Finding the right retirement plan is like finding the perfect pair of shoes. You want to make sure it fits the size of your company while giving your employees the right level of retirement benefits. “A retirement plan isn’t just for the benefit of your employees. A good retirement plan can spruce up your business and help you reel in those top-tier professionals. But if not chosen carefully, your retirement plan could be viewed as completely useless, becoming more of a burden than a benefit,” say Laurent Carrier, a financial planner and owner of Carrier Financial Services LLC in Colorado Springs, Colorado.
Yet, despite all your efforts to find the perfect plan, you may encounter some pitfalls. Here are just a few you may run into when it comes to setting up a retirement plan.
1. A lack of employee participation.
Not surprisingly, age, marriage and education level affect the probability that an employee will participate in their company’s retirement plan, according to the Small Business Administration’s 2009 Small Business Retirement Plan Availability and Worker Participation survey. Many of your younger workers won’t see the value in putting a portion of their paycheck into an account that they won’t be able to touch for 30 years. Others may not even meet the eligibility requirements of the plan you choose.
In 2009, only 19.5 percent of workers in small businesses participated in a retirement plan, according to the SBA’s study. A large majority of those employees who don’t participate in employer-sponsored plans blame strict eligibility requirements and an inability to afford contributions as the prime deterrents.
With this in mind, you want to tread carefully when it comes to picking a retirement plan, says Laurent Carrier. A plan that no one uses will become a money pit. You’ll still have to pay administration fees, regardless of your staff’s participation. And if your current employees don’t find it appealing, potential employees won’t either. “Before you choose a plan, talk to your workers. Find out what factors would entice them to participate in the company’s plan. Ask them what they think would be a reasonable contribution rate,” says Carrier. “Also, consider researching what types of plans other businesses in your industry are offering.”
2. Failing to keep up on compliance.
The government is constantly reforming and amending legislation surrounding retirement benefits and how it’s administered to your employees. For compliance reasons, you’ll be required to document all of the transactions between you and your employees.
The Employee Retirement Income Security Act of 1974 (ERISA) requires employers to uphold certain standards when administering retirement plans in their business. It requires you to report financial information and plan details to your participants and the government.
Among other things, employers are required to provide all participants with a Summary Plan Description that defines the participant’s rights and obligations under the plan. The Form 5500 Annual Return/Report contains details about the plan and its sponsors, as well as financial data and compliance measures. Your business could face hefty fines if you fail to submit the Form 5500. If your business has 100 or more participants, you’ll also be required to audit your plan yearly as part of the Form 5500 requirements.
3. Changes in the company size.
Recently, tough times forced many business owners to reduce their employee base. As your business changes, your needs change. With a smaller staff, a large pension plan may no longer be needed. The administration costs of your old plan are likely much higher than the costs of covering your new, smaller business structure.
What your business was when you first adopted your company’s pension plan might be completely different from what it is today. Be sure you’re not paying for a plan that no longer suits your business.
4. Market changes.
One of the main reasons you adopted a retirement plan was to attract more talented workers. But an outdated plan will lack the power of persuasion.
Businesses need to make sure the retirement plan they choose fits their industry, says Laurent Carrier. A retirement plan should never remain stagnant. To keep it enticing to employees, it needs to adjust to be competitive and fit your prospective employees’ expectations. You’ll need to make it a habit to research your industry’s standards and your competition’s offerings to keep up with the Joneses.
5. A lack of portability.
By law, when employees leave your company, they’re allowed to transfer their retirement savings into another retirement account. Carrier says that a plan that offers easy portability is much more attractive to prospective employees.
As often as possible, you want your employees to leave your business on good terms because you never know who they might know. Fighting with a provider for their money is the last thing your ex-employees want to deal with.
“It leaves a legacy taste,” says Laurent Carrier. If it’s a difficult process, the employee will likely get upset and someone either inside or outside the company is bound to hear about it. This is bad PR and bad for your company’s reputation, adds Carrier.
The Big Picture
Retirement plan providers will most likely try to sell you way more than you need. Don’t buy more than you need. Choose a plan that isn’t too much for you to handle. An industry expert can help you select a plan that isn’t too demanding for your business.
About Laurent Carrier and Carrier Financial Services LLC
Laurent Carrier is the owner and founder of Carrier Financial Services LLC. For over 40 years, his mission has been to provide honest, simple financial advice to his clients. As a well-respected community leader, Laurent has served on the board of the American Red Cross and is now on the Advisory Board with the Colorado College Summer Music Festival. He is enthusiastic about supporting non-profit educational organizations locally, nationally, and internationally. For more information, contact Carrier Financial Services LLC, 919 North Weber Street, Colorado Springs, Colorado 80903. 719-249-4774 or visit online at www.carrierfinancial.com