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The Small Business Perspective: R2--Why You Need a Retirement Plan
2006 March 1
© 2006, Libertiny Financial LLC
While an entire article can be written on the direct financial benefits of having a retirement plan in place for the business owner, this article addresses an equally important issue known as "R2": Recruiting and Retention of key employees. Key employees are the very few people who are critical to the growth and success of your business--your associate rainmaker, the 20% who are doing 80% of the work, and your customer service representative who is the voice, smile, and face of your business.
In the dark ages, your key employees compared notes on total compensation with trusted friends, colleagues they met in business associations, and their neighbors. Today, all of these channels of communication remain in place and we've added the world's largest neighborhood to the mix: The world wide web. Compensation was never a secret, the difference today is that the dissemination of information on compensation is widely and easily available to everyone. In other words, your employees know precisely what the going rate is for their services. And the ones that know the details are the ones who you need to recruit and retain.
A story: A friend of mine, who is a top notch business manager for a division of a large firm, has found himself, much to his chagrin, as the training person for not only people moving up through his firm, but for people who he'll soon be competing against. He's an excellent coach, has an outstanding reputation, and his office has become a revolving door--in come bright, motivated people with little experience and in a short time, out go these same people with an exceptional, hand's-on business education. Why? They recognize very quickly that their total compensation package is not as high as the package available down the street. He's done the math and every time this situation occurs, it sets him back 6 months in meeting his financial goals in addition to the time required to find and train a new person. Imagine what that would be like for you, a small business owner who doesn't have the human capital to draw on that's available to a large business. At this point, he doesn't have the option to compete because the decision isn't his. But the decision to compete is yours!
Folks who I work with typically site the mass confusion and overwhelming amount of paperwork, bewildering array of suppliers, arcane terminology, and perceived expense for not implementing a retirement plan. The ones who have implemented a plan frequently find poor follow-up service.
This doesn't have to happen to you if you follow these steps:
1) Delegate: Find an independent financial planner that you trust and delegate the majority of the workload to them--that's what you're paying them to do.
2) Don't micromanage: Set a few goals from the 50,000 foot level and then let your planner present you with 2 or 3 well researched and documented options. At this stage, key highlights such as the upside and downside to each plan should be presented on a one page comparison chart, not 100 pages of details.
3) Delegate again: Select the option that best suites your situation and then delegate the details back to the planner. Let your planner quarterback the process and people involved including: The broker, mutual fund company, accountant, attorney, and Third Party Administrator (TPA).
4) Require a timeline: This process will take several months to complete if done correctly. If you get a very quick turnaround, your planner just prepared a "canned" plan for you. Throw it away and find a new planner.
Demand a turnkey plan: Make sure that the plan that you select includes ongoing support so that you don't waste your time filling out endless documentation.
5) Now read the details: Insist on a document from your planner that specifically states who is responsible for payroll deductions, taxes, investment selections, and investment coaching for your employees. None of these issues should be your responsibility.
A tip on Plan Choices: The previous steps address the issues of confusion, paperwork, supplier relations, arcane terminology, and poor follow-up service. But what about cost? With changes to the rules related to retirement plans and more competition in the industry, your plan doesn't need to be complicated or expensive. Depending on the size and legal organization of your firm, you have choices ranging from traditional 401k and 403b plans, to the new Roth 401k, and lower cost alternatives such as a Solo 401k, Savings Incentive Match Plan for Employees (SIMPLE) IRA and Simplified Employee Pension (SEP). There's a plan out there that's right for you and your employees.
A small business owner should expect a lot of hand holding during and after the initial implementation of the plan. After all, you're not an expert in this area nor should you have to spend your time to become an expert. Here's a checklist of key questions that your financial planner should ask you:
1) Is this a new plan or rollover?
2) If it's a rollover plan, what is the plan's asset value?
3) How many employees are expected to contribute to the plan?
4) What is the expected annual cash flow into the plan?
5) Do you require small, medium, or a large variety of funding options?
6) How much plan flexibility do you need (employer contributions, employee contributions, or both)?
7) Is there a designated plan administrator in your office?
8) If there is a plan administrator, is that person computer literate?
9) How frequently do you want me to meet with you and your employees?
10) Do you have cost constraints?
11) May I send a questionnaire to your employees for their feedback about the retirement plan?
12) When may I meet with your employees?
A tip on Expected Employee Contributions: Studies have shown that many families approaching retirement age have very little savings [Ref: Testimony to the United States House of Representative's Committee on Education and the Workforce, 2004 February 25 by Peter Orszag, Brookings Institute]. Employees are just as confused regarding retirement plans as you are. It's important that your planner meet with them at least once per year to answer their questions. It's equally important that if your particular plan allows for it, automatically sign up your employees to participate. Do your part to help your employees have an enjoyable retirement by requiring them to actively "opt out" of your plan.
A tip on the Variety of Funding Options: Depending on the type of plan that you implement, you may have the opportunity to literally offer pages of fund selections to your employees. This is unnecessary, creates artificial complexity, and depending on your plan, can add to the plan expenses. A well designed plan needs 10 to 15 fund choices.
How does all of this help you to recruit and retain key employees? Based on the perceived issues that we've examined here, it's not surprising that many small businesses do not offer retirement plans. By implementing one, you're giving yourself a competitive advantage and treating your employees as the family members that they really are. Your present employees will be much more motivated to continue working for you and you'll have another tool to use as you recruit your next key employee away from your competition.
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