Many smaller companies experience difficulty offering some of the perks that larger companies do in order to maintain the loyalty, motivation and performance of key employees. But one area where they can find the playing field more level and a bit easier to compete is with employee retirement plans such as 401(k)s.
In the simplest terms, a 401(k) plan, named for section 401(k) of the Internal Revenue Code, permits employees of qualified companies to save for their retirement by setting aside tax deferred funds with each paycheck. They are the most popular of retirement plans because of their reasonably low cost to employers and their value to employees as a coveted benefit. Today, there are about 50 million Americans who have a combined total of $1.8 trillion invested in 401(k) plans, according to the ProfitSharing/401k Council of America (PSCA).
"The fact that a company will even consider establishing a 401(k) plan indicates it is serious about attracting and retaining top-notch employees by helping them plan for their retirement," explained Gloria Foote, who, along with co-principal and partner Barbara Williams, are certified financial planner practitioners for Carlsbad-based Financial Focus.
"Fewer and fewer employees are counting on Social Security alone to provide for them in their retirement years, so they are interested in retirement planning alternatives," Foote added. "A 401(k) plan can go a long way to keep employees satisfied and loyal, and that's usually always good for business performance."
Foote says that most small businesses find the most cost-effective way to establish and maintain a 401(k) plan is to use the services of an outside professional rather than taking on this formidable chore themselves. Handling the plan's myriad administrative details is practically a full-time job and will consume time and energies better spent on running their business.
While difficult to pinpoint cost due to the many variables involved in each individual circumstance, setting up a 401(k) can run anywhere from $500 to $5,000, depending upon the number of employees and assets under management, with additional per participant charges from $10 to $150. These numbers include set up, administrative, investment management and communication fees.
Employers will have a few important decisions to make when establishing their company plan -- choosing the investment options available to employees and deciding whether or not to match employee contributions.
"We recommend choosing a full-service provider, which offers a 'one-stop' solution for managing the plan's range of administrative services and investments," Williams said. "It's very important that the plan provider you choose offer a diverse range of investment and asset allocation funds that have different risk and return characteristics. By diversifying contributions employees make into funds with varying levels of risk and return, employees minimize the overall risk to their portfolios."
Though not legally obligated, many companies match employee contributions either fully or partially. Some don't match at all.
"It's far wiser to offer no match initially than it is to offer one and then take it away later once they've realized they can't afford to do so," Foote said.
The standard match for companies is 50 percent, up to 6 percent of an employee's salary. That means for every dollar an employee contributes, up to 6 percent of their pay, the company contributes 50 cents. That employer match increases the employee's returns by 50 percent.
Foote and Williams say companies considering a 401(k) will also want the provider to offer the capability of online access so that employees can manage as many of the administrative details as possible themselves rather than placing the burden on themselves or the provider.
Employees should have daily account access and the ability to make online changes, transfers or transactions. This will save substantial time related to education and administrative functions.
In order for the plan to really take hold though, the partners say you need a professional who can conduct a highly charged and informative orientation meeting.
"The idea is to create excitement about the plan and encourage as many employees as possible to enroll in order to make it worth everyone's while," Foote said. "The plan's representative should also hold annual meetings with plan participants as a way of maintaining their enthusiasm and continuing the plan's momentum."
When shopping around for a qualified provider, consider their experience, how long they've been in business and who their clients are. Make certain they can provide continuous service through direct contact or a Web site, and be sure they are capable of providing consistent and timely reporting and have a proven record of investment success.
The prospect of setting up a 401(k) may seem daunting at first. Realizing that it is a viable method of attracting and retaining quality employees will make it an easier pill to swallow.
For more information about Financial Focus call (760) 431-3040 or visit www.fifo1.com.
Barrett is a staff writer at Beck Ellman Heald agency