By Ed Avis
About 15 years ago, the employees at Willamette Print & Blueprint in Oregon asked the owners for a retirement plan. They agreed and set up a 401K through their payroll service, ADP.
“It wasn’t difficult at all to set up,” remembers David Guzman, the company’s vice president. “ADP said they would handle everything from beginning to end. They brought in Merrill Lynch to be the manager on the money side. Over time we switched to a smaller local firm that manages the investments, but it’s still done through the ADP portal.”
Guzman says the firm has had employees retire since the plan was started, and they have had no trouble accessing the funds. “It’s been smooth,” he says.
Willamette Print’s experience is typical. In an IRgA survey taken the week of August 14, about 75 percent of respondents said they offer employees a retirement plan. The majority offer at 401K plan, and most of the rest offer an IRA. None offer a traditional pension.
Helps with Recruiting and Retention
Starting a retirement plan may seem like an altruistic thing to do, but of course it helps the ownership in several key ways. First off, it can certainly help recruit and retain employees.
“It makes employees want to stay with you a long time,” says Soren Korzen, general manager of Bay Print Solutions in San Francisco, who set up a plan for their 14 employees through their payroll service. “And it definitely makes it easier to hire people when we can offer that.”
Naturally, the recruitment/retention value of a retirement plan depends greatly on whether the employer contributes to the plan. Eighty-seven percent of the respondents to the IRgA survey make employer contributions. Both Willamette Print and Bay Print Solutions fall into that category – Guzman says his company contributes 4 percent of an employee’s salary if they contribute 6 percent themselves; and Korzen says his firm fully matches the first 3 percent an employee contributes and 50 percent of the subsequent 4 percent employee contribution.
The speed at which an employee can begin participating in the retirement plan probably also plays a role in how valuable the benefit is considered by recruits. The IRgA survey showed that reprographics firms have a wide range of start times: About 17 percent said new employees can start immediately; the rest had start times ranging from 30 days to two years.
How the “vesting” is set up also affects how well a retirement plan works to retain employees, notes Eric Mangold, a wealth manager at Argosy Wealth Management who regularly works with small companies setting up retirement plans.
“If you have a vesting schedule on an employer contribution in which every year that an employee stays, they own a little bit more of the employer contribution,” they are incentivized to stay, Mangold explains. “If they leave and they have, let’s say, $1,000 in employer contribution and they’re only vested 40 percent, well that $1,000 is only 400 bucks when they walked away.”
According to the IRgA survey, most repro firms – 56 percent -- fully vest their employees immediately, so the retention aspect of the plan is not really present. Twenty-eight percent do have a multi-year vesting schedule, and the remaining 16 percent vest employees after they have been there a year.
Helps the Owner Build Wealth
Another benefit to owners of setting up a retirement plan is that it can help the owner build his or her retirement as well. A basic 401K plan serves that purpose, but Mangold says there are other options as well.
“If the employer is looking to maximize how much money they can put into their own retirement plan, does it make sense to add a profit-sharing feature? Does it make sense to add a defined benefit plan? There are other pieces you can hook into this,” Mangold says.
Furthermore, an owner can make contributions to his or her own plan, which has tax advantages on both ends – his position as an employee and his position as an owner.
“The employer wears two hats in that situation,” Mangold explains. “They wear a hat as the employer, but they also wear a hat as the employee because they’re eligible for an employer contribution, too. So the employer puts money in his own pocket and then takes a tax deduction off on that.”
Convenience vs. Design
The majority of small business owners that offer a retirement plan do it through their payroll service or an investment firm. The IRgA survey revealed that repro firms follow that trend: About 70 percent of respondents said they use an investment firm, such as Vanguard or Fidelity, to manage the plan, and most of the rest set it up through their payroll service or external accounting firm.
Korzen says setting up his company’s plan was as easy as turning on a switch.
“It was just part of the benefits package available when we switched to a new payroll service,” he remembers. “We just turned on the option for the 401K. It’s a fairly painless process.”
The convenience of using the standard plan offered by your payroll service or investment firm is important and probably means many more companies offer such plans than would otherwise. And in many cases, the basic plan from a payroll provider or Vanguard is all a company needs. But in some cases, Mangold says, the convenience of using the standard plan is outweighed by other concerns.
For example, if some employees are considered “highly compensated,” over $130,000 per year, and they contribute substantially more to their plans than other employees, the IRS might consider it an “unfair” plan and disallow part of the investments. Employers can avoid that by making certain contributions to each employee’s plan. The bottom line is that it can get a little tricky, so if you have a large company or a wide gap in compensation, it may pay to get professional advice.
“It’s not complicated from an employer’s perspective if they hire a third party administrator who knows all of the rules on the 401K and can give them that guidance,” Mangold explains. “This is really where it comes down to plan design.”
Third party administrators don’t replace the investment firm – such as Vanguard – but they make sure the plan is designed specifically for the company. Employees still log into Vanguard to check balances, make changes to their account, etc.
“If you’re just getting out of the gates and you’re not offering anything extravagant, then [using the plan through a payroll provider] could be a really good and probably cost-effective option,” Mangold says. “But they might outgrow it.”
Worth the Cost
For most employers, the benefits of offering a retirement plan outweigh the costs of making employer contributions and the potential paperwork hassles.
“We started our plan because we were just trying to improve retention and all that,” Korzen says. “We want to see people happy and stay with us. And definitely it works – we have very little turnover.”