A Cost-Effective Retirement Benefits Package
A robust compensation package can make all the difference in pulling that high-powered candidate. But providing the complete package has always been a cost-prohibitive challenge for small and medium-size businesses. While much of the news lately has been focused on health-care benefits, a reliable retirement plan may be even more important to employees.
A recent survey by the Transamerica Center for Retirement Studies showed that "47 percent of employees said they'd prefer a job with excellent retirement benefits with minimum salary requirements vs. a higher salary with poor retirement benefits" and that "58 percent of employees whose employer doesn't offer a retirement plan said they would likely leave their current job for a nearly identical position with a similar employer who offered one." A recent MetLife survey revealed that employees are four times more concerned about retirement income than their employers. The tea leaves are clear to anyone who is reading them.
So how do small-business owners cost-effectively incorporate a retirement plan into their overall compensation package? A multiple employer plan sponsored by a professional employer organization may be the answer.
What is an MEP?
A PEO-sponsored Multiple Employer Plan is an alternative type of traditional single employer plan specifically authorized by the Internal Revenue Service. Here's how it works: The PEO sets up the plan, and the PEO's customers choose whether to adopt and co-sponsor the plan for their own use, taking advantage of the PEO's efficiencies of scale to reduce the cost of sponsoring and administering the plan. Within the plan, the businesses are referred to as "adopting employers" when they join the MEP, while the PEO, referred to as the "MEP sponsor," does the heavy lifting of sponsoring and administering the plan.
What are the benefits?
In addition to the ability to better attract employees during the recruitment process and retain them throughout their employment, working with an MEP--compared with operating your own plan--offers critical time and cost savings. With an MEP you don't have to worry about the raft of complexities associated with setting up the plan or the nightmarish administrative details. Instead, you focus on the key considerations: What sort of benefits, such as matching amounts, are right for your business?
The potential cost savings vs. a single employer plan.
The cost-savings benefit is one of the most compelling to an entrepreneur, so let's address that further.
- Compliance testing: In order to maintain tax-qualified status, 401(k) plans must pass annual tests for nondiscrimination. Under an MEP, the sponsor manages the ongoing testing process and, because it can realize economies of scale, most MEPs offer mid-year testing at no additional cost to give adopting employers a snapshot of the plan's year-to-date test results.
- Participant and service fees: Economies of scale also allow an MEP sponsor to obtain more services at lower fees.
- Auditing: Some plans are required by law to be audited annually by a public accountant. Business owners can avoid shouldering this cost alone since the audit is handled by the sponsor level.
- Form 5500 filing: This form is required annually for pension and welfare benefit plans to report the plan's financials, investments and operations. An MEP sponsor aggregates this across the plan and files on behalf of its adopting employers.
- Reduced fiduciary liability: The MEP sponsor has primary fiduciary responsibility for plan operations, including contribution remittance, investment selection and monitoring, and transaction processing.
- Document preparation: As laws and regulations change over the years, modifying the original plan can become quite expensive, as plan documents are typically required to be professionally drafted by an attorney.
At its core, the MEP is another example of building on the efficiencies of scale offered by the PEO co-employment platform. By taking advantage of the PEO's HR, payroll and benefits strengths to reduce or even remove burdensome administrative functions and costs, small businesses can compete for talent with the Fortune 500.
Let's take a look at how an MEP helped an engineering firm with 50 employees and $1.5 million in existing plan assets reduce its overall 401(k) plan expenses, all while making the plan even more effective.
The aggregate asset base of the MEP enabled the plan to qualify for lower asset-management fees, no-load mutual funds and other cost-effective investment opportunities, so investment expenses dropped by more than 50 percent. That meant greater investment power for the employees and higher potential ROI. Also, because the MEP sponsor fulfilled the role of trustee and was responsible for day-to-day plan administration (including contribution processing, employee eligibility notification and approval of participant transactions such as loans and distributions), the engineering firm found its cost, time distraction and liability risks associated with running the plan substantially reduced.
This was a clear win-win-win for the employees, the business and its future recruitment opportunities. Everyday cases like these are what make the PEO platform such a compelling tool for small and medium businesses.