Ask practically any business owner to name one of the toughest challenges they face in running their business, and most are likely to say that good employees are hard to find and even harder to keep, especially at times when the economy and the job market are on an upswing.
These days, it takes more than a competitive salary and comprehensive health insurance to attract and retain a quality work force. It takes an attractive benefits package, including a company retirement plan that will provide employees with a steady, inflation-adjusted income for living out their golden years.
Offering a 401(k) retirement plan is fine for a company's rank and file employees, as it will allow each employee to make a maximum contribution and tax deferral of $13,000 a year, $16,000 if age 50 or older, and can eventually serve as a handy supplement to their Social Security benefits.
But qualified retirement plans like 401(k)s, group insurance plans and even Social Security can discriminate against company owners and key executive employees by placing highly restrictive limits on both contributions and tax advantages on benefits for highly compensated individuals.
"Having a 401(k) is simply not enough for highly compensated employees because they can be extremely limited in the amount they can contribute each year to their retirement plans," said Barbara Williams, a Certified Financial Planner practitioner, who, along with her partner and Certified Financial Planner practitioner Gloria Foote, founded and manage Financial Focus, a Carlsbad-based financial planning firm.
"Financial experts predict that you will need 80 percent of your current income in order to maintain your standard of living when you retire," Foote added. "But with just participation in a qualified plan and Social Security benefits alone, key employees could conceivably receive as little as 30 percent of their salary at retirement. That's why this particular group of employees needs a properly designed executive benefit plan to help close this gap and assure them that they can maintain their lifestyle at retirement."
Studies show that besides health insurance, retirement income is the one benefit that employees want most. And one of the best ways to recruit, retain and reward those employees who have a decided impact on the success of the business is to offer a superior package of benefits that fulfills this desire.
These packages might include a Selective Employment Retirement Plan (SERP), deferred compensation and executive bonus plans, all of which are designed to attract and retain key employees.
They create "golden handcuffs" that tie the business and the employee together for a specified length of service and reward them for their performance.
In addition, the plans can be used to help build personal wealth for the owners by keeping personal assets away from the business. They can also mitigate discrimination against owners and key employees in terms of maximum contributions and tax advantages, and provide a tax deduction for the business in many cases.
Owners can create a new plan or supplement an existing one with benefits that may not be subject to participation and contribution limits and annual reporting.
From the key employees' perspective, the advantages of these types of plans are considerable. They are not subject to government limitations on the amount they can save for retirement, which helps close or narrow the retirement income gap. They also receive enhanced retirement benefits, can defer taxes on the income until benefit payments are received or made available and may arrange for survivor benefits upon their death.
"Many financial planning firms can put in a 401(k) as an employee benefit," explained Williams. "But we think it's far more effective to take it a step further by putting a company in a position to recruit and retain key people and reward them for the success they bring. Another element of this approach involves taking a close look at the owners' financial situation and determining an appropriate plan to help them build wealth."
Business owners who may be considering either implementing a company retirement plan for their key or rank and file employees or supplementing an existing one should keep in mind several important factors when searching for a qualified firm to establish and manage it, the partners said.
"It's important for companies considering a qualified or non-qualified retirement plan to evaluate the firm's past investment performance as well as its ability to offer a number of investment choices so that the participants can put together the proper asset allocation," Williams explained.
The firm's technological capabilities are also very important.
"It's crucial that the firm managing the plan can offer participants ease of use, which also means less hassles for the owner or employer in terms of plan administration," she said. "They have to make it easy for participants to go online, make changes to investments and obtain the information they need when they need it."
Foote added that exceptional service, particularly in the form of education, helps improve total employee participation. The greater the number of employees participating, the greater the chance that highly compensated employees will be allowed to maximize their own contributions.
Good service also means that plan managers keep coming back to the employees and their company on a periodic basis to provide plan updates and obtain feedback from participants in order to continually improve the program.
"Quality service also means working with employers to solve talent issues involving recruiting and retention by devising creative retirement plans over and above 401(k)s for their key personnel," Foote said. "It's important to look at the personalities of the company and the owners and use industry knowledge and expertise to accomplish everyone's goals, from the rank and file to the highly compensated and the owners."
Foote and Williams maintain that nonqualified retirement plans provide opportunities for unlimited savings and a greatly enhanced retirement income. Employers would be wise to consider one or more of these creative plans if they want to reward and retain their valued employees.
Barrett is head writer at Beck Ellman Heald.