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Fiduciary Responsibilities In 401(k) Plans
401(k) fiduciaries face responsibilities and risks when
offering a 401(k) plan to participants. Smart financial
advisors and plan fiduciaries can ease plan adoption—and
create a stronger overall plan—by leveraging the tools
and products available to simplify fiduciary
responsibility and mitigate risk.
Small business owners know that to maintain and grow a
business is a constant struggle between growth and
spending, that benefits costs continue to escalate
faster than revenues, and that keeping good employees is
one of the most difficult issues they face.
To
take on additional benefits expenses in the midst of all
the other challenges they face may seem
counterintuitive, but it could be one of the best
decisions they make. The advantages of establishing and
maintaining a Defined Contribution (DC) retirement plan
for a small business include:
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Savings
One of the best reasons is that employees are very aware
of—and truly appreciate—the effort to provide a plan
that allows them to save for retirement. They also
recognize the company owner may make additional
contributions from company profits and/or matching
contributions to help them with this goal.
The ability and desire of individuals in the United
States to save is very low, as has been well documented
in survey after survey. Most employees realize that they
are poorly prepared for retirement and would welcome the
opportunity to participate in a DC plan. Employers who
offer such a plan are more highly regarded by employees
and prospective employees, addressing one of the
greatest costs of small businesses: turnover and
training.
-
Employee Retention
A Defined
Contribution plan is an effective way to
differentiate a business from competitors who do not
offer a plan as a way to retain the best employees.
In fact, a tax-qualified retirement plan has proven
to help increase employee retention.
-
Tax Incentives
If the owner, as an
employee of his or her business, elects to
participate in the plan, contributions made on one’s
own behalf escape current taxation as well. Many
small business owners would consider establishing a
DC plan if they were aware of the tax advantages to
them both personally and as business owner. An
important aspect of the Financial Advisor role is to
know and highlight the potential tax savings and
deferral available to the owner of various plan
types:
·
A
tax credit is available for establishing a plan for
certain businesses
·
Contributions made to the plan for both the business
owner and employees are deductible
·
The employer’s costs of maintaining the plan are
generally deductible
Frequently Asked Questions
Understandably, business owners are focused on business
issues and not retirement planning. Here are answers to
a few frequently asked questions:
I
need to save money to grow my business. How can I afford
to offer a retirement plan?
The right retirement plan is affordable and offers many
direct and indirect benefits such as: tax deduction for
the plan costs as well as contributions; possible tax
credits for establishing a new retirement plan; employee
loyalty; and an attractive way for the business owner or
principal to save on a tax deferred basis. A retirement
plan that is properly designed can provide large
benefits for modest costs.
The costs of establishing and maintaining a plan
continue to fall, relative to other benefit costs. With
the tax advantages factored in, the actual net cost of
maintaining a DC plan for a small business is quite
nominal.
My
employees want me to provide health coverage, which is
very expensive. How can I afford to offer both health
care and retirement benefits?
Health care costs continue to rise faster than almost
any other expense. New strategies, however, for
providing health benefits, such as Health Savings
Accounts (HSAs) and high-deductible insurance coverage,
can curtail health care expense substantially, which
leaves room for you to provide both health and
retirement benefits. Retirement plan costs are both
reasonable and predictable. If anything, retirement plan
administration expenses have declined in recent years.
My
business income varies considerably both monthly and
year-to-year. How can I commit to a fixed contribution
when I am not certain the business can always support
it?
Plans can be designed in a variety of ways to help
minimize the required annual contribution while allowing
you considerable flexibility to increase your company
contribution—as well as your own—when business is good.
Plans can also be designed with no employer
contributions and serve simply as a vehicle for employee
savings.
Some small businesses have relatively stable revenue
year over year, and those plans that require a
contribution allow for proper tax planning by the owner.
For businesses that are still growing or that have
uncertain revenue, plan types that allow for flexibility
or only for employee contributions might be a better
option.
Most of my employees are part time or turn over
frequently. Do I need to cover all employees who work
for the company?
Depending on the plan type, you may be able to exclude
some employees such as part time, seasonal, and
short-term employees. Employees employed for less than
1,000 hours per year may be excluded—although there is
no 1,000 hours standard for SEPs—but offering coverage
to part timers might help you retain them, and not
increase your total expense compared to the time and
cost of training new hires.
I
set up a SEP for my business a couple of years ago. Why
should I consider a 401(k) plan instead?
As
your business and the salaries of your employees grow,
your ability to contribute more and to provide guidance
to employees with their plan investments is more
favorable with a 401(k) plan. Key employees
appreciate the difference. Once you do switch to the new
plan, it can continue to grow with your
business without changing to another type of plan. Other
considerations are that a SEP is funded by employer
contributions only and does not allow for employee
contributions. Offering a retirement plan is about
helping your employees provide for their retirement, but
also about helping you grow and maintain your business
profitably at a reasonable, predictable and flexible
cost.
Choosing The Right Plan For A Small Business
Not all small businesses are the same, and sorting
through all the options requires some expertise. If you
have any questions about small business 401(k) plans or
if you would like a copy of the Polaris401(k)
Small Business Retirement Plans Plan Sponsor White Paper,
which helps Financial Advisors and Plan Sponsors select
the plan that’s the best for their particular needs,
simply contact Polaris401(k) at 877.814.401k. We
look forward to hearing from you.
A
prospectus for the underlying investment options is
available by calling 877-814-401k. The prospectus
contains the investment objectives, risks, fees,
charges, expenses and other information regarding the
underlying funds, which should be considered carefully
before investing. Please read the prospectus carefully
before investing. The unallocated group variable annuity
funding Polaris401(k) is an unregistered product
without a contract prospectus.
Variable annuities are issued by AIG SunAmerica Life
Assurance Company, except in New York. AIG SunAmerica
Life Assurance Company is a subsidiary of AIG Retirement
Services, Inc. and a member of the American
International Group, Inc. (AIG) family of financial
services companies. The
purchase of a variable annuity
is not required for, and is
not a term of, the provision of any banking service or
activity. Neither AIG SunAmerica nor its representatives
provide tax or legal advice. Clients should contact
their own tax advisor or attorney regarding their
particular situation. Distributed by AIG SunAmerica
Capital Services, Inc. 21650 Oxnard St., Woodland
Hills, CA 91367 (800) 445-7862
Not FDIC or
NCUA/NCUSIF Insured.
No Bank or
Credit Union Guarantee. May Lose Value.
K-4538-AR5 (02/08)
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