BIG Saving for Small Plans
Combine plainspoken Iowa advice and highly proficient technical knowledge, and you get Keith Gredys. You also get significant retirement savings rates for the small businesses with whom he works.
“Due to the tax savings, Uncle Sam is picking up the tab on almost all employee contributions.”
“We use more sophisticated plan designs,” Gredys, Chairman and CEO of Clive, Iowa-based Kidder Advisers, explained. “I figure if there’s a way to get the participant outcome we want—higher participation, deferral rates, and higher overall contributions—I want to look at what can be done outside of the normal auto this and auto that.”
Targeting the micro and small plan market, he provided a clear example of how maxing out highly-compensated employee contributions can help organizations as a whole. A bank had roughly 65 employees and a SIMPLE IRA plan. A CPA brought the Kidder team in and said, “You’ve got to do something better than this thing.”
“We originally set up a 401(k) plan,” Gredys noted. “We then did cross-testing, and the demographics worked well. The key, highly-compensated people had to put in 7% to 7.5% of pay for every employee in order to get their maximum contributions. It was a combination of safe harbor and profit sharing, and we were already ahead of the curve with what the participants needed to accumulate.”
He then turned to the education process and getting lower-compensated employees to contribute consistently.
“It was pretty basic, but we could quickly get the deferral rates up over 7%. So right there, 14.5% of pay goes into their accounts between the two contributions.”
The bank also requested an ESOP, but in their particular situation, it didn’t work. Gredys instead added a cash balance plan (the fastest growing area of his business) and targeted specific individuals “to get a little bit more.”
“For the highly compensated, they’re now in the neighborhood of 20% to 25% of pay or better,” he added. “We used the tax laws and design features to get to those percentages.”
Add it all up, and rank-and-file employees got a 9% employer contribution plus the 7% to 8% they contributed (slowly increasing over time). Key employees received 25% to 30% of pay.
“Why does this make sense? Because of the demographics. Due to the tax savings, Uncle Sam is picking up the tab on almost all employee contributions. Tax savings for the owners and key people are split between them and the employees. It didn’t really cost the employer more for the employee contributions because the government is essentially picking up that difference. Rather than sending it to Washington, you’re giving it back to your employees.”
Advisors and sponsors often overlook complex plan designs like this because advisors and sponsors rarely get into that level of detail.
“We have all of the various auto features for them, but the key element here was designing the plan so that it made sense both from the employer and employee perspectives,” Gredys concluded. “It’s an all-around win-win for everyone involved.”
Keith J. Gredys J.D., AIF, is Chairman and CEO of Kidder Advisers, Inc. in Clive, Iowa.