In a March 26 article entitled Small Business Retirement Plans: How Firms Perceive Benefits & Costs, the Center for Retirement Research of Boston College reports that:
• Only about half of U.S. private sector workers are covered by an employer-sponsored retirement plan, and few workers save without one.
• Half (52%) of companies with less than 50 employees provide a retirement plan.
• Companies with less than 50 employees are not aware that they can claim a tax credit of up to $5,000 for 3 years to help offset the costs of starting a plan.
• Most employers (52%) believe that annual ongoing costs exceed $10,000, excluding contribution matches.
• Although most employers (54%) believe that administrative responsibilities require less than a day a month, 32% believe it requires more than 1 week per month and 15% don’t know.
This article puts some hard numbers to the costs and administrative responsibilities of sponsoring a retirement savings plan, with a focus on small employers. It should be noted that plan participants share plan costs, which reduces sponsor costs. These participant costs are usually paid as a percentage of the participant’s account balance.
Small employers should give serious consideration to joining a multiple employer plan like a Multiple Employer Plan (MEP), Pooled Employer Plan (PEP) or Group of Plans (GoP). In the following we use the abbreviation PSP for Pooled Savings Plan to cover all such choices, and then we highlight the differences among these choices in a separate section.
Actual costs
According to this article:
“The cost of offering 401(k) depends on a number of factors and can range considerably. For example, while a company with 10 employees can expect to pay anywhere from $1,400 to $5,600 to get a plan up and running and cover its administration for the first year, a larger business may pay more or possibly even less depending on things like plan design, the number of employees, or their Third Party Administrator (TPA) service provider. Keep in mind that there’s a tax credit for start-up costs for small businesses with less than 100 employees, which the SECURE Act increased to up to $5,000 annually for the first three years.“
In addition to start-up costs, this article reports that the typical contribution match is about 5% of payroll, but this match is entirely up to the plan sponsor. The employer pays contribution matches.
Plan participants pay most of the other ongoing costs, but it is sound fiduciary practice to keep these as low as practical.Additional ongoing costs—beyond the employer match—are estimated to be between 0.5% and 2.0% of assets in the plan.
By contrast, a pooled plan provider (P3) pays the start-up costs for a PSP, and this article estimates the all-in employer cost for a pooled savings plan at $25 per participants, so $2,500 per year for a plan with 100 employees. But we’ve observed costs closer to $60 per participant per year, so $6,000 for 100 participants, which is still less than the $10,000 per year that most believe.
In addition to these costs, audits are required for plans with more than 100 participants. Audit fees vary widely, so it’s worth researching and negotiating. Costs can be substantially reduced by electronically providing the data that the auditor needs.
Administrative Burden
According to this article, there are about 10 administrative responsibilities that are mostly handled by the plan’s service providers, and each requires only about 30 minutes of the plan sponsor’s time each year, so 300 minutes (30×10) or about 5 hours per year.
For PSPs, the administrative responsibility is primarily to monitor the P3, which we estimate should take less than 3 hours per year, but care is advised because P3s don’t all assume the same responsibilities. Some P3s assume all administrative responsibilities “Except for…” where they specify sponsor responsibilities. Others list their responsibilities, implying that anything omitted is the plan sponsor’s responsibility.
Multiple Plan Choices
Types of Pooled Employer Plans
A word on QDIAs
Most employees are financially challenged. They don’t know how to invest, so they trust their employer to decide for them. By far the most popular employer choice has been a target date fund (TDF), but TDFs have shortcomings that are being addressed with newer approaches that provide greater flexibility and even personalization.
PSPs should use these better Qualified Default Investment Alternatives (QDIAs), and you should require them in your PSP choice. Importantly, most TDFs are very risky near their target date, so they will blow up in the next stock market crash. Don’t use them.
From a fiduciary perspective, the QDIA is your most important decision because it takes responsibility for the investments of participants who default—they depend on you for protection. More than half of participants default on average. Choose a safe personalized QDIA.
Conclusion
Sponsoring a retirement plan does not have to be expensive in dollars or time, although it may seem so to smaller companies. Employers are focused on making their companies successful so opening a retirement plan is a distraction, but it is also an incentive for happy employees, and it can be a competitive necessity. PSPs can help. The path is laid out in this article.
SEE ALSO:
• Difference Between MEPs, PEPs, GoPs and SMS
• There’s No Way Out. Deal With It.