Tag Archives: retirement

401ks for Entrepreneurs: What You Need to Know

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Starting your own business as an entrepreneur puts you at significant financial and personal risks. However, there is one risk – not saving for retirement – that you don’t have to subject yourself to. Whether you run your business alone or have a few employees at your back, there is a 401k plan available that can help you ensure that your golden years are stress-free.

Sole Proprietors

Just because your business is a one-person operation doesn’t mean you (and your spouse) have to miss out on the benefits of saving for retirement with a 401k account. You can set up an individual 401k (also known as a one-participant or solo- 401k) plan through your bank or another financial institution in order to contribute pre-tax funds into a savings, mutual fund, or money market account of your choosing.

As both employer and employee, you can make two kinds of contributions to your 401k account.

  • As employee, you can defer up to 100% of your earned income into your account, up to $17,500 per year (or $23,000 if you are over age 50).
  • As employer, you can contribute a further 25% of your earned income into the account. The total contributed amount cannot exceed $51,000 per year.
  • These contribution limits are current as of the 2013 tax year. The limits are now indexed to inflation and will increase in $500 over time.

As with most other retirement plans, there are withdrawal limits. You may be subject to taxes up to or exceeding 10% of the withdrawal amount for withdrawals made before age 59 ½. However, when setting up your individual plan, you can tailor these limits to allow you early access to your funds through loans or hardship distributions.

Business Owners with Employees

Offering a retirement plan as part of your employee compensation plan can help you attract talented and qualified employees to work for you. In many cases, you can offset offering a lower salary by including good benefits, including a 401k plan. You can deduct the cost of the plan from your business’s taxes each year, and your employees can put aside tax-free money in preparation for retirement.

  • A traditional 401k plan enable employers to make contributions on behalf of employees, match employee contributions or both. Employees can make their own contributions through pre-tax payroll deductions.  Employers are subject to annual nondiscrimination testing that ensures benefits are proportional among all employees. Employer contributions are subject to a vesting schedule (the length of time that must pass before employees attain full ownership of employer contributions).
  • A safe harbor 401k plan is similar to a traditional 401k. The differences include: employer contributions are fully vested when made; it is subject to far fewer complex tax rules, making it less of a burden on employers; and it is exempt from nondiscrimination testing.
  • An automatic enrollment 401k plan allows employers to deduct a certain amount from employee wages and contribute it to a retirement plan on the employee’s behalf. The employee must choose to opt out or contribute a different amount than that chosen by the employer.
  • The SIMPLE 401k plan was created specifically to make setting up employee retirement accounts easier for small businesses (those with fewer than 100 employees who receive at least $5,000 in compensation each year). It is not subject to nondiscrimination testing, and is a more cost-efficient way to offer retirement benefits to your employees.

While you can certainly set up your 401k accounts on your own, it’s best to ask the advice of your lawyer or business banker before making a final decision. An expert can help you make sure that the 401k you choose is right for your business’s financial plan, right for you and your employees, and easy to administer.

Author’s Bio: Megan Webb-Morgan writes for B2B lead gen resource, ResourceNation.com. Follow them on Facebook and Twitter.

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5 Things Employers Should Consider When Offering a 401k

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Starting this July, 401k participants will receive more disclosures about the fees they are paying inside their 401k plans.

The Department of Labor wants more transparency and disclosure on what kind of fees employees are paying inside their 401k plans. Why? Because many employees have no idea how much they are paying in mutual fund fees. A recent survey by AARP said that 71% of people saving for retirement thought they didn’t pay any investment fees whatsoever.

The fees inside a 401k are either paid by the plan sponsor (you – the employer) or by the participants, which are the employees. Over the last few years more of the fees have been paid by the employees. According to a report issued by the Investment Company Institute and Deloitte, employers are moving more of the plan charges onto their employees. For instance, employees are now paying for 91% of plan expenses, which is a substantial increase from 2009 when they paid 78% of such charges.

So how does this happen? Say an employer wants to start a 401k and calls a bunch of mutual fund families to get some pricing quotes to see how much it will cost to set up and administer. Most of the bids come back at $5000 a year. But one comes back at $1000 a year. Why is this one so much cheaper? Because the fund is making the money on the back end – higher mutual fund fees. So the employer goes with the cheaper option, and the little guy ends up paying more in fees.

A report issued last month by the U.S. Government Accountability Office highlighted that many employers aren’t really aware about the fees charged by retirement plan providers (the mutual funds). The most obvious known fee is the expense ratio inside the mutual funds offered inside the 401k plans. Many 401k plans do not offer enough low cost mutual funds such as index funds. That’s because they are usually not as profitable (to the fund company) as an actively managed fund is.

Not sure what the difference between an index fund and actively managed fund is? Further explanation along with the five things to consider if you offer your employees a 401k program and what it means for them are below.

1) Offer index funds inside your 401k plan (for an explanation of index funds vs. actively managed funds, click here)

2) Be proactive. Tell your employees about the upcoming information they will receive about the fees they are paying.

3) Calculate the average expense ratios of the funds in your 401k.  Shop your pan and see how competitive your current 401k is.

4) Remember that if you are most likely a plan fiduciary, which means you are personally liable if you breach your duty as a fiduciary to the plan participants and beneficiaries.

5) Consult with 3rd party professionals like plan administrators and ERISA attorneys to make sure your 401k plan is compliant.

Some Additional Statistics to Keep in Mind…

In the 1990s, when the average stock mutual fund was making 10% year after year, no one was complaining about mutual fund expenses inside 401k plans.  Everyone was making money.  But today, stock market returns have averaged 3.77% for the past 10 years.  Mutual fund fees inside 401ks have decreased over the past 10 years.  According to the Investment Company Institute, the average expense ratio for a stock fund in 1997 was 1.04%.  In 2011, the average fee was 0.93%.

Remember: higher fees mean lower returns for 401k participants.

If the average investor made 3.77% net of fees and the average fee paid by the investor was 0.94%, the average investor paid nearly 20% of his/her profits in fees.

The trend is for more transparency in 401k fees that people will pay.  Get in front of this and be proactive.  Remember what Wayne Gretsky said – “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.”

Justin Krane is a Certified Financial Planner with Krane Financial Solutions. Follow Justin on Twitter @justinkrane.

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Making Sense of Retirement Plans

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As retirement plan sponsors, small businesses assume many responsibilities regarding their employees’ path to retirement, often acting as fiduciaries. Over the next year, any employer offering such plans faces new regulations from the Department of Labor. The rules, known as 408(b) (2), were originally scheduled to go into effect this past July, but have been postponed until April 1, 2012. The rules aim at providing greater transparency to the retirement industry as a whole, through documenting the fees participants pay brokers and retirement plan contractors for managing their accounts.

Retirement plans can be a burden to small business owners. This is due to the fact that upon becoming a plan sponsor, owners become a plan fiduciary and therefore must act in the sole interest of their participants. Owners cannot make a profit off of retirement plans. Any gains must be reimbursed to the plan.

These gains can be detected by the Department of Labor. Due to the April 1 start date of the rules these audits have been greatly increased. Although this might cause headaches for some small business owners, having a healthy retirement plan is still very important. Providing a retirement plan is a great way to ensure longevity among current employees. This is also a great way to attract bright new employees. There are two steps small business owners should take in order to safely navigate the retirement plan waters.

First, employers should understand what type of plan they provide, or want to provide, to their employees. There are two main types of plans, defined benefit and defined contribution plans. A defined benefit plan, funded by the employer, promises you a specific monthly benefit at retirement. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more often, it may calculate your benefit through a formula that includes factors such as your salary, your age, and the number of years you worked at the company. For example, your pension benefit might be equal to 1 percent of your average salary for the last 5 years of employment times your total years of service.

A defined contribution plan, on the other hand, does not promise you a specific benefit amount at retirement. Instead, you and/or your employer contribute money to your individual account in the plan. In many cases, you are responsible for choosing how these contributions are invested, and deciding how much to contribute from your paycheck through pretax deductions. Your employer may add to your account, in some cases by matching a certain percentage of your contributions. The value of your account depends on how much is contributed and how well the investments perform. At retirement, you receive the balance in your account, reflecting the contributions, investment gains or losses, and any fees charged against your account. The 401(k) plan is a popular type of defined contribution plan.

Second, small business owners should become familiar with the new rules. Come April 2012, business owners, as plan sponsors, will be responsible for:

1. Identifying all service providers working for their employees’ retirement plans, including part-time workers, contractors and sub-contractors.
2. Have these workers put all of the duties they are performing for the plan in writing.
3. Have them put in writing whether or not they accept fiduciary responsibility.
4. Find out how much these workers make either from the retirement plan company or assets.
5. Make sure these fees are reasonable for the services being provided.

Providing a solid retirement plan will create stability and contentment both among small business owners and their employees.

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