Framework for Finding the Right Fit
By Nathan Fisher
Retirement plans can be a crucial tool for small businesses looking to recruit and retain talent. A recent survey by the U.S. Government Accountability Office found that only about 14 percent of small businesses offer retirement plans to employees. However, that number is growing, with more and more realizing 401(k) plans are a great recruitment tool, and technology making it easier and easier for smaller businesses to offer the same benefits large corporations do. This figure may seem startling to many but I’ve had numerous conversations with small business owners and it makes perfect sense to me.
The fact is that many small business owners just don’t have the time to devote to retirement plans—running their business is hard enough. Additionally, many of the tools and solutions can be confusing to understand and what works for larger businesses do not necessarily work for smaller businesses. This is why at Fisher Investments 401(k) Solutions, we developed our own framework called R.E.T.I.R.E™ that we can walk small business owners and managers through, which makes navigating retirement plans less daunting. Here’s how it works:
R – Resources to Help People Prepare for Retirement.
You need to make sure that your plan includes sufficient resources to help people benefit from what you are offering. Employees are often scared and confused by retirement, which can cause them to avoid talking about it. To help employees find the most suitable plan for their specific needs, small business retirement plans should offer personalized help like enrollment meetings and 1:1 sessions. Unfortunately, while many plans are set up to help the small business owner in my experience, employees typically do not receive the same resources.
E – Engagement.
One of the major reasons small businesses want to offer retirement plans is to attract and retain employees. So if plan participation is too low, then it’s a problem. As mentioned, many employees may find plans confusing or scary, which is why it’s important to ensure you have the right resources for the plan. However, there are a number of different factors that can influence engagement. First, studies show people view their future selves as strangers. This phenomenon has a huge impact on how people think about and make decisions that will affect them in the future — like retirement. In order to cross this hurdle you have to create ways for people to empathize with their future selves. The other way you can create broader employee engagement is through peer influence. Like in fashion, what you need is to find those trendsetters – the people in the office that can become evangelists for retirement planning.
T – Tracking Individuals Toward Retirement Readiness.
Many times employees only save up to the matching contribution, oftentimes anywhere from zero to six percent. Unfortunately, this is not enough to replace their income in retirement. So although every little bit helps, I believe employees should be putting closer to 10 percent of their salary toward retirement, and depending on their age and how much they’ve already saved, possibly even more. Employees can use resources like the gap analysis or retirement calculators once every other year to re-calibrate their savings rate to help them track toward true retirement readiness. The key to proper tracking, oftentimes, is helping workers budget, so they have savings to put into the plan.
I – Investment Solutions for Different Types of Investors.
People don’t have the same dreams for retirement so there can never be a one-size-fits-all retirement plan. Small business owners need to look for providers that allow participants to create tailored investment solutions based on their goals, level of interest in investing and budget. The majority of employees will likely end up in a target date fund and, or, a managed account solution. I believe that these types of investment solutions work better for most people in the long run compared to individuals making choices based on what they hear in the news regarding factors such as market trends and global politics.
R – Removing Conflicts of Interest.
This is a major problem for small business owners and luckily something that is starting to get more attention. Business owners need to make sure that their providers are disclosing any conflicts of interest. For example, the practice of paying sales commissions is a big problem in small plans. That issue can be resolved by charging a flat fee that is simple and transparent.
E – Expenses: Keep Fees Reasonable.
It’s important for fees to be reasonable, as they can take quite a chunk out of someone’s retirement savings over time. What may seem reasonable in one year may not actually be reasonable over a 30 year period. Business owners need to make sure they are selecting plans that are manageable for employees both in the short-term and the long-term.
A retirement plan not only allows both employees and small business owners to save for retirement, but it also helps companies attract and retain the workers that will ultimately help their businesses grow. The more informed owners are about their plans, the better able they are to manage them in the best interest of their participants and realize their full contribution to their business.
Nathan Fisher is the managing director and head of 401(k) solutions for Fisher Investments.