Earlier this month a key bipartisan committee of the House of Representatives unanimously - yes, unanimously - passed a bill that would make big changes to 401(k) retirement plans. The bill is particularly aimed at small businesses.
Among other things, the proposed legislation would allow small businesses to join together to better negotiate fees and options for the retirement plans they offer their employees. It would also create a tax credit for companies that automatically enroll their employees in their retirement plans while also offering easier access for part-time workers to participate.
There’s a big reason behind this push. A recent survey by Bankrate.com showed that one in five working Americans was not saving anything for retirement. Anything! And those who were saving weren’t saving enough. Just 28 percent said they were putting away 6 percent to 10 percent of their income, a number that falls short of most experts’ recommendations.
Businesses, particularly small companies, which provide more than half the jobs in this country, could be doing more to help alleviate this problem. But, unfortunately, they’re not. A 2017 survey from the Pew Charitable Trusts found that only 53 percent of small and mid-sized companies offered a retirement plan.
So why don’t more small businesses do this? It depends on the business.
“We are a very small business, with only part-time employees, other than myself,” Scott Hughes, the owner of Pennsauken-based manufacturer EA Consumables, told me. “If my current company required a different level of employee, in which we would need such a benefit to be able to compete in the employment market, we would reconsider our situation. However, that is not currently foreseen.”
Bob Rosini, the owner of Jeb Plastics - a two-person distributor in Wilmington – admits that he doesn’t have a retirement plan, either. It’s not because he doesn’t see the value. It’s mainly because of other priorities. “I purchased this business eight years ago,” he said. “And any profits above salaries went to paying off the bank loan that I had taken out to purchase the business. I would definitely consider a 401(k) plan in the future ... as long as the funds are available.”
Hughes’ and Rosini’s situations are not unlike many small businesses across the country. Which is why Congress is targeting them with its new bill. But we shouldn’t wait for this to become law. That’s because if you’re running a small business today – regardless of size – there are at least three very strong reasons why having a 401(k) plan can benefit both you and your employees.
One, obviously, is that it provides your employees with the ability to save for their retirement and do so using pre-tax dollars. Unfortunately, many employees don’t participate in their company’s 401(k) plans and that’s mainly due to lack of education or incentives – such as a match - from the employer. I’ve seen this oftentimes come back to bite a number of my clients. They think they’re saving money by not providing or contributing to a retirement plan. But think about it: If an older, loyal employee hasn’t saved enough for retirement, who will he or she come back to for help? And how can you say no to offering some assistance?
Second, the more your employees put away, the more you can put away. The 401(k) rules don’t allow business owners and their family members to save the maximum (currently $19,000) a year for themselves unless their employees are also saving a proportionate amount. In other words, it can’t be “discriminatory.” So the more you can educate and persuade your employees to participate, the more benefit you’ll also receive.
Finally, as health-care costs have come down over the last few years, retirement plans have been growing in popularity with employees. A study last year from employee benefits firm Willis Towers Watson found that 66 percent of employees were willing to have more money taken from their paychecks to support a better retirement plan as opposed to health-care benefits. Offering a good retirement plan can be a valuable weapon in these days of low unemployment and rising competition for skilled talent, and provide tax advantages.
Small-business owners have a perception that setting up a 401(k) plan is an administrative challenge and expensive. But that’s not the case. “The reality is that they are not overly burdensome, especially when comparing costs to the employee goodwill and tax benefits generated by establishing one,” said Michael Sharp, a Horsham financial planner. “With the help of technology and third-party administrators, much of the work can be streamlined.”
Many banks and big financial-services companies offer “cookie-cutter” plans for very low or even no cost to set up. They’ll provide their clients with the educational materials needed to help employees make investment choices and understand the benefits of saving for retirement. They usually offer a choice of funds that keep the plan risk-balanced, guidance to help you comply with all fiduciary rules, and administrative services to collect amounts contributed, perform those discrimination tests mentioned above, and file annual tax returns.
“I believe retirement plans are extremely important for small-business owners,” Sharp says. He’s right. And maybe the proposed congressional legislation will encourage more business owners to start them. But that doesn’t mean you have to wait, regardless of how small your business is.
— Gene Marks is a certified public accountant and the owner of the Marks Group, a technology and financial management consulting firm in Bala Cynwyd.