Making Sense of Retirement Plans

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.