The sweeping $1.35 trillion tax bill President Bush signed into law includes measures designed to make retirement plans simpler for entrepreneurs to sponsor. The question is, Will the changes bring entrepreneurs flocking to the plans to help their employees?
The answer: not necessarily. Small-business owners, put off by prohibitive costs and complicated administrative tasks, have traditionally been far less likely than CEOs of larger companies to set up retirement plans. Rep. Ben Cardin (D-MD), who co-sponsored the House pension reform bill, estimated that among companies with fewer than 100 employees, as many as 80 percent of workers have no pension or retirement plan (compared to just 25 percent for large companies).
As experts are quick to point out, the absence of these savings options has put small-business owners at a competitive disadvantage in the war for talent. The new law aims to remedy that by offering some extra incentives to entrepreneurs considering sponsoring plans, but it's not clear whether the enhancements address the problems.
First, the legislation offers a tax credit for new plans established in 2002 and beyond by owners of businesses with 100 or fewer employees. The credit would apply to 50 percent of the first $1,000 in start-up expenses for the first three years after the start of the plan. While the offer does address the cost issue, not everybody is impressed with the dollar figure. "That's peanuts," observes Don Buckner, 39, founder of Okahumpka, Florida-based American Manufacturing and Machine Inc. and president of its main subsidiary, Vac-Tron Equipment, which makes industrial vacuum products. "I wouldn't even fill out the paperwork." The $22 million company doesn't offer its 50 employees a retirement plan, but Buckner says that particular perk isn't a factor in attracting talent in his region. "It's not expected," he says.
Buckner isn't alone in his thinking. According to the 2001 "Small Employer Retirement Survey" from the Employee Benefit Research Institute (EBRI), a nonpartisan public policy research organization, the No. 1 reason for not sponsoring plans-with 19 percent of entrepreneurs citing it-is that their employees wouldn't be interested, preferring the compensation in additional wages and other benefits.
The legislation's gradual increase in contribution limits for owners and employees for most plans is one way to make the plans more attractive and appealing, says Eva Spenny, director of retail retirement plans for American Express Financial Advisors. But EBRI president and CEO Dallas Salisbury cites the fact that roughly one-fifth of federal workers don't contribute to a 401(k) plan that offers 5 percent matching. "It's one of the richest plans in the country, and they still can't get that 20 percent of people to participate," he says.
The new law also doesn't address the No. 2 concern, which
was cited by
18 percent of EBRI's nonsponsoring respondents: that revenue is too uncertain to commit to a plan. Another 15 percent say a large percentage of their work force is seasonal, part time or high-turnover. "So what you end up with is the vast majority of entrepreneurial firms that don't sponsor any kind of plan," says Salisbury, "and essentially they say it's for reasons that have nothing to do with the law."
For entrepreneurs who have held back only because of administration headaches, the reform does try to make the task easier on the back end by simplifying the "top-heavy" rules. At present, if a plan is top-heavy (key employees receive an excessive portion of the plan's benefits), it has to satisfy special vesting schedules and make minimum contributions for nonkey employees. "Those rules don't go away [with the new law]," says Robert Corcoran, vice president at Fidelity Investments Retail Retirement Service, "but they're simpler."
One roadblock yet to be addressed is educating entrepreneurs about their options, says Spenny. For example, a lot of entrepreneurs think they have to start with a 401(k), she says, but in fact, there are a wide variety of plans at varying cost levels. Because small businesses tend to transition as they grow in terms of their plan needs, they should start with something small-SEPs, SIMPLEs and Keoghs-and then segue to 401(k)s later. "[Entrepreneurs] think they don't have the resources," she says, "but until they really sit down and look at what their goals are and what resources are required, they just don't know."
C.J. Prince is a New York City writer who specializes in business topics and the executive editor of Chief Executive magazine.