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Small Businesses Take on the 401(k) Challenge

Organizations with 100 or fewer workers find it challenging to implement and administer 401(k) plans because of administrative costs and the lack of bargaining power with third-party administrators.

April 14, 2011
Related Topics: Retirement/Pensions, Benefit Design and Communication, Workforce Planning, Compensation

Administrative costs for a 401(k) plan, which can easily run several thousand dollars a year for small businesses, have become especially daunting in the recent tight credit environment.

Jason Edwards, managing partner of Edwards Financial Services in Winter Park, Florida, which specializes in retirement planning for small businesses, says making a plan attractive to employees frequently requires matching contributions—an option many small businesses can’t afford or don’t want to pay.

In fact, nearly 72 percent of workers in small businesses have no retirement plan available through their company, according to a March 2010 Small Business Administration study that examined companies with fewer than 100 employees.

Affordability, the rigors of administration and the limited range of options typically stand in the way of small employers. But some have been able to make sense out of the seemingly confusing landscape of 401(k) plans.

Costs can’t be ignored, but they can be approached systematically. One method used by large companies for years now gaining traction among smaller firms is to conduct a request for proposal, which calls for an employer to lay out its current plan features and specify its retirement planning needs, says Frank Palmieri, an employee benefits attorney with Palmieri & Eisenberg in Princeton, New Jersey.

The process allows employers to compare plans across offerings using consistent information.

According to Edwards, fees can vary greatly and plan providers are continually devising new ones—a trend that is likely to continue with the implementation of new Labor Department regulations that require additional disclosure of investment expenses.

Edwards says that turning the spotlight on funds that now charge comparatively hefty fees could cause fund managers to pare back those charges to stay competitive. However, plan sponsors could see an increase in other fees to offset the hit to plan providers’ revenue from lower investment expenses.

Even so, businesses should have more tools to assess plan expenses and are likely to be in a better position to push back on their costs—a move that can pay off.

“It just makes good sense for small businesses to renegotiate their plans each year to ensure their offerings are the best,” says Debbie Ritchie, chief operating officer for the Studer Group in Gulf Breeze, Florida, a 125-employee consulting firm, which saw plan fees cut in half this year without a loss in benefits.

“Our broker is aware of our concerns and was able to negotiate a reduction with the company’s plan provider,” Ritchie says.

Cost is often not the biggest problem small businesses face, says Edwards, who has seen companies struggle with waning employee participation. Of the approximately 28 percent of employees who have a company-sponsored plan available, 9 percent, or slightly less than one-third, don’t participate, according to the Small Business Administration report.

Many lower-paid employees think they can’t set aside money from their paychecks, but they often don’t understand the advantages of saving on a pretax basis, Edwards says.

“The more that small business employers can bring in the tools to educate their employees about the benefits of saving, the better participation will be,” he says.

This situation was the case for Johnson & Johnson, a financial services and insurance company based in Charleston, South Carolina, whose 401(k) employee participation was as high as 98 percent at one time. After years of enrollment meetings, human resources manager Lisa Kluczinsky found one-on-one sessions with an investment expert from the company’s plan provider was much more effective.

“Meeting with an investment adviser also adds credibility to the process,” she says.

Plan portability is another key concern for small businesses. Employers need to ask plan providers about the flexibility they have in making plan changes and their associated costs. It can make a huge difference, especially if service deteriorates or a company’s situation changes.

One of the hardest parts of revamping a 401(k) plan for the rapidly growing staffing-and-recruiting firm Glen Allen, Virginia-based Inc. was getting out of its former annuity-based plan, says chief people officer Greg Moyer. Termination fees had to be negotiated before the company could move ahead with a more suitable plan.

Small-business employers also need to continually reassess the breadth of their plan’s investment options. Regularly revisiting fund options is not only part of a company’s fiduciary responsibility but is a sound strategy for maintaining employee interest.

Defined contribution plans can become stagnant, and employees can lose interest unless employers continually seek ways to engage their employees, Edwards says.

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