Perspective: How to Encourage Small Businesses to Not Eliminate Their Retirement Plan

Given the challenging economic environment, many small companies continue to look for ways to reduce their expenses. For some of these organizations, eliminating their retirement plan may seem like a viable option. After all, it represents a way to cut costs and the plan doesn’t directly impact their business opportunities. However, this can be a shortsighted move and may put small companies at a competitive disadvantage down the road.

Responding to the Severe Recession 

Many companies across the country turned to their retirement plan as a way to bolster their balance sheets during the depths of the recession. However, rather than entirely eliminate their plans, many larger companies chose to suspend or reduce their matching contributions. Now that the economy appears to be on the mend, 80% of mid- and large-sized companies are planning to restore their match  in 2010.

Repercussions for Small Companies and Their Employees 

While the unemployment rate remains elevated, the decision to restore 401(k) matches may be an early sign that hiring trends will be improving. If this is the case, smaller companies that eliminate their retirement plan may find it more difficult to attract and retain key employees. In addition, their employees may find it difficult to put aside enough money to enjoy a secure retirement. 

Educating Small-Business Owner Clients About Their Plan’s Value 

As an adviser, you have an opportunity to demonstrate the value you add by educating your small-business owner clients about the importance of maintaining their retirement plans.  It may also open doors to generate business from smaller companies that don’t currently offer a plan. In particular, discuss the following:

• A Key Employee Benefit: A company-sponsored retirement plan is often cited as one of the most important benefits a company can offer, along with salary and healthcare insurance. Explain to your small-business clients that eliminating their plan may give their employees an excuse to look elsewhere, especially since many larger companies are restoring their plan’s match.
• Lost Business Opportunities: It has been said that it costs at least ten times more to generate a brand new customer versus retaining an existing customer. The same may hold true with a company’s key employees. Replacing these individuals is not only time consuming and expensive, it also means lost business opportunities during the interviewing and training process.
• Ways to Help Employees Save for a Secure Future: Explain to your clients than many plan providers offer one-stop investments, such as target date funds, to help simplify the savings process and allows the company to meet certain fiduciary responsibilities. Your clients may also be able to offer a feature that automatically rebalances their employees’ retirement accounts on an annual basis. Furthermore, the plan provider may offer a program that automatically increases employee contribution amounts every year.
• Tax Advantages and Credits: Companies can reduce their overall tax burden by deducting their contributions as a business expense. In addition, companies that establish a new 401(k) or SIMPLE IRA plan for their employees may be eligible to receive a $500 tax credit for three years to cover the plan’s administrative expenses.

While small companies may look to eliminate their retirement plan to save money, it could negatively impact their business down the road. Not only could it make it more difficult to attract talented employees, the company may also lose key employees to organizations that provide a plan. Advisers are in a unique position to educate small companies about the benefits of retaining their retirement plan. This, in turn, demonstrates the value the adviser brings to the table and it could lead to cross-selling opportunities for their financial planning services.

In the first of our three articles related to small company retirement plans, online here, we discussed how advisers can educate employers about the importance of offering a plan and the most popular plan options for small businesses.  

The final article in this series will describe ways that small business owners can maximize their retirement plan’s effectiveness by increasing participation and contribution rates. 

John Guido is the Division Vice President, Marketing for ADP Retirement Service. In this capacity, he is responsible for oversight of ADP’s product and strategic initiatives in the retirement space. Prior to joining ADP, Guido held senior level marketing and sales roles at Metlife and Standard and Poor’s.

ADP Broker-Dealer, Inc., ADP, Inc. and their affiliates do not offer investment, tax, or legal advice, and nothing in this article is intended to be, nor should be construed as, advice or a recommendation for a particular situation.  Please have your clients consult with their own adviser for such advice.