“What benefits do you offer?”
When interviewing job candidates, almost every one asks the question above. It makes sense. Most candidates want to know if the company offers health insurance, a retirement plan, or both, before they are hired. Given the competitive nature of today’s job market, having a good benefits package is an important tool for recruiting the best and the brightest.
While there are many companies that can help you learn about and buy health insurance, the information concerning retirement plans for employees is harder to come by. What are the options, costs, and obligations employers have in providing a retirement plan?
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To learn more, I spoke with Mark Zoril, the CEO and founder of PlanVision. His company is a Registered Investment Advisor (RIA) and helps companies create great retirement plans for employees. The following Q & A with Mark Zoril is based on my notes, and do not represent his exact words.
What options does a small business have in offering retirement plans?
There are two main options, one is known as a SIMPLE IRA and the other is a 401K plan. However, when small businesses offer their employees a 401 (K) plan, we strongly recommend they go with a safe harbor 401 (K) plan.
What is a SIMPLE IRA plan?
A SIMPLE IRA plan is low cost, easy to set-up, and specifically designed for small businesses. Only companies with under 100 employees can offer this plan. While there are a number of differences between a SIMPLE IRA and a 401K plan, there are two that stand out. First, the maximum tax deferred contribution for a SIMPLE IRA is much lower than a 401K plan. For 2015, the maximum is $12,500 (plus an additional $3,000 for those over 50 years of age). The contribution limits for a 401 (K) plan for 2015 is $18,000 (plus an additional $6,000 for those over 50).
The main cost of a SIMPLE IRA is the contribution requirement (almost all staff is eligible). An employer must offer either 2% of each employee’s salary, regardless of whether or not the employee contributes to the plan, or match employee contributions up to 3% of their total salary.
What is the difference between safe harbor and non safe-harbor 401(K) plans?
The highest paid employees tend to contribute the most in terms of both money and as a percentage of their salary. However, business retirement plans are supposed to serve all employees and there are rules which prevent the top employees from contributing significantly more than everyone else. For 401(K) plans that do not use the safe-harbor exemption, the companies are required to perform ADP and ACP testing to make sure they are not violating these rules. Those that qualify for the safe-harbor exemption are exempt from this testing.
In exchange for relief from these rules, companies give up some of their freedom in making rules for their plans. For example, they must match employee contributions to their retirement plan dollar for dollar, with a maximum of up to 3% of their salary. Any employee contributions that are over the 3% mark but still under 5% must also be matched, but only $.50 on the dollar. Or they must make a contribution of 3% for all eligible staff.
How expensive is offering a 401 (K) safe harbor plan?
The record keeping cost for offering a high quality 401 (k) plan can be as low as $1,500 + 1/10th percent (or sometimes less) of the assets in the retirement plan . However, if you go with a broker/dealer to manage your 401 (k), you may be paying substantially more. For example, you might pay half percent of assets or greater for record keeping or end up with unnecessarily expensive fund options.
Let’s start with the different parties involved in a 401K plan.
There is the plan record keeper. They keep track of who is in the plan, how much they have contributed, and what the employer must contribute.
There is the trustee of the plan. Basically, this is the party that is holding the money.
There can be a broker/dealer, the company through which stocks, mutual funds, and ETFs are bought and sold.
Or there is a plan advisor which helps the company decide what investment options to include in the plan and might provide guidance to the employees as well. Basically, this is what my company PlanVision does.
If you go to a broker dealer, they may offer all the above services to you. They may even offer to provide all these services with no upfront costs. However, small businesses should be very careful about these offerings. Oftentimes, the broker/dealer will share the fees with the record keeper or investment firms. These fees are generated by choosing mutual funds with high fees. Many people don’t know but one mutual fund will have different share classes with widely varying fees. There can be 1% difference or more between the lowest and highest cost share classes.
To avoid paying to much, I recommend the following:
- You ask for unbundled services, even if all services areprovided by one-party.
- You require that there be no fee sharing (known as revenue sharing) between parties and pay flat fees for services where possible.
- You offer ETFs, index funds or lowest cost class of mutual fund shares.
This sounds very complicated. Is there a simple way to do this?
Yes, for record keeping we recommend Employee Fiduciary. Although we frequently work with them, we don’t get any compensation for referring them business. They will handle record keeping for $1,500 per year for up to 30 eligible employees. They also have relationships with firms that will serve as a trustee to the fund. Through them, you can get these services for less than 10 basis points or 1/10th of a percent.
Where does your firm come into the picture?
We help decide what investment options an employer should offer for their 401(K) and act as a fiduciary on the plan as well. While employers can offer their employees a self-directed brokerage account, history has shown this to be a risky proposition. Some employees could choose very speculative investment choices and blame employers for the results. We help employers chose a good selection of low-cost investment options, primarily index funds. Furthermore, we help onboard employees into the retirement plan and provide them ongoing guidance. Our fees start at $395 per year and fluctuate based upon total staff.
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Founder of PlanVision
Mark Zoril, a 20 year veteran of working directly with employers, is the Founder of PlanVision. PlanVision helps smaller firms establish great retirement plans or improve their current plan by reducing unnecessary plan costs and enhancing employee communication.