1100 Dauphin Street, Suite B Mobile, AL 36604
I get frustrated reading that high quality, low cost 401k plans are not the norm for small businesses. I think this opinion is the result of too many small business owners who don’t bother to shop the market for 401k plans.
I’m reading a great book called “Salt Sugar Fat: How the Food Giants Hooked Us,” by Michael Moss. You’re probably wondering how a book like this relates to low cost 401k plans. I think you’ll see the parallels shortly.
Moss’ basic premise rests on the idea that large corporate interests use high amounts of fat, sugar and salt to sell us large quantities of nutritionally unsound food (think: delicious, cheesy pizza and double bacon cheeseburgers chased down by sweet juices and sodas.) The result? We have eaten ourselves into an epidemic of obesity. Thus, the natural question becomes, who should we blame? Are we consumers the victims of corporate greed? Or is an efficient market simply providing us with exactly what we want?
While there may be cause for debate in the world of “Big Food,” I think there should be no debate in the world of 401ks, IRAs and retirement plans. The cost of investments, the quality of investments, the additional (and potentially unnecessary) fees we may pay – heck, even employee participation rates to some extent – are demand driven. We went to the retirement plan supermarket, put the plan in our carts and made our purchase.
This all implies that the retirement plan market is NOT broken. We may be unhappy when we examine our plans more closely and we may have legit gripes, but we are NOT victims. We chose to participate in the market and it delivered a variety of market-driven solutions. Was there fine print that we failed to read? Yup. Are some practices a bit deceptive? Absolutely. Are there providers with conflicts of interests? I’m shocked – SHOCKED!
Now before you think I’ve had a market-driven conversion experience, let me give you the good news:
The retirement plan process is demand-driven.
At Employee Fiduciary, March is a busy month. And no, I’m not talking about putting together our NCAA brackets. Corporate tax returns are due March 15, which means we are helping our clients analyze the deductibility of 2012 contributions. We are busy completing 401k plan testing and compliance.
In a perfect world, all employees would make the maximum contributions to their plan and reap the rewards come retirement time. But for many employees, putting aside money for retirement is difficult - many need their paycheck in its entirety just for everyday living expenses. On the other hand, highly compensated employees have the ability to make larger contributions to the plan. The IRS has rules that limit deductibility of plan contributions. Basically, the wealthy can max out only if the less well compensated make significant contributions as well.
Because of this, we have seen many of our own clients choose to invest in a 401k plan with “safe harbor” provisions. The 401k safe harbor plan allows highly compensated owner-employees to make maximum contributions even if their employees make smaller contributions - or no contribution at all.
With this kind of plan in place, a small business owner doesn’t run the risk of failing a non-discrimination test (safe harbor plans don’t require discrimination testing) and triggering a refund of contributions, which then are taxed as part of personal income.
But what’s the catch? And does it violate the principles of frugality?
You’ve probably seen the Discovery television show MythBusters. Two highly intelligent, slightly crazy guys and their team of hipster scientists test common myths, often by literally blowing stuff up. Today we will adopt that approach to a “401k plan consultation” episode, wherein the Frugal Fiduciary (that’s me) blows up the #1 myth plan participants have about low cost 401(k) plans and their limitations.