Time for Some Upgrades
Some changes don’t feel like upgrades, like adding Jar Jar Binks to the Star Wars saga – my opinion. Then there are those things that don’t change the fundamentals of a product, but still make a big impact, like upgrades to a car model - kudos to whoever thought of the backup camera. The later example resembles the changes the SECURE Act brought to retirement Plan Sponsors. I don’t see any of the legislation as being groundbreaking for Plan Sponsors or fundamentally changing the way retirement plans are run. But after a decade of little changes in retirement plan legislation, it was time for some upgrades. These upgrades help ease the burden of starting a retirement plan and encourage employee savings.
Though there are several reasons why businesses want to start a retirement plan, there is one common reason why many don’t- cost. There are several kinds of retirement plans out there, many of which have a low administration cost. However, the types of plans that offer greater flexibility often carry with them an added level of administration costs and reporting requirements. Most retirement plan providers are compensated based on some percentage of the total amount of assets in the retirement plan. Since starter retirement plans begin with $0, and I’ve never come across providers that are in business to not make any money, fees tend to be higher to start in order make up for the lack of assets– and/or are accompanied by some sort of fat fee.
There is a tax credit for employers who start a 401k, to help offset the costs of starting it. These tax credits aren’t a new concept. What’s new is that rather than having the tax credit cap out at $500 per year for the first 3 years, it caps out at $5,000 a year for the first 3 years. Keep in mind that this is up to $5,000 in tax credits. This change can be a great help and incentive for small businesses to start a retirement plan. Not only can a retirement plan help incentivize employees to work for/stay with you as an employer, having access to a retirement saving vehicle is extremely important.
People can be good at finding ways to spend extra money that’s sitting in their bank account. Right now, 62% of Americans need to catch up on retirement savings to be adequately prepared. Another stumbling block is the future factor. It’s tough to think 15, 20, or 30 years into the future. A lot can happen in that time-frame. One common complaint that comes up with retirement savers is wishing they had started sooner and been more diligent in putting small amounts away over time. It’s easy to find a better time to start contributing to a retirement plan. There will always be a list of excuses for not starting to contribute towards your retirement. Taking the step to click the start button can be difficult for people. The funny thing is, when people are automatically enrolled in a plan, the difficulty of pushing the “stop button” on their retirement plan keeps most people from taking that extra step towards postponing their retirement. The SECURE Act has put some incentives in place to encourage setting up plans with auto-enrollment. Companies that set up their plan with an auto-enrollment feature can receive up to $500 a year for the first 3 years in tax credits, in addition to the tax credit for a starter plan.
Every company has different needs. You may or may not have considered adding a company retirement plan to your benefits package. But, with all the changes the SECURE Act brings, it may be time to take another look at starting a company retirement plan. Also, remember to talk to your tax and financial professionals to make sure starting a plan makes sense for your individual situation.
TD Ameritrade. (2019, September). 2019 Retirement Pulse Survey. Retrieved from TD Ameritrade: https://s2.q4cdn.com/437609071/files/doc_news/research/2019/retirement-pulse-survey.pdf