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Employee Benefits
Small Business Employee Retirement Plans
By John Burke
President, Starboard Asset Management, Inc.
Today's tight labor market on the Treasure Coast has small
business owners looking for an edge in the competition for top talent. A
401(k) plan can provide that lure, but many companies have shied away
from this popular retirement savings vehicle because of high costs and
liability concerns.
If you are one of these small business leaders, you now can construct a
unique low-cost 401(k) plan that also provides professional investment
advice options for employees.
Employers looking to start a plan, and those with existing plans, often
have a misperception that a 401(k) is expensive and burdensome. In
reality, if constructed properly, the plan can be less expensive than a
company-sponsored Savings Incentive Match Plan for Employees IRA.
There are a number of advantages to 401(k) plans:
Owners and employees can put away 50 percent more retirement money each
year in a 401(k) than in a SIMPLE IRA.
The federal government allows small businesses with fewer than 100
employees to take a tax credit in the first three years of the plan to
defray startup cost.
By designing an "open" plan, independent of an insurance or mutual-fund
company, your employees will not be locked into a proprietary set of
funds or investment options dictated by those companies. These "closed"
plans often are loaded with conflicts of interest and fees from 2 to 4
percent. This excessive cost eats into plan assets and often is the
reason for the majority of funds under-performing the leading stock
indexes.
Your open plan should have an independent record keeper, allowing you
and your advisor to choose the best and lowest cost investment options.
You can avoid being captive in a plan with one or two poorly performing
mutual fund families.
To hold down costs in your plan, consider a customized low-cost 401(k)
plan, which can include a diversified stable of both low-cost index
funds and exchange traded funds, which have exploded in popularity
because of their simple structure.
Index funds mirror a stock or bond index, like the Standard & Poor's
500. They are attractive investments because fees and expenses are very
low. In contrast, 80 percent of active fund managers historically
under-perform the S&P 500.
Exchange Traded Funds, or ETFs, are similar to index funds in several
ways. They consist of a portfolio of securities designed to track an
index or sector, are diversified and have very low costs. In contrast to
index funds, priced at close of trading, ETFs trade all day like a
stock.
Employers also can get help in limiting the fiduciary liability of
having a 401(k). Many business owners fear that employees will sue if
their accounts fare poorly and fail to produce sufficient funds for
retirement.
The solution: prudent monitoring of plan assets by an independent
advisor who can construct a cost-effective plan and help employees with
investment decisions. This creates a shared liability between the
business and a trusted third-party advisor. It pays to use an
independent registered investment advisor to prevent any conflicts of
interest, such as those between advisors affiliated with brokerage firms
and 401(k) plan administrators.
Employees usually are very receptive to having a professional manager
oversee their investment options. Most employees are not financial
experts and often are intimidated by the prospect of handling retirement
assets. This can create either paralysis, causing employees to stay with
losing investments much too long, or market-timing attempts, often way
off the mark.
An advisor can bring needed discipline and risk-management skills to
employees, lessening their anxiety. This arrangement combines the best
of the pension and 401(k) plans. The advisor can be paid directly by the
company (outside of plan assets), leaving index fund or ETF expenses as
the only cost to employees.
The advisor should work on a fee-only basis. That person must disclose,
in writing, the fee for managing risk and portfolio costs. This
straightforward approach prevents conflicts of interest that have become
so prevalent in the current 401(k) environment and on Wall Street in
general.
Retirement Plan Pre-Tax Contribution Limits
| Year |
SIMPLE IRA |
Traditional 401(k) |
| 2004 |
$9,000 |
$13,000 |
| 2005 |
$10,000 |
$14,000 |
| 2006 |
$10,000 |
$15,000 |
Source: Investopedia.com
Estimated total annual cost (with % of assets) of small business retirement options
(assumes retirement plan with $1.5 million in assets and 20 employees)
Professionally Managed
Low Cost 401k |
SIMPLE IRA
(with average mutual fund expense ratio) |
Insurance/Annuity 401k |
Mutual Fund Sponsored 401k |
| $14,075 (0.94%) |
$23,000 (1.53%) |
$33,894 (2.25%) |
$34,500 (2.3%) |
Sources: Employee Fiduciary (employeefiduciary.com) and Hewitt Associates
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