4 Key Considerations when Selecting a Retirement Plan for your Small Business
Retirement Daily Guest Contributor
By Chad Parks
For small business owners, figuring out how to offer a retirement plan for your employees can feel overwhelming, especially if you aren’t well-versed in finance. When considering plan options, there are four key aspects to evaluate: 1) costs associated with the plan, 2) variety of investments available, 3) flexibility of plan design and 4) quality of customer service. Each consideration is discussed in detail below.
1. Costs: Understand how your plan provider is getting paid, who is getting paid and how much.
Pay attention to whether a plan utilizes an asset-based or flat-fee model. In asset-based models, common in today’s marketplace, fees are calculated as a percentage of savings every month. The higher the asset fee, the more money your employees will pay as their savings increase. Alternatively, with flat-fee models, the fees are a known cost every year.
When selecting a retirement plan, determine what services you will receive for those fees. By folding the service fees into the plan cost, some plans include access to a financial advisor, external plan fiduciary, third-party administrator, recordkeeper or some combination of those parties. If these services are included in your plan, determine how the providers are being paid.
Ask if your plan includes a fiduciary bond to protect against any potential misconduct by the fiduciary. In some cases, securing such a bond as insurance may be another added cost.
Evaluate the fees associated with different plan offerings to determine which is right for your business. Before committing to a retirement plan offering, do some comparison shopping to ensure the fees are reasonable for the services provided. It’s OK to not go with the cheapest or most expensive plan out there; just know exactly what you’re getting for your money.
2. Investments: Know which investments are offered in your plan, the variety of investments available and the expenses associated with them.
Most people aren’t investment experts and can be easily intimidated by the idea of selecting investments. This hesitation is understandable, considering there are tens of thousands of ETFs and mutual funds to choose from.
Accordingly, most people will need guidance from a financial expert to make wise retirement-planning decisions. There are many professionals capable of pointing you and your employees in the right direction. Fiduciary advisors are investment professionals who are legally obligated to put their clients’ best interests first. The plan provider or an outsourced third party typically acts as the fiduciary advisor, who is responsible for selecting investments for your retirement plan. For a cost, this person will continue to monitor and make decisions about the investments in your plan after selecting them.
These investments also have associated fees, with the price varying by investment vehicle. Ensure the fees you pay are reasonable compared to similar products. Your fiduciary advisor should provide education about what you are paying, as well as play a hand in monitoring fees to ensure they remain low. It’s important to confirm that your fiduciary advisor is honoring these responsibilities.
Additionally, offer user-friendly investments in your plan lineup for less experienced investors. Target-date funds, which are professionally managed with a specific end date in mind, tend to be popular among people who aren’t as confident about managing investments. For example, a 45-year-old who expects to retire in 20 years would have an estimated retirement date of 2040. This 20-year time horizon would hypothetically put the saver into a 2040 target-date fund. Such a fund takes greater risks today and becomes more conservatively managed year-over-year as 2040 approaches. This is an example of a less risky investment because it’s managed for a shorter time horizon.
3. Plan design: Consider the distinctive needs based on your ownership structure, goals, and number and types of employees.
Think about what you’re trying to accomplish with your retirement plan offering. Some small business owners establish a plan primarily to maximize their own contributions. In this circumstance, an individual 401(k), or solo 401(k), could make sense. Designed specifically for the self-employed owner and his or her spouse, it enables you to contribute both as an employee via salary deferral and as an employer via your business.
Other small business owners focus more on the benefits a retirement plan could offer to their employees. Perhaps you’re even willing to make a matched contribution to incentivize employees to save for retirement.
No matter the circumstances, select a provider that can create a sensible plan design for your specific situation. Some providers focus on offering standardized plans, while others specialize in customizable plans.
Choosing a plan design that’s right for your business involves considerations such as differing eligibility periods for employees, profit-sharing calculations, rules related to loans and distributions, as well as enhanced plan capabilities. For example, a small business with a consistent management team but high turnover of seasonal staff might benefit from a plan that allows employees to participate after a set number of years with the employer. Other businesses that have a natural age gap among employees might select a plan design allowing older workers to save more and participate in profit-sharing, since they’re closer to retirement.
An additional consideration is whether to offer a Roth 401(k) option alongside a traditional 401(k). Contributions to a Roth 401(k) are taxed beforehand, while withdrawals from it are untaxed. Conversely, contributions to a traditional 401(k) aren’t taxed, but withdrawals are. Both options offer potential advantages and disadvantages, depending on the investor.
4. Customer service: Evaluate how the plan provider will deliver customer service to you and your employees.
The small business owner offering the retirement plan and the employees enrolling in it are all clients of the plan provider. The service that needs to be delivered for the business owner, also called the plan sponsor, can be significantly different than the service that the employees, or savers, require.
In evaluating the quality of a plan provider’s customer service, ask if they have a dedicated support team in place. Before committing to a plan provider, it’s important to know how and when the plan sponsor and the savers will be able to access the customer service team. Service access could include support via phone, text, email, chat and/or CRM system. Some plan providers may even have separate teams dedicated to plan sponsor support versus participant support.
Ultimately, saving for retirement is the responsibility of the saver, and offering a workplace retirement plan can help your employees secure a sound financial future. Whether you are an investment expert or not, there are professionals and resources available to help you as a small business owner navigate the process of finding a retirement plan that can provide the best fit for all involved.
About the author: Chad Parks
Chad Parks is the founder and CEO of Ubiquity Retirement + Savings, a leading financial technology company that pioneered transparent, flat-fee retirement plans for the historically under-served small business market. For over 20 years, the firm has helped more than 9,000+ businesses contribute over $2.25 billion toward retirement savings. Chad started his career as a financial advisor and has more than 24 years of experience in the industry.