Implementing Retirement Plans for Staff

When Gini Dietrich hunts talent for her 15-person Chicago PR company, she can tell candidates they'll be fully vested in the company's 401(k) retirement plan after a year. "It really allows me, as a small-business [owner], to compete with the big PR firms," Dietrich, 33, says of her employee retirement plan.

Having any retirement plan places Arment Dietrich Inc. among a small and shrinking minority of entrepreneurs. A 2005 Union Bank of California study of its small-business customers found that 75 percent offered no retirement benefits. Plus, the number of companies with less than $1 million in annual sales that had no retirement plan grew by 6 percent over the previous year.

Other studies paint similar pictures: A 2003 survey by the Employee Benefit Research Institute, a Washington, DC, think tank, found no retirement plans at more than 71 percent of companies with fewer than 100 employees. By comparison, EBRI found that less than 42 percent of employees at midsize and large companies lacked plans.

Cost and complexity keep entrepreneurs from offering retirement benefits, according to Christy Schmitt, senior vice president and manager of the small-business segment for Union Bank of California. Also, the retirement products on the market take too much time to understand and involve too many fees and other outlays for most entrepreneurs to embrace them, she says.

Popular small-business retirement options include profit-sharing plans, 401(k)s, Simplified Employee Pensions, and Simple IRAs. Profit-sharing plans are the most costly and complex, followed by 401(k)s. SEPs and Simple IRAs are generally regarded as most suitable for entrepreneurs, according to Lindsey Wilkins, partner in charge of global retirement solutions for St. Louis investment firm Edward Jones.

"An SEP or Simple IRA can [cost the employer] as little as $10 per employee per year," Wilkins says. "And a Simple IRA is like a mini-401(k) without all the costs and filings with the IRS." By comparison, 401(k)s can cost the employer a total of $1,500 to $2,500 in fees per year, Wilkins says. Profit-sharing plans are even more expensive to administer.

Choosing to match contributions ups your costs even more. Dietrich, for example, matches every dollar her employees put into the company 401(k), up to 5 percent of their pay. While matching adds value to employees, the added cost raises the hurdle significantly for growing businesses, says Schmitt.

Recent innovations may loosen the logjam. New web-based, self-directed 401(k)s promise to reduce administrative costs and educational burdens on entrepreneurs, Schmitt says. And Wilkins points with optimism to the new Roth 401(k)s, which allow entrepreneurs and employees with incomes too high to partake in Roth IRAs to take advantage of the Roth tax-deferral features.

Wilkins does not foresee major change happening until most baby boomers near retirement age, when pension planning seems more important. However, she says that in the first quarter of 2006, the number of small employers that signed up for her company's retirement offerings was up nearly 75 percent.

One entrepreneur who needs no education on the cost-effectiveness of retirement plans is Dietrich. Since starting her 401(k) plan in September 2005, she's gotten positive responses from job candidates and found the plan even easier to administer than the bare-bones IRA she had before. "I was scared to do it at first because I was told there are a lot of hidden fees," she says. "But I've been very happy with the low cost."

Mark Henricks writes on business and technology for leading publications and is author of Not Just a Living.