While there are many advantages to offering a small business retirement plan, only about 45 percent of companies with fewer than 50 employees offer an employer-sponsored retirement plan. That is in contrast to businesses that employ 100 or more workers, in which 90 percent offer some sort of retirement plan.
Since small business retirement plans can attract and retain workers in this tight job market and they can provide significant benefits to the business owner. Employers benefit from a tax deduction, and both employees and the employer get a tax-advantaged method to fund their future retirement.
Here are seven questions related to retirement plans that small business owners should ask themselves today.
Why can’t I just sell or liquidate my business as my retirement plan?
Many small business owners look at their business as a retirement nest egg. But that might not be the case. Changes in market conditions could adversely affect the value of your business or your ability to sell it. One of those changes is the glut of baby boomer businesses that will be for sale in the coming years.
Funds in your retirement plan could give you the flexibility to sell your shares in a strong market or wait to sell until a recession passes. One thing to avoid is selling in desperation because you need the proceeds for retirement. Giving the impression that you are having a “distress sale” could prevent you from selling at a premium.
Can I afford to match funds or, for that matter, make employer contributions?
When you start researching types of retirement plans, you will find a variety of employer-sponsored retirement plans from which to choose. Some plans are funded entirely by contributions from the employer, employee contributions wholly fund others, and some can be a combination of both.
Determining whether you can afford to match funds can help pare down your options from what’s available to what’s best suited to your needs. Moreover, you may discover that some plans offer flexibility to contribute higher amounts in some years and none whatsoever in other years, which can be indispensable for business with unpredictable cash flow.
Other plans, especially those that incorporate profit sharing, enable employers to contribute different amounts to different employees. Employers who have finite funds may find that these options can offer an efficient way to make sure their most important employees (or the business owner himself) is well taken care of. These plans can offer the flexibility needed to meet your retirement needs without breaking the bank on employee retirement funds.
Lastly, it is not uncommon for a business to start with a less costly retirement plan and transition to another as cash flow allows.
Are employer contributions fully vested?
There are many reasons why small business owners in Massachusetts and New Hampshire should consider offering retirement plans. If one of your motivations is not only to attract top talent but to retain that talent, then identifying a retirement plan that permits you to vest employer contributions over time can help achieve that mission.
With a vesting option, you can release ownership of employer contributions to the employee over time. This can be a powerful incentive for employees to stay at the company long enough to offset any costs you may have incurred with the hiring and training of that employee.
What are my legal requirements for sponsoring a plan?
Every employer-sponsored retirement plan needs a custodian to hold the plan’s assets, keep records, issue reports on the plan’s activities, and provide a list of investment options. The plan must also assign a trustee to assume some or all of the fiduciary responsibilities.
These tasks tend to be complicated, so many small businesses outsource them to professionals who specialize in these fields. In the process of outsourcing, the plan sponsors have a legal obligation, under the Employee Retirement Income Security Act (ERISA), to examine the professional service providers closely. This scrutiny ensures that the administrative costs are reasonable and the benefits are distributed only to the plan participants.
Plan sponsors can also protect themselves and the participants by obtaining competitive quotes from multiple providers to compare prices, services, and the performance of the investments they will be using. Sponsors should perform this type of “benchmarking” regularly.
Do I need an advisor?
Some small businesses in Massachusetts and New Hampshire manage their retirement plan without outside help, and you might believe that you can do that, too. But here are a few reasons you might want to consider an experienced retirement plan advisor:
- It reduces your liability: If something goes wrong within the plan, the Department of Labor will be examining the plan’s fiduciaries since they have liability for managing the plan properly. If you haven’t outsourced your investment and administrative fiduciary liabilities, that leaves you with the personal liability.
- A professional advisor manages the investment options: Do you have the knowledge and time to choose and monitor the investments in the plan? It might pay to have someone who does.
- Advisors get the employees enrolled and contributing: An advisor will field questions from the workers, educate them on how the plan operates, and assist them with their asset allocation.
Should I hire a retirement plan administrator?
Most small business owners are consumed with working on their company. A plan administrator manages the retirement plan, ensuring the funds are collected and credited to each participant’s account. Unlike an advisor, the plan administrator does not make investing decisions.
The administrator’s duties might include:
- Ensuring that all plan data is accurate and provided to the participants regularly
- Calculating a plan beneficiary’s entitlement
- Reconciling the amounts contributed to the plan
- Filing annual tax returns for the plan
- Sending payments to beneficiaries
- Abiding by court rulings and paying retirement benefits to ex-spouses of beneficiaries
- Dealing with concerns and complaints
Who serves as a fiduciary?
The plan sponsor has fiduciary responsibility for the retirement plan. Those duties include administration, operation, and asset investment. Since there are legalities and complexities associated with these responsibilities, plan sponsors often hire professional fiduciaries, such as advisors and plan administrators.
Make sure anyone you hire as a fiduciary acknowledges that they will be obligated to act solely in the interest of the plan participants and beneficiaries to provide benefits. Also, ensure that they will be charging reasonable fees for their services.
Starting a retirement plan for your small business is not complicated, especially with the help of professionals. The benefits of having a retirement plan more than outweigh any work involved. Getting both you and your employees on the right track for retirement is paramount. Plus, you’ll be doing so while also attracting and retaining talented workers and providing significant tax advantages for you and the business.
An experienced advisor or plan consultant can be invaluable in helping you get started, presenting and explaining your options, and overseeing your plan.
Bartley Financial and Your Small Business Retirement Plan
Retirement plans can benefit your employees, your business, and you. But as you can see, knowing what questions to ask and getting the answers you need can be challenging. Bartley Financial can provide the services and expertise you need to introduce a retirement plan to your small business.
Robert Bartley, the founder and owner of Bartley Financial, grew up working many hours at his family’s restaurant, saved the money he earned, and started to invest. He felt he wasn’t getting the service he needed from the business CPA, who lacked an aptitude for suggesting creative solutions. In fact, the more involved he became in his family’s business, the more he realized that, behind the scenes, critical information about the business was ending up in data silos, headed by financial and law professionals unwilling or incapable of coordinating with one another. Convinced that there had to be a better way to manage his personal and family business’ finances, he went to school and pursued the professional designations of CPA and CFP™.
Now, Robert uses his personal business experience and financial acumen to guide other business owners in Massachusetts and New Hampshire toward their most successful futures. The Bartley Financial team (which includes two CPAs) coordinates your business and personal goals and, in the process, enhances your business’ attractiveness to employees, improves its tax and cash flow strategies, increases its value, tackles your company’s administrative needs, and coordinates a comprehensive approach with your business’ other financial, legal, and insurance professionals.
Finally, Bartley Financial is a fee-only fiduciary. Fiduciaries are the only professional financial advisors mandated to put your and your business’s financial needs ahead of their own. Bartley’s fee-only structure ensures that your costs are forecastable and unencumbered by commissions or other hidden, fluctuating, and unpredictable charges. You can be sure that Bartley Financial advisors will have top-notch customer service at the top of their priority lists.