How Small Businesses Can Help Employees Retire

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The company directory includes more than one name. So now it's time to think about the kind of benefits to offer employees.

Experts say one perk not to skimp on is a retirement-savings plan.

Here's how to do it without short-changing your own retirement:

Be a good employer

A retirement plan is less expensive than health care coverage and can engender a lot of good will among employees. "The responsibility for seeing that the American public retires with some sense of security is on the shoulders of small businesses," says Joseph Birkofer, CFP, a principal at Legacy Asset Management in Houston.

"The fact is, the average employee saves only $3,000 a year. You can't retire on $3,000 a year. People don't realize they need about $1 million to retire." While you can't retire people on any of these plans, you can certainly make them think twice about saving for the future. For example, where else can someone with only $5,000 in retirement savings get some expert advice? To offset the plan's costs, build the expense into the price of your products or services.

Beat the competition

If altruism doesn't appeal to you, how about your bank account? Experts say that a retirement-savings plan will help in the recruitment and retention of valued employees. One company recently hired Birkofer to set up a plan similar to that of a big oil company because its aim was to hire away those employees. "If you are in the game, you have to have a retirement plan," he says.

Keep it simple

If you can afford it, offer a pension plan. But for many small businesses, a 401(k) "is the only game in town," says Birkofer. Still, don't be afraid to ask if your business qualifies for other products like a super 401(k) (a mix of retirement and profit sharing), a Roth IRA (tax-free money when cashed out), even a solo IRA where your employees are treated as independent contractors, says Todd Rustman, CFA, CFP, president and wealth manager at GR Capital Asset Management LLC.

To get a plan started, you can talk to a no-load provider like Fidelity, Oppenheimer or John Hancock, because they have an array of mutual funds to choose from. The administrative cost can be about $2,500 a year. But if your account isn't big enough to warrant someone dedicated to your company, you may need to hire an independent adviser. His or her job is to field employee questions and be your advocate at the no-load provider. Such an adviser can charge a flat fee of $150 to $500 an hour, or up to 2% of the assets.

To match or not to match

Experts say that since a 401(k) or IRA plan has to be offered to everyone, matching 3% of an employee's compensation for all staff members will save on legal headaches as well as paperwork. According to the 2006 Pension Protection Act, this type of safe-harbor contribution will exempt you from nondiscrimination testing. Another plus: Deductions can automatically be taken out of an employee's paycheck, a task you can turn over to your payroll company.

Helps the bottom line

Although it might seem like a lot of money out of your own pocket, the after-tax situation for a retirement-savings plan is the same as not spending the money and paying more to Uncle Sam, says Birkofer. So who would you rather make happy: those you work with every day or the federal government?

Don't drop the ball

While getting employees to sign up for a retirement savings plan is half the battle, getting them to feel responsible for their own retirement is another matter. But you can make it a part of the corporate culture by talking it up, holding annual meetings about retirement, and encouraging employees to reassess their investment choices at least once a year as the market tends to change.

More importantly, offer investment choices that are easy to understand. Instead of giving them brochures of 12 funds in the plan, for example, explain how one fund may be better-suited for someone in her 20s who can afford to wait out fluctuations in the market, while another fund is more appropriate for someone in her 50s with an eye toward retirement.

Lastly, teach your employees to view investing in the company 401(k) as just one of several things they should do to fund their own retirement. Too often, says Thomas Mackell, chairman of the board of directors for the Federal Reserve Bank in Richmond, Va., people borrow from their 401(k) to pay everyday expenses.

"I have visions of elderly people living under bridges," says Mackell, who also is author When The Good Pensions Go Away: Why America Needs a New Deal for Pension and Health Care Reform (Wiley).

"Once they've cashed it all out, they are not going to have enough to be able to retire," Mackell says. "I am incensed about the situation."

Mackell advocates a cabinet-level post devoted to long-term demographics and their impact on society and the economy. He also wants people to become more educated about their retirement options and push for reform, in which 401(k)s are not "the only game in town."


 

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