PLANSPONSOR - November/December 2024 - 37

remain small relative to the post-tax savings and potential future
benefits of investing in the plan. " You're talking about investment
growth of multiple, full percentage points and fees that are
basis points, " says Sean Jordan, head of small- and mid-market
segments at Principal Financial Group in West Springfield,
Massachusetts. " They're different scales. "
For participants, any employer match can further offset costs,
plus other benefits can encourage saving in a plan, despite fees.
" There are things participants can get from a plan, such as the
possibility to take a loan or make a hardship withdrawal: Those
might not be available in an alternative, " says Joe Valletta, principal
owner of HR [Human Resource] Investment Consultants
Inc. in Baltimore and the 401k Averages Book's co-author.
Another factor in favor of plan participation despite higher
fees is that, as both the plan and participant assets grow, the plan's
costs should start to decline, especially in a PEP that is quickly
expanding. So, even if tax benefits do not outweigh expenses in
the first year, participants' savings compound over time.
" Generally, as a plan gets bigger, the cost per participant will
get lower, " says Schmelzle. " The benefits to all of us, as individuals,
of saving and starting early far outweigh the risk of not doing
so, even if you compared it with a similarly situated non-tax-qualified
vehicle such as a brokerage account, where trying to invest
those dollars is generally more expensive. " -Beth Braverman
Small-Plan Options for Small Employers
A
lthough many understand the benefits
of offering one, more than
40% of small employers have no retirement
plan for their workers. Compare
that with just 9% of large businesses,
employing 500 or more.
Automatic individual retirement
account programs developed by states,
along with the new tax credit for small
businesses provided for in the SECURE
[Setting Every Community Up for
Retirement Enhancement] 2.0 Act, have
made it easier for businesses with up to
100 employees to offer a plan. Still, more
work must be done to close the access gap.
As of 2023, small businesses employed
about 46.4% of private sector employees,
the Small Business Administration found.
State auto-IRA mandates now require
private sector employers in 17 states to
facilitate participation in a state-run plan
or provide their own plan, with other
states either preparing to implement or
considering a state program. According
to Georgetown University's Center for
Retirement Initiatives, about 220,000
employers are currently registered in state
auto-IRA programs, and about 66,000 are
conducting automatic payroll deductions.
Weigh the Differences
When deciding between sponsoring an
employer plan, joining a pooled employer
plan or facilitating a state auto-IRA, small
employers have several things to consider,
says Chris West, managing director and
Art by Pete Ryan
head of the U.S. LifeSight PEP at WTW in
Dallas. Offering a 401(k) has significant
costs, she says, such as administrative
fees, regulatory and compliance fees, and
management and investment fees; if an
employer also makes matching contributions,
the plan may be difficult to afford.
" 401(k) plans involve compliance regulations,
and there's annual testing to ensure
the plan is not favoring [highly compensated
employees], " West says. " This kind
of complexity
can be time-consuming;
it can require specialized knowledge ...
[and] hiring some kind of third party. ...
Oftentimes, small companies just don't
have the human resources or the departments
they need to manage a 401(k), and
that could feel burdensome to them. "
West advises employers to listen to
their staff regarding what they want in
retirement benefits. A PEP is " brilliant for
a small business, " she says, as it provides
advantages of scale and offers a low-cost
investment lineup. " You're not putting
your
resources toward administration. "
For example, being in a PEP eliminates the
need for the plan audit typically required of
401(k)s. " And most of the fiduciary responsibility
is lifted off an employer; [its] fiduciary
duty is just to monitor the PEP itself. "
West says small employers are
showing significant interest in joining
the LifeSight PEP, but larger employers
are too, as they also see the benefits of less
administrative and fiduciary demands,
especially as 401(k) litigation increases.
employees,
Potential small-plan sponsors have
another new alternative as well, says Ron
Ulrich, vice president of product consulting
and compliance at ADP Retirement
Services in Salem, New Hampshire.
Eligible employers with 100 or fewer
including at
least one nonhighly
compensated participant, may
now claim a tax credit of up to $5,000 in
each of three years for the ordinary and
necessary costs of starting a SEP [simple
employee pension] plan, SIMPLE [savings
incentive match plan for employees] IRA
plan, or qualified plan such as a 401(k).
" Increasing the tax credits definitely
seems to have had an impact on small
employers being able to start up plans, "
Ulrich says. When his firm tells clients
about the tax credit for startup administration,
this " definitely allows them to create a
plan where they [couldn't have before] due
to tax cash flow issues they may have had. "
In fact, he says he attributes the new
plans ADP has as clients to the tax credit.
Moreover, the contribution credit-
also provided for by SECURE 2.0-lets
small employers earn up to a $1,000 credit
for each participant. Last year was the first
year for the credit, so, he says, it is still relatively
new. " We think that [will also] have a
big impact-not only on small employers
creating plans, but on being able to make
a contribution[-a safe harbor contribution-]on
behalf of their employees ... that
they may not have been able to afford otherwise, "
he says. -Remy Samuels
PLANSPONSOR.COM November - December 2024 37
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