Retirement plans are fast becoming an important tool for small businesses to attract and retain talent. Surprising even some experts, it has joined the ranks of health care as a major employee demand, according to a new survey. More than ever, small business owners need financial advisors to help them find their way through the thicket of plans and regulations.
According to the Bank of America Merrill Lynch Workplace Benefits Report released in June, 66% of small business owners now say retirement benefits are important to attracting new talent, and 58% say they are important to driving loyalty. "A few years ago we'd have small business owners who wouldn't put this [issue] high on the list of things that attract and retain employees," says Rich Linton, head of Small Business Retirement for Bank of America Merrill Lynch. For years, the premium had been on health care, which is still a top priority among job seekers.
But the real change is that small business owners are taking responsibility for making sure their employees are financially literate and able to plan their own financial futures, Linton says. In his 20 years in the retirement business, he has never seen such serious interest in employee retirement plans from small business owners. "That's an astonishing shift," he says. "Five years ago it was difficult to get business owners to engage in education beyond the basics of 'Here's your 401(k), here are your options, here's how the plan works,'" he says. Now they are asking financial advisors for help making their employees better savers and investors.
The downturn in 2008 and 2009 contributed to this shift, Linton says. Retirement benefits are not cheap to provide, so many employers want to be sure they and their employees are getting their money's worth. "Employers are asking their advisors to help with 'How do I make my employees more financially literate so they can optimize the benefits I'm providing?'"
Tom Foster, national spokesman for The Hartford's retirement business, says that small business owners often start from the wrong place. They assume they must put away a certain percentage for their own retirement, but don't really come up with a game plan for selecting a plan and funding it. "Once they figure out how much to allocate, then they should seek out expert advice from a financial advisor," Foster says.
Starter retirement plans
For the small employers who don't have a big budget and need the retirement plan to help themselves as well as employees, consider starting small and growing into a bigger plan later. Ed O'Connor, head of the Retirement Services Group at Morgan Stanley Smith Barney, says that for these businesses a SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account) or a SEP IRA (Simplified Employee Pension Plan IRA) are best bets. They are not qualified plans, like 401(k)s, and so are cheaper to set up and maintain; no complicated forms to file. They also do not have a lot of complicated rules about how much business owners must contribute to employees before their plan can get preferential tax treatment. But, the downside for owners is all contributions from employers are immediately vested. This differs from many sophisticated plans with provisions stopping employees from taking the employer match with them if they leave before a certain number of years.
The SIMPLE is an IRA for small business, and allows workers to defer up to $11,500 of their annual salary into the plan. Workers over age 50 can make an extra "catch-up" contribution of $2,500 a year. The employer can either match employee contributions 100% of the first 3% of salary, or contribute 2% of each employee's compensation. Because they are not qualified plans like 401(k)s, SIMPLE IRAs do not have a lot of rules to meet to get preferential tax treatment. But the amount of money that highly-paid employees, including the owners, can receive is much more limited than other plans. In short, it's a good starter plan, and can be outgrown when the business, and the budget for contributions, gets bigger.
The SEP is O'Connor's suggestion for a small business at the next stage of life with a small number of employees. It allows employers to contribute to traditional IRAs that are set up for employees. Only the employer contributes to a SEP, and he or she has the flexibility to decide whether to make contributions year-to-year. So if a year is looking like it might be thin, the employer can opt out of contributing, unlike many qualified plans, where the employer is more restricted.
When the company is bigger, it's time to move on to qualified plans, including 401(k)s, defined benefit plans and/or profit-sharing plans. Qualified plans allows the employer to get tax advantages including deductions for contributions to the plan, and the growth is not taxable until the money gets withdrawn after the employee's — or owner's — retirement.
This story originally appeared in OnWallStreet, a Source Media publication.
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