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.