Fiducial | We help your business grow and be profitable.

by Renee Fellows

April 30, 2008— America ’s employees are worried. According to the 2008 Employee Confidence Survey ® performed by the Employee Benefit Research Institute (EBRI), the percentage of workers very confident about having enough money for a comfortable retirement decreased sharply, from 27 percent in 2007 to 18 percent in 2008. This is the biggest one-year drop in the 18-year history of the survey. Decreases in confidence occurred across all age groups and income levels but was particularly acute among younger workers and those with lower income.

The current economic downturn and long-standing financial concerns also played a pivotal role among those surveyed. When asked what they think is the most pressing financial issue facing most Americans today, just 5 percent of workers and 4 percent of retirees cited saving or planning for retirement. Instead, most workers mentioned:

• Making ends meet or the cost of living – 17%

• Paying for health insurance or medical expenses – 16%

• Making mortgage payments or paying for housing – 16%

• Paying down debt or loans – 13%

• Fuel or energy costs – 9%

• Job uncertainty – 6%

Yet less than half of small businesses typically offer a retirement plan to workers, says the EBRI survey. The good news is that employee interest is growing. F rom 1987 to 2006, workers at small businesses have shown an increased probability of participating in an employer-sponsored plan when one is made available to them.

A new law making it easier for companies to automatically enroll their employees in 401(k) plans went into effect December 24, 2007. The Pension Protection Act of 2006 amends the Employment Retirement Income Security Act of 1974 by giving employers the green light to automatically enroll employees into pension plans. Rather than allowing employees the choice to "opt out" of their company's default 401(k) plan they are now automatically "opted in".

Now new federal rules spell out how it will work: Employees will first be given the chance to pick their own retirement investments or tell the company they don't want to participate. But if the company gets no response from an employee, automatic enrollment will swing into action. A second notice will tell the worker how the company is investing a portion of his paycheck. Such a notice will be sent every year.

Additionally, the legislation:

• Ensures that workers have more information about the performance of their accounts;

• Provides greater access to professional advice about investing for retirement;

• Gives workers greater control over how their accounts are invested; and

• Makes permanent the higher contribution limits for IRAs and 401(k)s that were passed in 2001, enabling more workers to build larger retirement nest eggs.

For small business owners who are struggling to survive recession, the thought of adding a retirement plan may seem
overwhelming. The plan doesn’t need to be complicated to be effective. You’re working hard for your money; isn’t it
time that your money started working for you?

Start with the basics.

If you don’t have any retirement planning in place, stop what you’re doing and make immediate plans to set up a basic retirement account. National investment companies like Fidelity and Vanguard or even commercial banks like Bank of America provide low-cost plans that are easy to set-up and administer.

There are several different types of retirement accounts available to small business. A few of the easiest to manage include Simple Employee Pension (SEP), Saving Incentive Match Plan (SIMPLE IRA), 401(k), and the Defined Benefit Plan.

The Simplified Employee Pension Plan (SEP IRA) – This is a great option for a business with only a handful of employees that wants to provide a low cost, low maintenance plan. The plan is funded with tax-deductible employer contributions, and must cover all eligible employees. Employee contributions are not allowed. With a SEP there is no "plan document," so there’s no need to file annual reports with the IRS. Contributions can vary from year to year. So if the company hits a lean spell, you aren't locked in.

Savings Incentive Match Plan (SIMPLE IRA) – This is a better option for employees because they are allowed to make contributions to their own IRA. Of course with every positive comes a negative. The employer must match the contributions paid by the employee. Also, the employer contribution to his/her own IRA is capped at $10,000 with a 3% maximum employer match.

Profit Sharing Plan – This type of plan is a great way to boost morale and encourage employee interest in the organization because they in effect become beneficiaries of the company’s success by sharing in the profits. Beware that employees will come to ‘expect’ their annual profit sharing and morale can crash rapidly in a down year when profits are not as good.

401(k) – A great option for small businesses with more than 25 employees, the 401(k) can provide investment options, levels of vesting that can also help to build loyalty and employee retention, and relatively low management fees for the company. There’s also hidden benefits. Loans can be taken against the 401(k) by the employee and repaid with interest. The employer can also make additional bonus contributions to the employee’s plan.

Defined Benefit Plan – Not as out of fashion as you might think, the Defined Benefit Plan may be a good fit for the
older business owner (50+) looking toward retirement. Often established as a Keogh plan, the Defined Benefit Plan can receive substantial owner contributions as a quick way to stash away those retirement dollars in a limited time horizon. There are drawbacks, the plans are expensive to maintain and require consistent contributions. If you cannot make a commitment to the requirements, it may be best to look at another option.

Learn to Fish

The Chinese proverb rings true. ‘Give a man a fish and he will eat for a day. Teach a man to fish and he will eat for a lifetime.’ Employees must consistently be informed about plan benefits and dangers. Nearly sixty percent of employees with a 401(k) reported cashing in the plan when they changed jobs. That means that while they were diligent about contributing to and maintaining a 401(k), they weren’t smart about the penalties and the loss of savings when closing the account. A majority of that sixty percent didn’t open another account, but rather spent the cash outright. This is where a company-wide educational campaign is a necessity. By helping employees to appreciate their investment and the financial drawbacks of early withdrawal, they’ll be less likely to make rash decisions that may affect their financial situation for years to come.

The government purposely set up penalties and punishments for not properly managing 401(k) funds. The least of which is an almost forty percent government take of monies withdrawn early when accounting for capital gains taxes, penalties and year end taxes on the income received. According to a recent article in USA Today, the U.S. retirement system was structured so that retirees could count on three sources of income: Social Security, pension benefits, and personal savings. Social Security now faces a 75-year deficit and was never intended to fully support workers in retirement. The White House Pension Protection Act brief goes on to say, “ If we fail to act, Social Security, Medicare, and Medicaid will be almost 60 percent of the entire Federal budget in the year 2030.” Yet 40% of retirees say that government plans are still their primary source of income, according to a survey by the Employee Benefits Research Institute (EBRI). A sign that we still have a great deal of educating to do.

Employees look to their employer for direction, security and long range planning. While the task of increasing employee enrollment in the retirement plan may seem time consuming, it can translate to increased job satisfaction, improved morale, and good will feelings toward the organization. To learn more about small business finances or ways to establish employee benefit packages, contact a Fiducial Advisor by calling 866-FIDUCIAL or visit the web at www.Fiducial.com.

Renee Fellows is the owner of ClearPoint Marketing Communications in Derry, New Hampshire. She works with small business clients to develop marketing and public relations strategies that bring business and customers closer together. She can be reached at 603-434-9433 or via email at Rfellows@oneclearpoint.com.

Whatever your small business needs, your Fiducial tax and financial professional can analyze your situation and recommend an appropriate action plan. To locate a Fiducial office nearest you on fiducial.com, see the Zip Code Locator located in the upper right hand corner of the page. Do you have a particular topic that we should be writing about that can help your business? Please send your suggestions to: Howard.Margolis@fiducial.com.

DISCLAIMER
Although we do our best to provide our users with useful and accurate information on our web site, we do not update this information which is derived from sources believed to be accurate. Users must understand that information presented does not serve as an endorsement of any particular company or individual and that this information changes frequently and is subject to differing interpretations. Users are hereby advised that they are responsible for ensuring that the facts and general advice obtained from our site are applicable to their specific situations and should discuss their specific tax, business, financial, and legal matters with pertinent professionals.