retirement savings. Compare this with what you'd be able to defer with other retirement plans. Using the same scenario, you would be able to contribute only $12,177 to a Simple IRA, $4,650 to a SEP and only $2,420 to a defined benefit plan.
Certainly, for leaner years when you might need the additional cash, you likely will not contribute the maximum allowed and, under this plan, may elect the contribution amount each year. Solo 401(k) plans also usually permit loans, generally up to a maximum of $50,000 -- an attractive feature for a young person or couple wanting to start saving for retirement but preferring to keep some funds available for emergency use. In addition to these benefits, solo 401(k) plans are fairly easy and cost-effective to set up and administer through a provider, such as Vanguard and Fidelity.
Bottom line: For a self-employed professional or individual business owner, it's worth considering a solo 401(k)