Out of Reach

Could proposed 401(k) overhauls put small-business owners in over their heads?
Magazine Contributor
4 min read

This story appears in the July 2002 issue of Entrepreneur. Subscribe »

It's not as if small-business owners were enthusiastic about starting 401(k) plans in the first place. Add the potential for lawsuits and the whiff of scandal, and it begins to sound as pleasant as a root canal.

The reforms being proposed in Congress in response to the Enron debacle-in which company employees lost an estimated $1 billion worth of retirement funds invested in Enron stock-aren't likely to make things any easier for entrepreneurs, who could face increased liability and potentially higher costs associated with 401(k) plans. Current House and Senate bills amending the Employee Retirement Income Security Act have been fashioned from the deluge of pension reform proposals that rained down on congressional desks post-Enron.

Both the House and the proposed Senate bills emphasize better access to investment advice for 401(k) plan participants. The House version would not cap the amount employees are allowed to invest in employer stock, while at least one of the prominent Senate bills proposes limiting the ability of plans to offer employer stock as an investment option in cases where the employer makes contributions to workers in stock.

That last limitation would be a gross overreaction, and one that could have dangerous implications, says the American Benefits Council (ABC), an advocate of employer-sponsored benefit programs in Washington, DC. "Culture of ownership is a critical part of success," says James Delaplane, ABC's vice president of retirement policy. ABC contends that if business owners' matching contributions can't be invested in their companies, they may not make them at all.

of shareholders want the companies they've invested in to e-mail them important news immediately.

Stock ownership through a 401(k) is especially significant for small-business employees, experts believe. "It creates a sense of pride, emotional gratification, the feeling of psychological control-those are all very important for small-business growth," says Matt Hutcheson, an independent trustee and certified pension consultant in Tigard, Oregon.

Besides, he adds, it was not the fact that Enron employees invested in company stock that proved a fatal flaw, but rather the execution. For example, the plan's fiduciaries were also Enron executives who knew the stock was in trouble. "They breached their fiduciary duties," says Hutcheson.

Both bills would require companies to give advance warning of blackout periods, during which employees cannot trade within the 401(k) plan. It's good legislation, says Donald K. Jones, national sales manager for Nationwide Financial Services, a Columbus, Ohio-based retirement plan provider. It will, however, "cause more administrative burden to the small-business owner."

The House bill also includes provisions to simplify and reduce reporting requirements for plan sponsors, but proponents of reform say the extra paperwork will protect business owners from legal action should something go awry.

And so would access to better education and independent investment advice. Both the House and Senate versions agree that more education is needed, with the Senate placing more emphasis on advice from sources other than the financial institutions offering the plan options. "We believe the key is to make sure that investment advice is independent of trying to steer the participants into certain investment options," says Jones.

One way to accomplish that is to hire an independent fiduciary to handle both the investment and the plan operations issues. "The problem with that is: Who's going to pay for that?" says Delaplane.

Services from independent experts like Hutcheson can start at $15,000 a year. "Will employers still be willing to start plans to the same extent that they are today if there's this new cost associated with them?" asks Hutcheson.

Some may, but not very many, judging by the results of a recent Nationwide Financial Services study, which found that 89 percent of small-business owners who are considering retirement programs say cost is their top concern. Fiduciary worries came in a close second. "A small-business person who is just trying to get their business off the ground is not going to sign up for something that's going to open them up to huge liabilities," says Delaplane.

But those who are opposed to legislating may not have to worry just yet. The House and the Senate still have to compromise on a single bill-a tall order for two political parties so divided on this issue, Delaplane explains. Unless the Senate can drum up bipartisan support, "I'd say the odds are against it."

C.J. Prince is a New York City writer who specializes in business topics and is executive editor of CEO Magazine.

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