By Cyril Tuohy
Simplifying the employer-sponsored retirement system would give small business owners more incentive to sponsor a retirement plan, and educating workers about the tax breaks of saving and investing would motivate more workers to sign up, experts said at a House committee hearing last week.
There also exists a perception gap between the 56 percent of workers wanting more information about how to reach their retirement goals, and the 42 percent of employers who believe this to be the case, said Catherine Collinson, president of the Transamerica Center for Retirement Studies and the Transamerica Institute.
“There is an opportunity to close this disconnect: only 11 percent of small-company workers had spoken to their employer about retirement benefits and only 29 percent of small-company employers had surveyed their employees on the topic,” she said.
Collinson was one of four experts to testify before the House Committee on Small Business chaired by U.S. Rep. Sam Graves, R-Mo. about how best to boost the number of small businesses sponsoring retirement plans, and how to increase participation rates among businesses already offering the plans.
“Small companies, with their thin margins and lower operating capital, have found it a challenge to offer a full array of employee benefits, including pension or retirement savings plans,” said Graves, in an opening statement.
Increasing participation rates — helped by the ease of the payroll deduction — is considered by many retirement experts to be the easiest way for Americans to prepare for privately-funded retirement through the defined-contribution system.
While retirement plans are fairly common among large and midsize businesses, of the 43 million people who work for businesses that employ less than 100 people, only 14 percent of those companies offer retirement plan benefits, according to the Government Accountability Office.
Complicated tax laws dissuade small companies from offering retirement plans, said Ray Rucksdashel, chief financial officer of Quest-Tec Solutions, a Houston-based engineering company that serves the oil and gas sector.
“I think that it is important for the committee to understand that, in my view, the administrative complexities of 401(k) plan administration are the biggest obstacles to small businesses offering employee retirement plans,” he said.
For instance, the complexities surrounding his 38-employee company’s 401(k) retirement plan have forced Rucksdashel to hire an outside professional employer organization (PEO) to administer the retirement plan, he said.
Participation rates at companies with fewer than 100 employees could be boosted in several ways, Collinson said.
She said that the government should offer tax incentives to offset the cost of the plans to small employers, she said. For employers in which a 401(k) plan isn’t feasible, businesses should be offered incentives to join a multiple employer plan (MEP).
MEPs allow many businesses to merge their retirement plans into one. Employers cease to be a plan sponsor. The responsibilities and liabilities of individual plan sponsors who become fiduciaries are transferred to the MEP structure.
Collinson said that employers sponsoring retirement plans should include part-time workers, many of whom are ineligible depending on the employer. She also said that companies should increase the default contribution rate to 8 percent or even 10 percent for new employees.
She said that the Saver’s Credit, extended to low- and moderate-income Americans yet unknown to most employees, should also be promoted more aggressively. She said that eligibility requirements could be raised to make more tax filers eligible for the credit.
Paula A. Calimafde, chairwoman of the Small Business Council of America which represents small privately held and family-owned businesses, said the time had come to remove the one-year waiting period before employees of small businesses could join the retirement plan.
“Eliminating the wait would allow more small business employees to start participating in the 401(k) portion of the plan sooner,” Calimafde said.
She also suggested that the anti-discrimination rules governing 401(k) plans and highly compensated employees be simplified, and that certain Safe Harbor provisions along with required minimum distributions be eliminated.
Calimafde said that the success of the small business retirement system depends on providing business owners with enough incentives to offset the administrative costs, and that unless owners come out ahead they have no incentive to offer retirement plans.
“I would explore the expansion of the current tax credit for companies to start new retirement plans,” said C. Roy Messick 3rd, managing partner of TTP Retirement Plan Specialists in Overland Park, Kan. “An increase in this tax credit would help defray the startup cost of the plan. I would also add a tax credit of some amount based on the number of employees enrolled.”
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].
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