I was recently quoted in an article from Fiduciary News that discussed small to medium-sized businesses (SMBs) and why they may or may not offer a 401k plan as part of their benefits package. Since many of our retirement plan clients are small to mid-size firms, this topic is of particular interest to me.
While many employees at larger companies have access to a retirement plan, smaller organizations may be more reluctant to offer one. With the increased emphasis on making sure Americans have sufficient savings to retire, it is surprising that more employees are not provided with access to a plan. We hear many reasons why an employer doesn’t offer a 401k plan such as:
- Owners are uncertain about future cash flows and don’t want to commit the financial resources for plan vendors or employer contributions.
- They don’t think employees will use the plan (this is usually an assumption and not based on a survey or employee feedback).
- Typically the owners of smaller companies are wearing multiple hats and are not willing to dedicate the time or effort to put a plan in place.
- Owners of SMBs have most of their assets tied up in the business, making them unable to maximize their own contributions to IRS limits.
- They are still small enough to qualify for a SIMPLE IRA plan or another type of lower-maintenance retirement plan.
While it is true that SMBs do not offer retirement plans at the same rate as larger companies, there is an exception for companies with smaller employee bases (usually fewer than 20 employees). Typically, these are professional services firms or medical practices with predictable cash flows that have one or two owners earning significantly more than their employees. This makes it much easier for the owners to maximize their own contributions to the IRS limits with a minimal deposit required for their employees to pass compliance testing.
Other added benefits to the owners are reduced income taxes and rewarding tenured employees through the retirement plan. If the owners want to exceed the contribution limits imposed by the IRS for the defined contribution (e.g. 401k) plan, they can also add in a cash balance or traditional defined benefit plan and save well into six figures each year.
Regardless of company size, one common denominator applies to any employer offering a retirement plan: fiduciary responsibility. Anyone involved with the decision-making for the plan is responsible for ensuring the plan is working in the best interests of the participants and for making sure the fees charged are reasonable for the services provided. This process involves an ongoing documented review of the plan expenses, investments and service providers.
Failure to properly fulfill these obligations could result in personal and professional liability for each plan fiduciary. While larger companies can dedicate one person or a team to managing its employee benefits programs, it is another potential roadblock for a smaller company as many of them lack sufficient resources to continuously monitor the plan and its vendors.
Partnering with the right vendors can go a long way in helping employers meet their obligations while maximizing the benefits associated with the retirement plan. An intuitive website allows for smoother plan operations, a consultative compliance team makes staying compliant easier, and working with a knowledgeable retirement plan advisor can help streamline communication across plan vendors, reduce employer liability, and ensure that the ongoing review of the plan’s investments, fees and services is documented.
For more information on finding a retirement service provider who operates under the fiduciary standard, download our ebook, “The Value of a Retirement Plan Advisor.”
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