New plans, software cut the cost
and complexity of 401(k) plans
401(k) profit-sharing retirement plan -- once the bait that major
corporations dangled to catch and keep their most valuable employees
-- is finding its way into smaller businesses, thanks to technological
advances and sweeping changes in America's job pool.
The 401(k) combines a profit-sharing employer
match with a salary-reducing tax shelter. Employees may defer 25
percent of total earnings, up to $10,500 annually, while enjoying
aggregate employer contributions of up to 15 percent annually. Employees
direct their own investments, they may borrow against their 401(k)
balances or they may withdraw them in cases of hardship or medical
With all those features, it's no wonder the
401(k) has become a powerful tool for business owners in recruiting
and retaining workers.
Until recently, however, the cost and complexities of administering
401(k)s put them beyond the reach of most small businesses. Laden
with a Chinese menu of rules and regulations, even the simplest
401(k) could easily cost $7,500 and up per year to administer.
But that is changing, thanks in part to this
sign of the times: "Help Wanted."
Rock-bottom unemployment rates in recent years,
particularly in high-tech industries, have forced companies of all
sizes to sweeten their benefits packages to attract and retain the
best and brightest in an increasingly competitive job market.
"You can't run a company of any size without
committed workers," says David Wray, president of the Profit
Sharing/401(k) Council of America, a Chicago-based advocacy
group. "The real question is, what does it take to attract and retain
a committed work force? In some cases, a company will have no choice
but to put in a 401(k) program. The employees are going to demand
new workplace order
Employees demanding it? You heard right. Thanks in no
small measure to the Internet, employees are calling more and more
of the shots when it comes to where they'll hang their W-4.
"Twenty years ago, if I wanted a job, I was
very limited in getting my availability known to the right people,"
Wray explains. "Now, I take my resume and throw it on Monster.com
and it can be seen everywhere in the United States. The employees
can make their availability much more widely known immediately,
and they have much more information with which to compare benefit
packages. They're empowered like they've never been before because
Like quality health care, a pension plan has
been something that big businesses offered and small businesses
didn't. At companies with fewer than 25 employees, only 20 percent
of the workers were offered a plan and just 15 percent participated,
according to the 1999
Small Employer Retirement Survey conducted by the Employee
Benefit Research Institute. By contrast, at companies with 100
or more workers, 85 percent are offered some form of retirement
plan and two-thirds actually participate.
first online 401(k)
But now, the Internet and simpler new plans can help small business
owners close that gap.
Financial giant Fidelity Investments launched
the first Internet e401(k) last summer. For a flat fee of $1,750,
plus $20 per participant and a one-time setup fee of $750, a small
company can design a plan that includes a company match, vesting
schedules and a menu of 35 Fidelity mutual fund investment options.
Online services help the employer administer the plan, issue record-keeping
reports and even educate participants on how to plan for their retirement.
"Small business is a very under-served segment
of the marketplace," says Bill Carey, executive vice president of
Institutional Retirement Services Co. "When plans were available,
they tend not to be of the quality that larger companies have. But
in today's environment, particularly in high-tech companies, in
order to attract and retain employees, they have no choice but to
offer a plan."
A business with 25 employees would be looking
at a first-year fee of $3,500 (including $500 for compliance testing),
then $2,750 per year (including one annual compliance test), verses
$7,500 and up for an administered plan.
isn't brain surgery!'
Jim Gilbert, for one, thinks that price is still outrageous.
"I've been in the 401(k) business 15 years and
it has always been very obvious to me that the industry, to its
own benefit, has overcomplicated the whole 401(k) experience for
the end user," he says. "This isn't brain surgery!"
Last summer, Gilbert launched an Internet solution
of his own, 401(k) Easy,
a software program that allows small businesses to set up and administer
their own 401(k) plans for less than $1,000. The software can be
downloaded from the Web site for a test drive at no cost. While
Gilbert admits, "This is not a Ferrari 401(k); this is a Volkswagen,"
it does give small business affordable access to the Rolls-Royce
of pension plans.
"Eighty percent of small businesses in the United
States do not have a 401(k), and the two main reasons are cost and
perceived complexity," he says. "Running a 401(k) is no more complicated
than many other things that business people do to run their small
business, such as payroll, doing their taxes with TurboTax or their
books with QuickBooks."
One satisfied test driver is John Garrison,
managing shareholder at Collins, Butler & Co. accountants in
Enid, Okla. Garrison had jerry-built his own 401(k) administration
system using Excel software to manage the plan for his 24 co-workers
when he surfed upon 401(k) Easy one day. He called Gilbert immediately
and set up a plan for less than $1,000.
"We weren't even big enough for most mutual
fund companies to even take us," Garrison recalls. "They were all
$5,000 to $7,500 per year in administration, so there is a hard
savings of $6,000 a year. The biggest savings will be my time. I
cut my time from five or six hours a month down to an hour a month,
so I'll get back four or five billable hours at $125 an hour.
"Plus, in Enid, our market is typically mom-and-pop
companies of 10 to 100 employees. Now I have something I can recommend
to them as a reasonably priced way to administer a 401(k) plan."
into your first 401(k)
Of course, cost and complexity aren't the only reasons that small
businesses have been hesitant to embrace 401(k)s. In some industries,
turnover is so high that companies cannot meet participation minimums.
For others, even a $2,500 plan wouldn't be feasible, especially
when you add to that the time of a senior manager to administer
David Wray adds, "A company may have good prospects
but very uneven cash flow to where they can't really commit to a
match because they may not have the money when the match is due.
They might do better to go with simple profit sharing."
To help employers determine if a 401(k) plan
is right for their company, the U.S. Department of Labor's Pension
and Welfare Benefits Administration (PWBA) last summer issued two
pamphlets, "401(k) Plan Fee Disclosure Form" and "A
Look at 401(k) Fees for Employers." The PWBA Web site also includes
of all retirement plans.
They're a good place to start tiptoeing into
your first 401(k).
Jay MacDonald is a contributing
editor based in Florida
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-- Posted: Feb. 25, 2000