Post by Zoinkers on Dec 1, 2006 0:03:46 GMT -5
Bankrate.com
Nudge your boss to start 401(k) plan
Wednesday November 29, 6:00 am ET
Barbara Whelehan
The 401(k) plan turned 25 earlier this month. Go ahead, let out a big cheer!
It's an anniversary worth celebrating. Some 47 million people contribute to 401(k) plans, which collectively held $2.4 trillion in assets at the end of last year. Meanwhile, only about 21 million people in the private sector have old-fashioned defined-benefit plans, which hold about $1.9 trillion in assets.
While the 401(k) plan was originally supposed to supplement traditional pension plans, over the years it and its 403(b) and 457 cousins have become the most important retirement vehicles for working Americans.
Why not? The 401(k) plan has many advantages. You get an upfront tax savings since the money, in most cases, is saved on a pretax basis. Many workers get matching contributions (which is basically free money) from their employers. On top of that, it's portable, meaning you're not stuck working at a job you hate for your entire life just because you stand to collect a pension at the end of your career. Once you leave an employer, you can usually roll 401(k) assets into the plan at your new job or you can move them into a rollover IRA.
Yet believe it or not, investing in a 401(k) plan is not an option for everyone. In fact, according to The Retirement Security Project, just under half of working Americans had access to a 401(k) plan in 2004.
Small-business blues
Large companies generally are good about offering 401(k) plans to workers and some still offer a traditional pension. But employees of small firms are not as lucky, since smaller businesses are much less likely to offer any retirement plan at all.
ShareBuilder, an online brokerage firm, recently surveyed the owners of 507 very small businesses ranging in size from one to 50 employees.
Among the findings:
Only 14 percent offer a 401(k) plan.
18 percent offer alternative plans, such as a SIMPLE or SEP IRA.
13 percent offer either a profit-sharing or pension plan.
63 percent offer no retirement benefits at all to employees.
The businesses that did not offer a 401(k) plan offered these reasons:
Not have enough employees to make it worthwhile.
Unable to afford a company match.
Concerns about the stability of their business.
Most businesses that do offer a 401(k) plan indicated that their main reason was to attract and retain employees.
Here's the most shocking finding: "The vast majority of small businesses that don't currently offer 401(k) plans indicate they haven't been approached by employees to start one," according to the survey.
Speak up, American workers!
You have to be somewhat careful about how to approach the boss about company benefits. It probably wouldn't be a good idea to blurt something loudly within earshot of your co-workers at a holiday party, company picnic or even a general meeting. The shame-on-you approach will likely not work.
But an earnest approach just might. How you go about it will depend on the nature of your boss and your work environment. You might pull together a few facts and put it in an e-mail or you may want to arrange a one-on-one meeting with the business owner. Or just e-mail this article to your boss!
But there are plenty of compelling reasons why your boss just might be receptive: First, these plans offer tax breaks for businesses. Plus, the boss may have some concerns about his or her own retirement. According to that ShareBuilder survey, nearly half of small-business owners say they are not confident about saving enough for their own retirements.
So approach your employer tactfully. Build a case for why it's in the company's best interest to offer a retirement plan to its employees. Say the firm will have an edge over the competition or that such a plan will likely slow employee turnover. Workers no longer expect to be coddled, but they do need to have the basic tools to succeed, and a retirement plan is an important tool.
The right plan for small businesses
Not all retirement vehicles come with high costs. Some, such as a SIMPLE IRA, may cost little or nothing to set up, and administrative requirements are minimal. The cost of a 401(k) plan varies a lot, depending on whether, for example, it offers a loan feature, which would make it more expensive. Traditional 401(k) plans require extensive paperwork as well.
At the other end of the spectrum is the defined-benefit plan -- the traditional type of pension plan -- in which small-business owners can dump a lot of money, as much as $175,000 per employee in 2006 ($180,000 in 2007). But most don't adopt them for the same reasons large companies don't: They're administrative hassles, they're expensive and they require mandatory contributions each year.
Below is a sampling of retirement vehicles (not an exhaustive list) that small businesses might consider offering, as well as their features and contribution limits.
Small business retirement plans
Traditional or Roth 401(k) plan
Plans vary in complexity and cost. Except for safe harbor 401(k) plans and SIMPLE 401(k) plans (both of which require an employer to match contributions), traditional 401(k) plans must meet certain complex nondiscrimination tests. All 401(k) plans are subject to stringent reporting, disclosure and other requirements. With traditional 401(k) plans, employees get a tax break upfront (salary deferrals are not included in taxable income), whereas with Roth plans employees take tax-free distributions at the back end (but are taxed upfront).
Contribution limits
Employee contributions (elective deferrals) are limited to the lesser of 100 percent of compensation or $15,000 in 2006; $15,500 in 2007. Additional $5,000 catch-up contribution is allowed for those over 50. Employers can add as much as $44,000 ($45,000 in 2007), though the total maximum ceiling for employer/employee contributions is $49,000.
SIMPLE IRA
As is true with SIMPLE 401(k) plans, this one is appropriate for firms with fewer than 100 employees.
Contribution limits
Elective deferral limit is lesser of 100 percent of compensation or $10,000 in 2006; $10,500 in 2007. An additional $2,500 catch-up contribution is allowed for those over 50. Employer must make a match. It can match up to 3 percent of compensation (with lesser amounts allowed in no more than two of five years), or employer could contribute a straight 2 percent of compensation for all employees whether or not they contribute to the plan.
Self-employed 401(k) plan
Good plan for sole proprietors who want to maximize both the employee and employer contribution amounts. Business can only employ the owner and a spouse.
Contribution limits
These are the same as that of the regular 401(k) plan, with the sole proprietor able to make both elective deferrals plus the employer contribution up to a limit of $49,000.
SEP IRA (Simplified Employee Pensions)
Good for one person as well as small operations. Easy to set up, with little paperwork required. Does not have to be funded every year. Employer can use this to make sizable contributions to his own and to employees' accounts. The tax filing deadline is less restrictive for SEPs than for most other retirement plans.
Contribution limits
This plan does not allow an employee to defer a portion of salary to the account. Contribution limit is subject to certain limitations, with a maximum ceiling of $44,000 per account in 2006 ($45,000 in 2007).
Longtime financial journalist Barbara Mlotek Whelehan earned a certificate of specialization in financial planning. If you have a comment or suggestion about this column, write to Boomer Bucks.
Nudge your boss to start 401(k) plan
Wednesday November 29, 6:00 am ET
Barbara Whelehan
The 401(k) plan turned 25 earlier this month. Go ahead, let out a big cheer!
It's an anniversary worth celebrating. Some 47 million people contribute to 401(k) plans, which collectively held $2.4 trillion in assets at the end of last year. Meanwhile, only about 21 million people in the private sector have old-fashioned defined-benefit plans, which hold about $1.9 trillion in assets.
While the 401(k) plan was originally supposed to supplement traditional pension plans, over the years it and its 403(b) and 457 cousins have become the most important retirement vehicles for working Americans.
Why not? The 401(k) plan has many advantages. You get an upfront tax savings since the money, in most cases, is saved on a pretax basis. Many workers get matching contributions (which is basically free money) from their employers. On top of that, it's portable, meaning you're not stuck working at a job you hate for your entire life just because you stand to collect a pension at the end of your career. Once you leave an employer, you can usually roll 401(k) assets into the plan at your new job or you can move them into a rollover IRA.
Yet believe it or not, investing in a 401(k) plan is not an option for everyone. In fact, according to The Retirement Security Project, just under half of working Americans had access to a 401(k) plan in 2004.
Small-business blues
Large companies generally are good about offering 401(k) plans to workers and some still offer a traditional pension. But employees of small firms are not as lucky, since smaller businesses are much less likely to offer any retirement plan at all.
ShareBuilder, an online brokerage firm, recently surveyed the owners of 507 very small businesses ranging in size from one to 50 employees.
Among the findings:
Only 14 percent offer a 401(k) plan.
18 percent offer alternative plans, such as a SIMPLE or SEP IRA.
13 percent offer either a profit-sharing or pension plan.
63 percent offer no retirement benefits at all to employees.
The businesses that did not offer a 401(k) plan offered these reasons:
Not have enough employees to make it worthwhile.
Unable to afford a company match.
Concerns about the stability of their business.
Most businesses that do offer a 401(k) plan indicated that their main reason was to attract and retain employees.
Here's the most shocking finding: "The vast majority of small businesses that don't currently offer 401(k) plans indicate they haven't been approached by employees to start one," according to the survey.
Speak up, American workers!
You have to be somewhat careful about how to approach the boss about company benefits. It probably wouldn't be a good idea to blurt something loudly within earshot of your co-workers at a holiday party, company picnic or even a general meeting. The shame-on-you approach will likely not work.
But an earnest approach just might. How you go about it will depend on the nature of your boss and your work environment. You might pull together a few facts and put it in an e-mail or you may want to arrange a one-on-one meeting with the business owner. Or just e-mail this article to your boss!
But there are plenty of compelling reasons why your boss just might be receptive: First, these plans offer tax breaks for businesses. Plus, the boss may have some concerns about his or her own retirement. According to that ShareBuilder survey, nearly half of small-business owners say they are not confident about saving enough for their own retirements.
So approach your employer tactfully. Build a case for why it's in the company's best interest to offer a retirement plan to its employees. Say the firm will have an edge over the competition or that such a plan will likely slow employee turnover. Workers no longer expect to be coddled, but they do need to have the basic tools to succeed, and a retirement plan is an important tool.
The right plan for small businesses
Not all retirement vehicles come with high costs. Some, such as a SIMPLE IRA, may cost little or nothing to set up, and administrative requirements are minimal. The cost of a 401(k) plan varies a lot, depending on whether, for example, it offers a loan feature, which would make it more expensive. Traditional 401(k) plans require extensive paperwork as well.
At the other end of the spectrum is the defined-benefit plan -- the traditional type of pension plan -- in which small-business owners can dump a lot of money, as much as $175,000 per employee in 2006 ($180,000 in 2007). But most don't adopt them for the same reasons large companies don't: They're administrative hassles, they're expensive and they require mandatory contributions each year.
Below is a sampling of retirement vehicles (not an exhaustive list) that small businesses might consider offering, as well as their features and contribution limits.
Small business retirement plans
Traditional or Roth 401(k) plan
Plans vary in complexity and cost. Except for safe harbor 401(k) plans and SIMPLE 401(k) plans (both of which require an employer to match contributions), traditional 401(k) plans must meet certain complex nondiscrimination tests. All 401(k) plans are subject to stringent reporting, disclosure and other requirements. With traditional 401(k) plans, employees get a tax break upfront (salary deferrals are not included in taxable income), whereas with Roth plans employees take tax-free distributions at the back end (but are taxed upfront).
Contribution limits
Employee contributions (elective deferrals) are limited to the lesser of 100 percent of compensation or $15,000 in 2006; $15,500 in 2007. Additional $5,000 catch-up contribution is allowed for those over 50. Employers can add as much as $44,000 ($45,000 in 2007), though the total maximum ceiling for employer/employee contributions is $49,000.
SIMPLE IRA
As is true with SIMPLE 401(k) plans, this one is appropriate for firms with fewer than 100 employees.
Contribution limits
Elective deferral limit is lesser of 100 percent of compensation or $10,000 in 2006; $10,500 in 2007. An additional $2,500 catch-up contribution is allowed for those over 50. Employer must make a match. It can match up to 3 percent of compensation (with lesser amounts allowed in no more than two of five years), or employer could contribute a straight 2 percent of compensation for all employees whether or not they contribute to the plan.
Self-employed 401(k) plan
Good plan for sole proprietors who want to maximize both the employee and employer contribution amounts. Business can only employ the owner and a spouse.
Contribution limits
These are the same as that of the regular 401(k) plan, with the sole proprietor able to make both elective deferrals plus the employer contribution up to a limit of $49,000.
SEP IRA (Simplified Employee Pensions)
Good for one person as well as small operations. Easy to set up, with little paperwork required. Does not have to be funded every year. Employer can use this to make sizable contributions to his own and to employees' accounts. The tax filing deadline is less restrictive for SEPs than for most other retirement plans.
Contribution limits
This plan does not allow an employee to defer a portion of salary to the account. Contribution limit is subject to certain limitations, with a maximum ceiling of $44,000 per account in 2006 ($45,000 in 2007).
Longtime financial journalist Barbara Mlotek Whelehan earned a certificate of specialization in financial planning. If you have a comment or suggestion about this column, write to Boomer Bucks.