Attracting and Retaining Quality Employees through a 401k
Retirement Plan

by Bruce Fenton
A company's growth is only as good as its employees. With salaries and
benefits of high-quality employees increasing at a rapid rate, even
small companies need to provide modern benefits if they are to compete.
One of the most important and common benefits is a retirement plan such
as a 401k, Keogh or Defined Benefit plan.
The 401k plan is by far the most popular due to its low cost to
employers and high popularity with employees. Entrepreneurs and senior
managers often have difficulty juggling the responsibilities of growing
their business with the selection, evaluation and ongoing monitoring of
employee benefits. Despite the drain on time, the responsibility is not
to be taken lightly. A poorly set up retirement plan can cause a level
of unhappiness and resentment among employees far worse that if you had
no plan at all. Worse, anyone setting up a plan and acting as trustee
becomes a fiduciary and is subject to several legal responsibilities.
The penalties for not complying with these legal responsibilities, such
as Department of Labor and Pension Welfare Benefits Administration
penalties can be stiff. A common Department of Labor penalty is to fine
the trustee one third of the plan value for compliance violations.
On the bright side, properly set up plans can run smoothly with a
minimal amount of effort by the entrepreneur or manager and can increase
happiness and loyalty for employees for many years to come.
For companies setting up a plan for the first time, the most common
primary concern is cost. The startup costs of 401k plans range from $500
to over $5000 with an additional charge ranging from $10 - $150 per
person. In some cases, the most expensive plans are the ones that can
cause a business owner the most headaches, however in many instances,
you get what you pay for.
Trustees who find themselves pulled in
many directions with running a company should consider plans that
provide features designed to save the company time. It is also advisable
to coordinate your payroll deduction and 401k deposits into the plan
with a payroll company. This is not to say that you should necessarily
use the in-house 401k plan offered by your payroll company. Since these
plans are often tangential business for payroll companies, you may not
to receive that same amount of expertise and support you would get by
working with a qualified investment firm or mutual fund company. The
firm you select to manage your plan should be a mutual fund company or
investment firm who is registered as a member of the NASD, you can also
check their complaint file by calling the NASD or visiting the NASD web
site.
Plans that are usually the most streamlined are those known as bundled
plans, meaning that the administration and investment functions are
bundled together into one convenient package. These plans often cost
more than unbundled plans, those plans in which you select one company
for investment work and another for administration. With bundled plans,
you have only one place to turn for problems that may arise with your
plan. Employers can also save time by selecting an investment advisor
who provides services such as answering employee questions and
enrollment of new employees. Many times such advisors are compensated by
the fund companies who offer 401k plans so it isn't usually necessary
that the entrepreneur pay extra money for an advisors services. Savvy
employers may be able to convince an investment professional to provide
discounted financial planning services to all employees
outside of the 401k plan activities. An investment counselor eager to
receive the 401k business of a fast-growing employer will provide such
additional incentives. This enables the employer to offer financial
planning as another employee benefit without additional cost to the
company. Purchased as a separate benefit, financial planning services
for employees may cost between $30 and $150 per employee, often with an
additional hourly surcharge.
PLAN FEATURES - WHAT TO SELECT:
Companies in the technical sector will certainly find Internet access
to their 401k a large plus, if not a necessity. The more technical your
company and the more often your employees use the Internet, the more
Internet based services your 401k provider should offer. Such services
should include daily account access and the ability to make transfers
and transactions online. Again, this will save the employer time
involved with employer education and administration functions.
Another important aspect of plan setup to consider is selection of
investment choices. Many plans that are cost effective for small growing
companies are offered through mutual fund companies that are not known
for outstanding performance. If your employees are particularly
conscious about investment choices they will be more demanding about the
quality of the investment selections within the plan. Unfortunately,
many of the largest and most popular mutual fund companies such as
Fidelity, Putnam and Vanguard require employee participation or dollar
amount balance minimums that can make opening a plan prohibitive for a
small company. Certain investment firms have alliances with many large
fund companies that allow waivers of the minimum number of employees and
dollar amounts, thus making these types of well-known mutual fund plans
available to smaller companies.
Another type of 401k plan that is gaining popularity in recent years
is one that combines many mutual fund companies in one plan. In some
cases, these multiple fund choices can be brought together with
additional options to purchase stocks, bonds and CDs. This type of plan
is popular due to the obvious benefits of having vast diversification
ability within the account. These plans also aid entrepreneurs in
complying with certain legal considerations relating to the provision of
suitable investments. A plan with thousands of options is likely to
comply with legal requirements that call for diversification. Employers
wishing to use a multiple option plan are well advised to use one that
is offered by a mutual fund company or 401k provider. It is not
recommended that an employer try to create such a plan on their own, as
they will find themselves soon inundated with multiple statements and
forms from numerous fund companies and brokerage houses and an
administration nightmare.
MATCHING & VESTING:
In the beginning stages, it is often difficult for companies to match
employee contributions . Use of a good plan document during the setup
process will allow the entrepreneur the choice of contributing. Many
entrepreneurs delay making an employer contribution until they are sure
that they are able to do so permanently. It is easier to offer no
employer match at all than it is to offer an employer match then take it
away from employees. If you are in a high turnover business, such as
many technical and sales companies, you may wish to provide a large
match but make it only available to participants after a long vesting
period such as five years. This will encourage employees to stay at your
company longer. On a side note, this can also be effectively combined
with deferred compensation in which a percentage of an employees salary
is deferred for a period of five years and then paid at the end of that
five years. Deferred compensation serves the dual role of acting as a
method to encouraging employees to stay and providing the entrepreneur
with extra funds when an employee leaves before the five-year period has
elapsed. The extra funds from un-vested dollars and deferred
compensation can be used be used to ease the burden of losing the
employee and to help refill the position.
Aside from all the setup concerns, it is important that growing
companies act to at least set up some type of plan, rather than
paralyzing themselves with a decision and ending up not setting up a
plan for years. 401k's serve as an effective vehicle for growing
companies because they can grow easily to accommodate the largest of
corporations. Keoghs, simple plans and other options may offer initial
advantages but are not usually ideal for those companies who plan on
adding large amounts of staff in the coming years. All options should be
researched with the assistance of a qualified specialist. Early stage
growth companies should be able to set up a simple basic plan with start
up costs in the neighborhood of $800 and ongoing costs in the
neighborhood of $15 per person. On the low end of the cost spectrum,
this type of plan will adequately serve most companies. Small companies
can always upgrade to a more advanced plan as their budget for benefits
increases. Companies who are in a fast growth stage who either have a
basic plan or are in dire need of one due to a large number of new
employees should chose a more advanced plan. This may be a bundled plan
and /or a plan that provides options from numerous fund companies. These
plans are more expensive but if it is set up properly by a qualified
company, will be able to grow with the company at a rapid rate and
absorb any number of new employees that are added to it.
The prospect of setting up a 401k plan may seem intimidating,
confusing or expensive at first but it is a necessary tool for those
wishing to join the ranks of Americas largest and most successful growth
companies. Dell, Microsoft, Intel, Lotus, Lucent and many others have
combined quality 401k plans with premium employee education to attract
and retain the employees they need for continued growth. With proper
education and research, entrepreneurs can provide this important benefit
to his or her employees in a cost-effective manner and with minimal
effort.
Bruce is President of Atlantic Financial, a
401k provider in
Masssachusetts.