Small businesses are currently prohibited from pooling their purchasing power without a common set of employees. There is however legislation in the 113th congress that considers allowing small businesses to pool their purchasing power and transfer fiduciary responsibility to an independent fiduciary which would allow small businesses to offer all the 401k benefits that medium and large sized businesses offer to their employees. If passed, the legislation would provide access to 401k plans among employers with less than 100 employees who have traditionally not offered retirement plans because of cost, administrative hassles and fiduciary responsibilities.
Why are multi-employer 401k plans needed?
A 401(k) can be one of the employee’s best and most efficient ways in generating and producing a secure retirement. It provides the worker with two important advantages. The first is that all contributions and earnings to the 401(k) are tax deferred meaning that one will only pay taxes on contributions and earnings when the money is withdrawn in retirement age (beginning at 59 ½). Another is that many employers may provide matching contributions to the 401(k) account. This is an added “bonus” of working with a reputable company. Add both of these advantages together and the retirement savings plan may be one that is just too valuable to pass up.
How would the availability of these plans change the retirement landscape?
Many workers seek to retire at age 62-65, but as we all know many may not be actually able to afford to do so. By offering the 401k retirement option to small business participants, the retirement landscape may be affected in a positive way. Consider this. A worker in their 20’s who invests in a 401k from the onset, with the advantages of contributions on a pre-tax basis (elective deferrals), will see advantageous compounding returns over the course of his retirement nest egg.
It is very important that all businesses have the opportunity in offering a retirement plan like a 401(k) to their employees. Why? Because in many cases offering a 401(k) plan will help attract talented and hardworking employees to the small business. In addition, the 401k plan may also help to retain these valuable employees who may want to have the option of preparing for their retirement in the most tax efficient way. Lastly, there are several tax advantages such as tax deductible contributions which may also be available to the employer who may be offering these 401k retirement packages.
How likely is it that such a mandate would be passed and when?
It is hard to estimate if such a measure would pass and when. After all, we are dealing with the United States Congress.
Which financial professionals are poised to step into the shoes of being the independent fiduciary to these multi employer 401k plans?
I believe all the major investment financing firms and large banks would be pleased to act as fiduciaries for these 401(k) account holders and small business. Gaining the trust and offering cost effective, value added services to the small business will be vital in their participation.
What challenges will these independent fiduciaries face?
Confidence in the market and a lack of general knowledge to all participants involved. Educating employers and employees on the advantages but also the risks faced when entering the market will be key. After the financial meltdown in 2008, many became down right fearful of putting their hard earning savings into the market and rightfully so. However, the advantages of preparing and contributing to ones 401(k) should not be overlooked. This education to small business participants may be a challenge the fiduciaries may face.
Despite many of these challenges, small businesses still have a few useful options at their disposal. Employee benefits services, such as those that are offered by National PEO, help business owners sort out a fair method of distributing benefits amongst employees. Choosing to utilize a service like this will give small businesses an opportunity to allocate their resources much more efficiently while treating all employees well at the same time. Regardless of the size of the business, it can be very helpful for one to investigate their options by looking into this service.
Jordan Neifeld works for Gerstle Rosen & Goldenberg, P.A., which has maintained its reputation for excellence and client satisfaction in the areas of accounting, auditing, taxation, divorce and fraud forensic, business consulting, governmental, not-for-profit, litigation support, other real estate and construction accounting, as well as federal, state and local governmental accounting, auditing, and consulting services.