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New plans, software cut the cost
and complexity of 401(k) plans

401(k)s for small businessesThe 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 need.

With all those features, it's no wonder the 401(k) has become a powerful tool for business owners in recruiting and retaining workers.

Luring blue-chip employees
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.

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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 it."

The 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 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 of technology."

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.

The 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 Fidelity 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.

'This 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."

Tiptoeing 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 it.

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 a comparison 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
To comment on this story, please e-mail the editors


-- Posted: Feb. 25, 2000

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