Your 401(k) may work well for employees, but how well does it work for business owners and key employees?
The short answer should be “very well.” As a longtime resident, business owner and certified public accountant, I have read countless articles and listened to many experts about 401(k)s. They generally are well-intended and broadly applicable. However, in today’s push to ensure that nobody is offended or left out, I feel that a certain group quite often is left out. The owners and senior-most staff of successful companies commonly are assumed to be “fine” and, therefore, not the focus of some of the most basic advice.
So, for the record, let me say the standard line that putting in place a 401(k) could improve employee retention and attraction, and might be on its way to becoming a given in the eyes of many current or potential employees.
Now, let’s talk about why your retirement plan deserves more of your attention than it currently might garner. And while we’re at it, the term 401(k) has become synonymous with retirement plan, but it is not the only tool in the shed.
The fact is that entrepreneurs, small-business owners and senior staff of midsized companies often have a significant portion of their personal savings at stake in plans like these. If they do not, in most cases they know they should, but there is something preventing it from happening.
Retirement plans, both nontax-qualified and tax-qualified, stand to benefit the owners and senior staff of companies in a significant way. This segment of the workforce faces substantially higher taxes, and government-sponsored benefits contribute proportionately less toward their retirement.
Some would say this scenario is more likely to become more difficult in the future. As someone who has been the employee and the employer, and from the perspective of a certified public accountant, I strongly suggest that any tool that can reduce your tax burden, increase your liquid wealth and possibly add a level of protection from creditors or lawsuits be examined with fervor.
Unfortunately, more often I see that retirement plans are treated as a commodity, something to be picked off the shelf of the lowest-cost provider to the potential detriment of the buyer.
Contrary to some advice, it is not all about slashing costs. As most of my successful business clients would tell me, buying something is about value and getting what you need. Acknowledging that many may not know what they should want, let me offer a few suggestions as starting points to help you determine where real value might be added:
Plan design
If you have a company that is making money and you don’t have a retirement plan, chances are you would benefit from taking the time to put something in place.
There are various flavors of retirement plans that suit some businesses better than others. So take the time to ask if plain vanilla is really best for you, or if a more customized approach should be considered.
This would apply just as well if you already offer a plan. Things change, and the more information you have, the better decision you are likely to make. This step alone might result in an ability to substantially increase your personal contributions.
Plan design goals include simplicity, transparency and, perhaps above all, investment selection and performance monitoring.
Investments
Don’t let the fact that you cannot control the market lull you in to thinking there is nothing you can do to improve the degree of control or responsibility you have over your money. Opportunities exist to manage investment performance. This might require you to ask whomever you are working with to explain why they have recommended one particular investment over another.
There are literally thousands of options and you need not be limited to any of them. Don’t be afraid to push for a specific answer. Let’s perform our due diligence and ensure that best practices and fiduciary responsibility are considered in our investment decisions. Any improvement in performance or safety can mean a big difference in terms of your final result.
Cost
Yes, keeping an eye on costs is prudent. However, that is different than blindly accepting that lower cost is better.
This part of the equation is linked to the previous two. The right type of plan for you might have higher or lower costs than the right plan for another business owner. For example, it would be easy for an employer to miss that underperforming investments or a plan with low employee participation might represent the largest costs of all.
How you approach plan design, investment advice and employee education can all bear on “cost.” If a somewhat higher or lower cost is appropriate to maximize the value of your plan, so be it. As long as you have a clear understanding of what you are doing and why you are doing it, you will have a much better chance of a successful outcome.
At the end of the day the total value of your business is more than what you might sell or the core service that you provide. Time spent on liquid-asset accumulation and protection within the realm of your business does not take time away from operating your business – they are one in the same.
pgervais@gervaiscpas.com Paul Gervais, CPA, PFS, is owner of Gervais & Associates P.C.
