Time to consider a 401(k) plan.
In today's competitive marketplace, any thriving business should consider establishing a 401(k) employee benefits program. According to the U.S. Department of Labor, there were about 200,000 401(k) plans in the U.S. in 1995.
The business benefits are rooted in recruitment, retention and tax savings. To have a winning 401(k) plan strategy, you must come to agreement on tees, operations procedures, Investment options and employee education with your plan administrator. The right mix of these elements will produce a plan that will be profitable for everyone.
Once you decide to set up a 401(k) plan, the next step is to decide which company can implement the best plan for your business. You'll need to form an employee benefits planning committee to gather information on all the different types of companies that are authorized to set up 401(k) plans and other retirement options.
"Many companies set up an employee benefits planning committee comprised of management and line employees," says Jeff Boyle, senior vice president of business trust services for Union Bank of California. "They make decisions for the plan with equal representation."
Banks, brokerage houses, insurance companies and payroll administrators are among the companies that can set up your plan. Your committee must create a preliminary list of things the plan should offer, including whether your company will match employee contributions and the type of access you'd like employees to have to their accounts (via phone or the Internet). It can meet with plan administrators and then decide which firm can best meet your company's needs. The committee may even find that a 401(k) plan is not the best retirement option for your business.
* Fees. The cost of doing business with each plan administrator will vary. Your employee benefits planning committee must determine how much your company will want to pay for the bookkeeping and administration of your 401(k) plan.
In general, "as the number of employees grows, the fixed cost of running the plan goes down," says Boyle. If your company has fewer than 10 employees, you should seriously consider other retirement plan options. Companies with 25 or more employees will get the most benefit from 401(k) plans.
According to Karen DeCoud, Merrill Lynch vice president and retirement plan manager, it costs an average of $800 to $1,500 per year to set up and administer a 401(k) plan for 20 employees or fewer. Merrill Lynch doesn't administer plans with fewer than 25 people, but DeCoud says a plan with up to 100 employees costs about $4,000 per year; and for up to 300 employees, about $7,000 per year. "For companies larger than 300 employees, the plans are structured based on participation," she says. Fee ranges vary widely between banks, brokerage firms, insurance companies and others, so shop around for the best possible price.
* Operations procedures. You will have to designate a benefits planning committee member to work with the plan administrator to do the bookkeeping and government compliance testing for the plan. Bookkeeping involves such things as preparing taxes for the plan, ensuring that the proper payroll deductions are made for each employee and seeing to it that their investment instructions are carried out. Government compliance testing involves annual discrimination tests to make sure that all 401(k) plans are run fairly. Highly compensated employees (those making $80,000 or more) will reap disproportionate pretax benefits from a plan unless adjustments are made. "The tests are done on a percentage basis to make sure that people on the higher end are not putting away more than the lower-paid employees. If that's found to be the case, the employer must make a voluntary 3% contribution to the lower-paid employees to make the plan more fair," Boyle explains.
Operations also involves explaining to employees that they can access their account information via a 24-hour phone system or the Internet.
* Investment options. Your employee benefits planning committee will have the task of selecting the investment vehicles your employees will have to choose from. Most firms offer a choice of mutual funds ranging from aggressive growth funds to fixed-income investments.
You'll be asked to select from the choices your plan administrator offers, so make sure the funds are capable of meeting the investment objectives of the majority of your employees. Keep in mind you will be limited in your options based on the plan. Some firms, such as Merrill Lynch, offer employees the option of a stock trading account, where they can make their own stock purchases.
* Education. Employers are responsible for keeping employees informed about their investments, the tax consequences and benefits associated with their investment options and the sound principles of financial planning. The plan administrator you choose will play a major role in providing this information to your 401(k) plan participants. Your employee benefits planning committee will have to determine how skilled your administrator will be at providing such information, and then set up a schedule of meetings where the administrator can answer the plan members' questions.
Once you and your plan administrator have agreed on how each of the aforementioned areas will be handled, you should have a 401(k) plan strategy you can be proud of.
Business owners will find that most companies that administer 401(k) plans will offer some type of package that seeks to incorporate all of these areas into an effective strategy. For example, Union Bank offers Select Benefit, which provides a bundled program in which the bank administers and runs the plan, and educates employees about the benefits of 401(k) plans.
Brokerage firms such as Merrill Lynch offer similar programs, but they also have regular investment advisors available for any employee whose company has a 401(k) plan with their firm. As with any investment, when formulating your 401(k) strategy, do your homework and make choices that are in line with your objectives.
For more information on 401(k) plans, contact: The Institute of Management and Administration, 212-244-0360, or visit www.ioma.com; the Profit Sharing/401(k) Council of America, 312-4418550, or www.401k.org; or the 401k Forum, www.401kforum.com.
Check These Books Out:
401(k) Plans: A Comprehensive Planning and Compliance Guide By Michael E. Lloyd et al John Wiley & Sons, $115
The Decision-Maker's Guide to 401(k) Plans: How to Set Up Cost-Effective Plans in Companies of All Sizes By Stephen J. Butler Berrett-Koehler, $22.50
The Handbook of 401(k) Plan Management Edited by Towers Perrin Irwin Professional Publishing, $70
To order, call Books NOW! at 800-BOOKS-NOW or visit www.BooksNow.com/BlackEnterprise
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|Author:||Scott, Matthew S.|
|Date:||Aug 1, 1999|
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