If you ask most small business owners, they know the benefits of offering a retirement plan. It’s not a lack of interest that keeps them from sponsoring one for their employees. Usually it’s an understanding of the challenges that come with offering a retirement plan and a feeling that they are insurmountable. Go ahead and ask your business owner clients why they don’t offer a retirement plan. Likely, their answer will include some of the following factors.
One of the driving forces behind sponsoring a retirement plan for many small businesses is that the owners themselves want to be able to save for retirement in a tax-advantaged way. However, in most plans, there are rules that limit how much the owners can put away based on how much their employees are saving. Lack of employee participation hinders the owners’ ability to save and also defeats the purpose of sponsoring a retirement plan. Why go through the time and expense of offering a retirement plan if no one is using it?
You can take a twofold approach to solve the employee participation problem. First, provide education. Studies have found that only 57% of U.S. adults are financially literate. (1) When workers are taught about investments and financial planning, they will feel more comfortable participating in a workplace retirement plan and also value it more. Second, you can adopt automatic enrollment, which uses our natural human tendencies to boost plan participation. Vanguard found that plans with automatic enrollment have a 92% participation rate. (2)
Another challenge that small businesses face is that sponsoring a retirement plan opens the business up to significant legal liability. The rules and regulations for retirement plans are many and detailed. Failure to maintain compliance can result in everything from fines and extra paperwork to loss of tax-advantaged status and even litigation.
The best way to handle compliance risk is to delegate it. Plan sponsors are not able to delegate 100% of their risk since they hold the responsibility of the delegation itself, but they can delegate much of it. Delegating legal risk is not just outsourcing tasks, but requires outsourcing fiduciary duties.
Lack Of Expertise
Finally, many small business owners hesitate to offer retirement plans because they know nothing about them and have no interest in taking the time to learn about them. It is enough work to run a business; most of your clients simply do not have the capacity to figure out how to sponsor a retirement plan as well. Everything from plan choice and design to ongoing administration can be overwhelming for an already-busy business owner.
In situations like this, it is best to partner with an experienced pension consultant. Pension specialists have the expertise to decipher not only what the best plan for your client is, but assist in the design and implementation as well.
How I Can Help
If you have a small business owner client that could benefit from sponsoring a retirement plan, I can help. As a pension specialist, I partner with financial advisors and their clients to design and implement retirement plans that help clients meet both their business and personal goals. I can also help shoulder the legal liability as a 3(16) fiduciary of the plan. To learn more about how we can partner to help your clients, email me today at email@example.com.
About Kenny Phan
Kenny Phan is a Managing Partner/Pension Consultant at FinancialFocus Retirement Plan Services. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses around the nation, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.