By
John Cunningham, President, Retirement Planning Services
Small firms give lots of excuses for not establishing
a 401(k) plan. The two most common are, "It's too expensive" and,
"It's too time-consuming." Both are not true, thanks to advances
in technology that have streamlined the 401(k) administrative process
over the past several years.
Still, only 25% of firms with 25 to 100 employees offer
401(k) plans. The rest are overlooking the second most asked-for
employee benefit (after health insurance) and missing a golden opportunity
to help recruit and retain quality personnel. Experts predict that
in the next five years, an estimated 100,000 new 401(k)s will cover
more than six million workers. So if you can enlighten clients and
prospects about the ease and relatively low cost of providing a
401(k) plan, additional revenues can be yours.
Step one is preparing to enter this burgeoning
market by becoming a 401(k) expert or by partnering with one. (See
my article, "How small and mid-size brokers can profit from 401(k)s,"
in the June issue of HIU.) This month's article will deal
with the three other keys to effective 401(k) selling – prospecting,
presenting and closing the sale.
To effectively prospect, you need to first understand that many
small firms still perceive 401(k)s as a rich benefit affordable
only to large corporations with deep pockets. This may have been
true ten years ago, but new recordkeeping systems and the Internet
– which has reduced the number of calls to 401(k) vendors – have
sent the cost of 401(k) administration plummeting. During your presentation
to clients, you may want to relate 401(k)s to the now-popular electronic
devices -- computers, camcorders and cell phones – which thanks
to lower production costs are no longer limited to a select few.
The most common 401(k) objections
Below are some guidelines for addressing the most common
objections to 401(k)s for small firms:
Objection Number One: We can't afford it.
A 50-life group can expect to pay about $2,100 a year
plus a one-time setup fee of $500 to $1,000. That's about the
same as the cost of one laptop computer with a standard software
package! Smaller companies would pay even less, while a 100-life
group would pay an additional $1,000 in annual expenses.
Objection Number Two: It takes too much administrative
time.
A typical firm would need one individual spending
10 to 15 hours to help setup up the 401(k) plan, and then two
hours each payroll period. Who hasn't wasted more time in meetings?
Objection Number Three: It's too much liability
to take on.
- This is a big one for CEOs and CFOs, but a well-conceived
investment policy will satisfy even the most paranoid executive.
As a broker, you should help employers establish a policy that
outlines the following:
- Benchmarking the performance of up to eight different types
of funds – equities, bonds, money market, etc. – against an
index for each category.
- Pre-determined length of time before replacing a fund that
has under-performed or significantly changed its holdings (e.g.
replacing Blue Chip stocks with small caps).
- Specific methodology for switching funds.
- Documentation of every step when funds are replaced.
Objection Number Four: I can't afford the matching
contribution.
Again, the vision of corporate giants matching investments
dollar for dollar can intimidate small businesses. Yet according
to IRS regulations, an employer can offer a 401(k) without contributing
one dime. About 17% of firms with 401(k)s offer no match. A company's
match is completely discretionary, and can range from 0% to 100%.
Moreover, a 401(k) plan can be structured so the employer can
wait until year-end – perhaps after financial filings – to decide
how much, if anything, to contribute.
Firms can also set up five-year vesting schedules, where employees
are 20% vested after the first year, gradually increasing until
they become fully vested in five years. Those that leave before
the fifth year forfeit the non-vested portion of their funds.
These monies can then be used to either offset future matching
contributions, pay for plan expenses or allocated to others who
remain with the firm. Plus, all employer matches and administrative
setup fees are fully tax deductible to the company.
Whether your clients decide to match 100%, 0%, or something
in between, a 401(k) plan will still offer employees one of the
best methods to save for retirement, with tremendous tax advantages
and the ability to borrow against their vested funds. You can't
do that with an IRA.
# # #
ABOUT THE AUTHOR
John Cunningham is president of Retirement Planning
Services in New York City, and a partner with the New York City-based
Thesco Benefits. He has extensive experience designing and marketing
of 401(k)s, 403(b)s and other qualified plans, having worked with
all types of employers. Mr. Cunningham can be reached at 212-603-0284.
