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Cost Keeps Small Business Owners Nervous About Offering Retirement Plans

Despite the acknowledged importance of retirement savings, the cost of offering a defined contribution plan keeps many small business owners from offering them.

The Employee Benefit Research Institute s (EBRI) most recent Small Employer Retirement Survey reveals that at companies with fewer than 100 workers, only one-third of employees are covered by an employment-based retirement plan, compared to 64% of those at bigger companies. Moreover, only 29% of non-sponsors claim to be at least somewhat likely to start programs in the next two years, down from 32% the year before.

The reason, say employers, is cost. According to the EBRI survey, it is going to take significant financial changes to make retirement plans appealing to small employers. Respondents cited an increase in business profits, a plan that requires no employer contributions and increased tax credits for start-up expenses as prime motivators for sponsorship.

Prospective sponsors' concerns are not unfounded. Retirement plan experts explain that small plan sponsors face a number of difficulties in providing programs to their employees. However, most of these can be overcome with proper education, preparation and plan design.

Defined benefit pension plans, of course, are difficult for most companies to afford, large or small. Few small businesses still have them. According to the Bureau of Labor Statistics, 9% of those with fewer than 100 workers and 38% of companies with 100 or more, including large corporations, operate pension programs.

Bill Slater, vice president of MetLife Retirement Plans, notes that the expense is the major obstacle to establishing and maintaining a program, despite what appears to be a minor resurgence in DB plans.

Federal legislators are trying to revitalize the DB system by replacing the Treasury bond rate and simplifying the administration requirements. A cash balance structure might help mitigate the cost, but Slater admits that it would not necessarily help older workers. Therefore, employers probably are better off opting for a 401(k). But despite the relatively low price, sponsors, even those with as many as 500 employees, find that even 401(k) plan expenses can be daunting, especially the employer matches that are a standard component.

"Small employers face tension from various competing concerns, but if you can boil them down to one concern, it would be covering the cost and still providing employees with adequate benefits," said Don Mazursky, a partner at the Atlanta law firm of Mazursky & Dunaway.

Assistance at Hand

Some assistance is available for cash-strapped sponsors and would-be sponsors. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) offers 50% tax credits for qualified plan start-up costs to employers with fewer than 100 workers, plus a $500 tax credit during each of the first three years the plan is in effect. Employers also can save money through plan structure, said Catherine Collinson, senior vice president of Transamerica Retirement Services.

"Most providers are very flexible in terms of structure and cost," said Collinson, who also suggested that sponsors don't necessarily have to offer the employer match. "Everybody places a very high value on the match, but the labor market's been soft. Chances are the employer won't lose employees or have a hard time hiring them because of the lack of a match. The match is important, but having a plan is even more important."

Plan sponsors also need to educate themselves about their legal responsibility. Studies have shown that small business owners are shockingly unaware of their fiduciary duties. Most do not regularly evaluate their investment selections, and many have no idea that they are the primary fiduciaries of the plan. Furthermore, they do not know about the tax credits available to them or even about the most common types of retirement plans.

"In the post-Enron environment, with the mutual fund issue and Department of Labor guidance about what you have to do to stay on top of a crisis, [the amount of regulation] makes it harder for a small businessperson to allocate the time to do all those things," said EBRI President Dallas Salisbury. "For example, very fast vesting requirements and non-discrimination requirements add time and expense to administering [a 401(k)] and uncertainty about what employers can contribute."

Mazursky recommends that employers appoint a committee whose members make it their business to keep up with the regulations needed to operate a plan and who "actually understand they're responsible for looking after the participants' best interest."

The non-discrimination requirements and attendant testing of retirement plans have proven particularly nettlesome for small employers, especially those whose tiny businesses have a few highly compensated people (usually the owners) and a few low-paid employees. The result of such an arrangement usually is a lower-paid population that cannot afford to contribute as much as they might like and a higher-paid workforce that is not allowed to contribute as much as they might like for fear of violating anti-discrimination rules.