According to the Bank of America Merrill Lynch Workplace Benefits Report released in June, 66% of small business owners now say retirement benefits are important to attracting new talent, and 58% say they are important to driving loyalty. "A few years ago we'd have small business owners who wouldn't put this [issue] high on the list of things that attract and retain employees," says Rich Linton, head of Small Business Retirement for Bank of America Merrill Lynch. For years, the premium had been on healthcare, which, is still a top priority among job seekers.
But the real change is that small business owners are taking responsibility for making sure their employees are financially literate and able to plan their own financial futures, Linton says. In his 20 years in the retirement business, he has never seen such serious interest in employee retirement plans from small business owners. "That's an astonishing shift," he says. "Five years ago it was difficult to get business owners to engage in education beyond the basics of 'Here's your 401(k), here are your options, here's how the plan works,'" he says. Now they are asking financial advisors for help making their employees better savers and investors.
The downturn in 2008 and 2009 contributed to this shift, Linton says. Retirement benefits are not cheap to provide, so many employers want to be sure they and their employees are getting their money's worth. "Employers are asking their advisors to help with 'How do I make my employees more financially literate so they can optimize the benefits I'm providing?'"
Tom Foster, national spokesman for The Hartford's retirement business, says that small business owners often start from the wrong place. They assume they must put away a certain percentage for their own retirement, but don't really come up with a game plan for selecting a plan and funding it. "Once they figure out how much to allocate, then they should seek out expert advice from a financial advisor," Foster says.
Consider the case of a cardiac surgeon with two partners plus seven employees that Foster handled. The doctors had a profit sharing plan for years. The surgeon and his partners each saved $49,000 per year, and put away the matching percentage for his employees based on their salaries. After a while, the doctors' wealth accumulation slowed due to slumping markets. Foster helped them change the plan from a traditional 401(k) profit sharing plan to a strategy using "New Comparability Allocations." One requirement for this plan is this: If owners want to be able to contribute the full $49,000 for themselves, they must contribute a minimum of 5% of salary for each employee.
In addition, the surgeon and his partners added another retirement plan, called a "cash balance plan." This works for small business owners who are over age 45, have sustained profitability and are worried about taxes and accumulating enough to retire. If done properly, the business owner does not have to pay all of the employees additional money in the cash balance plan. After paying the employees 5% on the defined contribution plan, and then adding another 2.5% minimum on the cash balance side, the business owners only have to include 50 employees, or 40% of the employees, whichever is less.
In the case of the doctor and his partners, with 10 employees total, 40% equals four employees. The doctors opted to include the three partners, plus one employee. They chose the one who made the smallest salary, and whose contribution would cost the partners the least amount of money. "The beauty is I get to pick and choose," Foster says. There are so many different ways to allocate dollars, he says. "If I'm a younger business owner I might not look at plan design because I've got 30 years to fund the plan. Whether you're young or old there's a retirement plan to fit your needs, you just have to get the right advisors."
Experts agree that advisors must start by asking clients to answer a few basic questions. What is the primary goal of the business owner in starting the retirement plan? Is it to build a competitive benefits program to attract and keep employees, or to put money away for their own retirement? What is the budget for setting up a plan and contributing to it? What do the business owners need for themselves?
