The first in a series of articles about working with small-business retirement plans.
Small-business owners face multiple challenges—from making payroll to attracting and retaining the best possible talent. Today’s economic environment has compounded the challenge small-business owners have faced for many years—how to offer a competitive benefits package that includes a retirement plan for dedicated employees. With hopes of an economic recovery on the horizon and an increase in the demand for talent, it could eventually become a buyer’s market again for employees. In this scenario, small-business employees may start looking elsewhere for a strong benefits package to ensure their healthcare and retirement planning needs are being met. For financial advisers committed to the retirement plan business, this provides a unique opportunity for growth—despite the ever-changing market conditions.
There are many factors that go into developing a comprehensive retirement plan. The first step is understanding the needs of the small-business owner. Is a sole-proprietor looking to maximize his or her retirement savings? Is it a family-owned business with multiple highly-compensated employees? Would the small-business owner like to contribute to their own retirement savings while offering a plan for their employees?
Once a needs analysis is complete, the next step is educating your prospective clients about the benefits of offering a retirement plan, the types of plan designs, and how plans can help retain key employees while also supporting the client’s business goals. Retirement-centric financial advisers understand the challenges many business owners face and strive to present them with cost-efficient options.
Several common objections small-business owners have to offering a retirement plan revolve around the cost of the plan. However, there are solutions to help mitigate these concerns:
|Revenue is too uncertain or low||Many retirement plan solutions offer competitive pricing as well as tax benefits from the federal government for initiating a plan, such as a $500 per year tax credit spanning three years to cover eligible administrative costs.|
|Administrative costs||Integrating a small-business owner’s payroll and retirement plan allows the owner to devote resources to running their business.|
|Low employee interest||Implement an employee education program that can raise awareness and drive participation.|
|Match on employee contributions||Employer matching employee contributions, along with most plan fees, are tax deductible. (Subject to certain Internal Revenue Code limitations.)|
Some of the most commonly utilized plan types are:
1. 401(k): Many small-business owners ignore this option, but they are allowed to set up a 401(k) when self-employed. The 401(k) plan may be funded by the owner through deferred compensation and the business as a percentage of profit. There usually is more paperwork required than for other plan types, and set-up costs are usually a bit higher. The 401(k) plan will likely need a third-party administrator (TPA).
2. SIMPLE IRA: This plan type is very easy to create, typically has very low administrative costs and comes with no annual IRS reporting requirements.
3. New Comparability Plans: These plans are essentially profit-sharing plans set up to provide increased rewards to senior and other key employees. The most appropriate use of this type of plan is when a small business has multiple owners with similar incomes but varying ages. Keep in mind, though, this plan type does require nondiscrimination testing requirements be met.
It’s also critical to keep yourself, and your small-business owner clients, abreast of legislative and regulatory changes as well as the innovations in retirement plan design.
The next column in this series, online next month, will explore the mechanics of maintaining strong small-business retirement plans.
John Guido is the Division Vice President, Marketing for ADP Retirement Service. In this capacity, John is responsible for oversight of ADP’s product and strategic initiatives in the retirement space. Prior to joining ADP, John held senior level marketing and sales roles at Metlife and Standard and Poor’s.
ADP Broker-Dealer, Inc., ADP, Inc. and their affiliates do not offer investment, tax or legal advice, and nothing in this article is intended to be, nor should be construed as, advice or a recommendation for a particular situation. Please have your clients consult with their own adviser for such advice.