Saturday, May 10, 2008

One More Thing To Do


Last week, the Connecticut legislature didn’t get around to voting on a bill that would have effectively set up a state-sponsored 401(k) plan for small businesses (see CT State 401(k) Plan Proposal Dies as Session Ends). Proponents—which included AARP—claimed that the legislation would save businesses with fewer than 100 workers a lot of money, basically by allowing them to pool their plan investments—a pool large enough to provide the negotiating power that small businesses generally lack on their own (workers would have individual accounts and be able to choose from various investment options, while employers could contribute a percentage or set up a program to which employees would contribute).

Opponents—which included the Connecticut Business and Industry Association (CBIA), the Connecticut Bankers Association, the Insurance Association of Connecticut, the American Society of Pension Professionals and Actuaries (ASPPA), the Council of Independent 401(k) Recordkeepers (CIKR), and the Small Business Council of America (SBCA)—refuted that cost-saving claim. Cost-effective alternatives exist already, they said, in the form of SIMPLE IRAs. Moreover, they were doubtful that the projected cost savings would actually occur under the new design. And, of course, they also were concerned about the “competition” resulting from such a program for their members.

In comments submitted on behalf of ASPPA, CIKR, and the SBCA, Michael Callahan, founder of Southington, Connecticut-based third-party administrator Pentec, Inc., said, “If an employer doesn’t want to set up a retirement plan, it is generally either because the employer is not educated about available options, or the employer does not want to commit to making contributions for employees each year.”

Now, one can hardly argue that small business owners are, as a rule, intimately familiar with their retirement plan options, and surely there are any number of them who are not comfortable committing to making contributions every year. But, IMHO, neither of those is a major impediment to adoption of these programs by small businesses.

Fees Matter

And, despite the assertions of those opposed to the Connecticut proposal, I do think fees are an important issue, though perhaps not a central concern. These days, it’s not unusual for even moderate-size plans to be able to pay no explicit fees, courtesy of revenue-sharing offsets. However, smaller programs—particularly start-ups—are confronted with different realities; frequently forced to embrace proprietary fund solutions, and fund solutions of higher-priced mutual fund share classes, in addition to explicit administrative charges. However, for the very most part (explicit fees are always a complication), these “extra” charges, while real, are drawn from the participant investment accounts, not the employer’s purse (business owners frequently overlook the fact that theirs is the largest balance—and thus the largest “contributor”).

There are other noteworthy impediments: A fear of getting sued by participants looms larger every day (even though the plaintiff’s bar seems focused on more lucrative targets), not to mention concerns about the time and energy associated with keeping up with these programs. Indeed, IMHO, one of the biggest impediments to small-business adoption of these programs was noted in Callahan’s comments arguing against the proposal. “The ERISA rules, and Internal Revenue Code non-discrimination requirements, are designed to protect rank and file workers. These rules are important—they are also complicated and time consuming.”

While it was cited as a reason to oppose the legislation, that admonition applies with even greater force when it comes to what is required of employers to administer these programs on an ongoing basis.

Those rules and restrictions are, of course, in place for good and valid reasons, and many were put in place to deal with specific, real-world abuses. But the fact remains that offering a qualified retirement plan benefit is neither simple, nor easy—and until it can be, we probably shouldn’t wonder why so many choose not to take on that responsibility.

That’s not to say the Connecticut legislation dealt with any of that, though I’m guessing that it might well have made it easier for small businesses to choose a program, and perhaps one that charged participant accounts less than they would pay outside that model (they may well have paid more in taxes, of course). We often fret about the shortcomings of a system where only three-quarters (or less) of those eligible to participate in a 401(k) do so, and we rightfully worry about the adequacy of the deferral rates of those who do save.

However, the sad fact is that only about half of working Americans today even have the option of participating in a workplace savings plan—and most of the job creation in this nation’s economy comes from small businesses. We need to be creative in order to help make it easier for small businesses to embrace these programs and give those they employ a chance to save for retirement.

It takes a lot of courage, time, and energy to start and run a small business, after all. What small business owners generally aren’t looking for - is one more thing to do.

- Nevin E. Adams, JD

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