BuyerZone Employee Retirement Plans Buyer s Guide will:

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1 Introduction As a business owner or manager, you want to attract and retain high quality employees. By offering retirement plans such as 401k or Individual Retirement Account (IRA), you can motivate potential and existing staffers by helping them prepare for life after the workforce. Employee retirement plans allow participants to put pre tax earnings into an investment account. This lowers their current taxable income, helps them save money for the future, and lets them defer paying taxes on that income until they start making withdrawals. The good news is that today s retirement plan options are cost effective and require little to no administration. An employee retirement plan professional can develop the right plan for your company and your budget. This BuyerZone Buyer s Guide will: Explain the various retirement plans available Detail how to avoid costly discriminating testing Describe which providers you can work with and what you should look for in a provider Determine the costs involved in setting up and maintaining a plan. Table of contents Understanding the 401k plan k Plans discrimination testing...2 Understanding IRAs and other retirement plans...3 Retirement plan administration...4 Choosing a retirement plan provider...5 Employee retirement plan pricing...5 Employee Retirement Plan Tips...6 Pricing guidelines Actual costs for employee retirement plans will vary tremendously depending on number of employees, types of services, and assets invested. Here are some very rough estimates for the various fees of a 401k plan. We'll go into more detail about 401k and other common plans in Employee retirement plan pricing on page k plan fees Estimated cost Set up fees $500 to $3,000 Administrative fees $800 + $15 to $40 per participant per quarter Discrimination testing $800 to $2,500 Page 1 of 7

2 Understanding the 401k plan When starting an employee retirement plan, you ll find several options available. However, most businesses appreciate the ease and familiarity of traditional 401k plans. 401k plans give employees more flexibility with their investment options and contribution amounts than other retirement plans. Participants can invest up to $16,500 in 2009 and incrementally more each year. Employees 50 and older can also take advantage of a catch up provision allowing them to invest several thousand dollars more each year, up to $5,500 in Participants don t pay taxes on contributions until they withdraw funds once they reach 59½ years in age, which is when withdrawals are allowed without penalty. However, some 401k plans allow participants to request a loan or hardship withdrawal before the minimum age is attained. Matching, where your company contributes to participants 401k plans, is a very valuable tool to get employees to participate and remain part of your company for years to come. 401k plans allow you to develop vesting schedules where you can determine how many years an employee must be with the company to gain ownership of your matching contributions. You can allow partial vesting over a period of years the employee gains ownership to an equal percentage of funds each year or 100% vesting after multiple years. If you choose to match employee contributions, expect to pay about 1% of total payroll. You then have two contribution options: match a percentage of an employee s contributions (up to 6% of total compensation), or a fixed amount for every employee. Employee contributions are always 100% vested from day one. As the plan sponsor, you can seamlessly rollover an employee s 401k plan from a previous employer into your plan. You re also eligible for tax credits for setting up the plan and for matching employee contributions. Many businesses feel they need over 100 employees to start a 401k plan, but that s not necessarily true. Even if you have fewer than 100 employees, there s a 401k plan for just about any budgetary concern, administrative need, and investment goal. Also, if you re expecting to grow the company, traditional 401k plans are modular, allowing you to add and remove participants over time. 403b plans for non-profits Non profit organizations such as universities and hospitals can offer a variation of the 401k known as the 403b. The two plans are essentially identical except 403b participants can t invest in individual stocks. Rather, their funds are placed in annuity contracts with insurance companies or into custodial accounts holding mutual funds. 403b plans also feature the 15 Year Rule. This allows employees with 15 years of service to contribute an additional $3,000 per year for a maximum of five years. 401k Plans discrimination testing The IRS imposes strict guidelines on 401k plans to ensure that all employees, regardless of income, contribute equally to a plan. Discrimination testing determines if a company s traditional 401k plan is too top heavy. If employees earning more than $100,000 per year contribute over 2% more than lower compensated employees, the higher paid employees must reduce their deferrals. The excess contributions would Page 2 of 7

3 then be returned to the high paid employees and your company may face penalties. There are two ways to avoid having top heavy 401k plans. The first is obvious: convince rank and file employees to contribute more through education and incentives. The second option is to convert traditional 401k plans into Safe Harbor 401k plans. Safe Harbor 401k plans require you to match employee contributions as a percentage of salary up to 4% of employee compensation or provide a fixed contribution of 3%. You must make these contributions to all eligible employees 21 years or older with 1,000 hours of service in the previous year, even if they don t contribute on their own. All funds are 100% vested from day one. This matching will increase your expenses, but you won t be subject to discrimination testing and your employees are free to contribute any amount they wish up to the plan limits for the year. You must continue to contribute to Safe Harbor 401k plans even if business experiences a downswing. If you must halt contributions, you re required to provide 30 days notice to your employees and will then be subjected to discrimination testing. As more employees take full advantage of the plan, your chances of passing discrimination testing increase. Start by educating them about the benefits and necessities for planning for retirement. Providers can supply you with brochures, information packets, and even software detailing the importance of saving early and often. If you have employees in their 20s and 30s, explain how time works in their favor by providing a nice head start to exponentially increase their retirement savings. If they are closer to retirement age, detail how the catch up provision can compensate for those lost investment years. Understanding IRAs and other retirement plans If a 401k plan sounds too administratively taxing, you do have other IRS approved options. Businesses with fewer than 100 employees can offer Individual Retirement Accounts (IRAs) instead. IRAs are free from the complexity and costly testing requirements of traditional 401k plans, but do provide similar pre tax benefits. IRAs require little to no administration and cost less to start up than 401k plans, but have lower plan limits, fewer investment choices, and tighter restrictions. A Simplified Employee Pension (SEP) IRA is best for very small companies (5 to 20 employees) or self employed entrepreneurs. The deadline for establishing a SEP IRA is tax day far later than other plans. Only employers can contribute to SEP IRAs established after December 31, 1996; these tax deductible contributions can vary from 0% to 25% of salary, or up to $49,000 in While you re not required to contribute every year, you must contribute the same percentage to all eligible employees. Another version of the IRA is the Savings Incentive Matching Plan for Employees (SIMPLE) IRA. These plans offer a flexible, easy toadminister solution for businesses with 100 or fewer employees that have no other retirement plan. Employees who currently earn at least $5,000 and previously earned $5,000 in any two prior years are eligible to participate. SIMPLE IRAs are funded by employer contributions and optional employee contributions. You must provide either a fixed 2% contribution of employee compensation to all eligible staffers or match up to 3% of employee compensation up to $11,500. If business is slow, you can reduce the amount you match for any two years in a fiveyear span. All matching funds are immediately 100% vested. SIMPLE IRAs feature lower plan limits than traditional 401k plans ($11,500 maximum in 2009; additional $2,500 catch up for employees over 50) and must be set up between January 1 and October 1. Another cost effective alternative to traditional 401k plans is a SIMPLE 401k plan. Small businesses with less than Page 3 of 7

4 100 employees and no other retirement plans are eligible, and can offer the plan to all employees 21 years and older that were employed for a calendar year. They don t require discrimination testing, and administration is, well, simple. SIMPLE 401k plans require you to match employee contributions up to 3% of salary or make a flat contribution of 2% of salary to employees. You must provide matching to all eligible employees and participants are 100% vested. The limits of SIMPLE 401k plans are considerably lower than traditional 401k plans $11,500 in 2009 with a $2,500 catch up for employees over 50. Also, you can t stop contributions even when busine ss is slow. Sole proprietors with no employees other than a spouse may want to check out the solo 401k. It s easy to administer and inexpensive, and the benefits are similar to conventional 401k plans. Since you re the only employee, there s no concern of the plan being top heavy. The solo 401k features very high limits but can only cover you and your spouse you can no longer contribute once you add any non spousal employees. As of 2009, you can contribute up to $49,000 $16,500 from salary plus an additional profit share amount up to $32,500. If you re over 50 years of age, you can contribute an additional $5,500 per year. Businesses can also offer profit sharing plans such as the KEOGH for employees. The fees are similar to the 401k and they provide the largest annual limits of any available plan. However, it is a very expensive option, best for very small companies with 10 to 15 employees, all of whom are highly compensated. Retirement plan administration Retirement plan administration and setup may sound like a lot of work and it is. Fortunately, a plan provider can help set up the plan, maintain records, and file taxes. A plan provider is typically an insurance firm or mutual fund company, or a third party administrator (TPA) that works with multiple mutual fund companies. A provider can help you through these three critical stages of retirement plan administration: 1. Select a type of plan that will adequately provide for the retirement of your employees and address your company s financial requirements 2. Establish the plan by choosing one with a detailed plan document, appropriate assets, investment tools for employees, and a viable recordkeeping system 3. Maintain and grow the plan by educating staff about the plan, making deposits on time, keeping up to date with government regulations, and managing plan assets. Bundled vs. unbundled plan providers Retirement plan administration usually involves two main categories of providers: bundled and unbundled. Bundled plan providers provide a one stop shopping source and are best for small companies because of their low cost and simplicity. They provide a single point of contact for all services retirement plan administration, investment options, recordkeeping, and employee education. Most bundled providers are from insurance companies and financial institutions that have relationships with several mutual fund companies. However, they may not have a wide selection of investments to choose from, and customization is limited. Larger companies seeking more control can opt for an unbundled plan provider. With an unbundled plan provider, you can choose a combination of in house staff and providers to manage your company s retirement plan administration. Unbundled plan providers also offer a wide variety of investment choices. Cost can be a deterrent they are much more expensive than bundled plans. Because you have to manage multiple sources to make changes, they re also more complex to administer. Page 4 of 7

5 Choosing between a bundled and unbundled provider comes down to cost and company needs. If you have more than 100 employees, it may help to compare both types. Companies with fewer than 100 employees typically opt for bundled providers because of their lower cost and simplicity. Choosing a retirement plan provider Once you decide if you want a bundled or unbundled plan, make sure you do your due diligence on each retirement plan provider: some providers specialize in one type or the other. Vendor expertise should always be a top concern, so find out how long each potential retirement plan provider has been in business. The longer they have been around, the better their chances of understanding what employees want, knowing how to deal with ongoing tax changes, and adjusting to market conditions. If they have successfully helped clients in businesses similar to yours, that experience is particularly valuable. Find out how many plans the provider manages. Most have between three and 10. That s fine if you re a small company looking for a basic plan. But if you need a lot of assistance getting set up, or you need to rollover funds, you may want a retirement plan provider with more plan options. Also, learn what their average assets are. Some vendors specialize in certain asset sizes. If your company will contribute less than $1M in assets, a vendor whose clients average $10M in assets or more might not be a good fit. If you re not sure a traditional 401k plan is right for you, choose a provider who offers alternative options such as IRAs or SIMPLE 401k plans. It s always best to choose a retirement plan provider that can adapt a plan to your company s current and future needs. If you are new to the world of employee retirement plans, you ll want a vendor who is always accessible for consultations. However, availability doesn t always equate to quality. Make sure they provide a solid mix of good customer service, education, and plan choices. Many providers offer your employees 24 x 7 online access to their accounts to check balances, exchange funds, and research investment options, which will help maintain employee interest and participation. Retirement plan providers should also make sure your plans are compliant and assist you with changes if necessary. Make sure to get a list of references from each retirement plan provider. Get critical information from the references they supply, including: Has the plan been in the best interest of your employees? What kind of customer service do they provide (web based, phone, live chat?) Do they provide updated marketing materials, web links, monthly newsletters, etc? Do you have online access to account information? How do they help keep your plan compliant? Do they offer classroom education for your employees? Do they offer several plan options, or just a single plan? Did you get a complete breakdown of all fees? Employee retirement plan pricing Total costs of an employee retirement plan can be very difficult to pin down. There aren t any hard and fast rules, and vendors charge individual fees for everything from the written plan document to the withdrawal of funds. And of course, any matching funds you contribute are an additional cost to anything listed here. If you want to see actual examples of what other BuyerZone users paid for employee retirement plans, visit BuyerZone.com and check out our real world employee retirement plan pricing article. Page 5 of 7

6 401k pricing In general, expect to spend $5,000 to $10,000 annually for a 401k plan. These costs will vary based on the number of employees you have, the types of services you require, and the assets invested. Here s a breakdown of the primary costs: Set up fees can be $500 to $3,000, depending on the number of employees and the investment options you provide. Annual administrative fees for companies with under $1M in total assets can be $800 plus an additional quarterly charge of $15 to $40 per participant. Larger companies will pay a higher annual fee but lower perparticipant costs. Discrimination testing can cost $800 to $2,500, if it s not factored in with your annual fees. Pricing for other plans If the costs for traditional 401k plans seem overwhelming, consider a SIMPLE 401k or the various IRA options. They are less expensive and require little to no administration or compliance testing, but are subject to the limitations (discussed in IRAs and other retirement plans.) A solo 401k plan can cost as little as $40 to $200 per year, plus annual management fees of 1% to 1.5% of assets. A SIMPLE 401k will run you about $400 to $1,000 annually, with an additional charge of $20 to $50 per participant. Also add administrative services at an hourly rate of $100 to $150. Set up fees for SIMPLE IRA or SEP IRA plans can be as low as $20 to $50 per employee, with annual administrative and record keeping fees ranging anywhere from $0 to $1,000. Profit sharing (KEOGH) plans have administrative fees similar to standard 401k plans. The key difference is the required cost of a reporting service which accounts for $1,000 to $2,000 of the total costs. Other fees that may apply to all types of plans include $800 to $1,500 to rollover assets from a pre existing plan, $100 to $250 per hour for consulting or investment advice, and small fees (0.25% to 1%) for selling and transferring funds. You can pass some of these fees on to employees, but if they re relatively small $10 or less per participant it looks a lot better if you just pick them up. Almost all companies require employees to pay if they take out a loan for a 401k plan, typically $30 to $75 to process the paperwork and distribute checks. Most vendors will waive some of these fees for the largest accounts the more assets you commit to their management, the more of a break you ll get. Employee Retirement Plan Tips When cash flow is tight, it s tempting to save money by cutting back or stopping your employer match, but that s a mistake. If the matching was a big reason low and mid level employees signed up, taking it away could cut back on participation and increase your risk of failing discrimination testing. Try to find other areas to cut back, such as offering fewer investment options or eliminating sessions with an investment advisor. Don t forget about the tax benefits to starting an employee retirement plan. Since 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) has provided a tax credit of 50% for setting up the plan Page 6 of 7

7 and educating employees. You can receive a maximum credit of $500 per year for three years. Make sure that you offer direct rollovers for employees with a 401k or IRA from a previous employer. This way, the check from their old plan goes directly to your provider for deposit. The check never reaches the employees hands and they don t have to pay any taxes or penalties on the amount rolled over. If you offer company stock as a profit share option, make sure it is a small percentage of total benefits. After the Enron scandal, many employees are concerned about losing their nest egg if a company ever goes under. If you pass some of the smaller fees onto your employees, try to keep them reasonable. Most companies will pay for individual account fees (except for sale and exchange charges). If employees have to keep paying out of pocket or a percentage of their account for every service, they may lose interest in the plan. If you choose to allow loans against your 401k plan, employees can borrow up to 50% of their vested account balance for up to five years. Even without a loan provision, employees can still request withdrawals for specific hardships, such as losing a job or medical emergencies. This is not your responsibility your plan provider should detail these requirements in the plan document, or direct employees to additional information through the IRS web site. Page 7 of 7