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The Hidden Dividends of 401(k)s

By Ellen Hoffman While millions of workers lament the investment losses in their retirement accounts, 28 million Americans who work for small businesses don't even have retirement accounts. But that can be remedied fairly easily and inexpensively.

Just 34% of workers in businesses with 99 or fewer employees had some type of retirement plan in 1999, vs. 64% of employees at larger companies, according to the U.S. Labor Dept. (1999 is the last year for which figures are available).

Many small businesses say they don't offer any kind of retirement plan because "revenue is too uncertain," and "employees prefer wages and/or other benefits," according to the 2002 Small Employer Retirement Survey, released this month by the Employee Benefit Research Institute, the American Savings Education Council (ASEC), and Matthew Greenwald & Associates. These groups are, respectively, a nonprofit research group, a coalition of government agencies and companies that try to motivate Americans to save money, and a market-research company.

PRIORITIES. The same survey reported that small businesses offering retirement plans do so in the belief that such benefits help attract and retain "quality employees" and enhance "the attitude and performance of their employees." (You can read the full survey results here.) But even when small-business owners see the advantage of a retirement plan, they often don't regard it as a priority.

Dick Herring, president of Phenoseal, a Franklin (Mass.) outfit that makes caulks and sealants, offers his 45 employees both a profit-sharing plan and a 401(k), but he says he can do so because his business is a "mature" one -- it has been around for more than 40 years. If someone starting a new business asked for his advice, Herring says he wouldn't recommend making a retirement plan a priority. Instead, he says, "I'd tell them to figure out how they're going to pay their taxes."

There may be a way to accomplish both objectives. And the good news for small businesses and their employees is that setting up some kind of retirement plan need not be expensive or complicated. Because numerous reports suggest that Americans aren't saving enough for retirement, and because of concern about the future of Social Security, the federal government has created incentives for small employers to implement retirement plans, and has increased efforts to spread information about these opportunities.

NEW INCENTIVES. Among the types of plans that are available are "SIMPLE" retirement plans, the Simplified Employee Pension (SEP), profit-sharing plans, traditional or guaranteed pensions, and 401(k)s.

The 2001 tax bill encourages employers with fewer than 100 people to implement retirement plans by offering the employers a tax credit of 50%, up to $500, for the costs of setting up a plan. The tax bill also liberalized some other federal pension rules that experts say have discouraged employers from offering plans in the past. You can read about these technical changes starting on page 47 of Seeds of Change, a booklet on the tax cut published by Deloitte and Touche (you can read it online by clicking here).

Each type of retirement plan has its own rules on eligibility, contribution limits, and deadlines. What they share is the ability of the business owner to deduct contributions as a business expense, and for an employee to receive tax-deferred benefits of retirement savings similar to those offered by larger companies. In addition, these small-business plans generally require less paperwork than those of a large business and can be administered relatively inexpensively by the company or an outside financial-services firm.

YOUR OPTIONS. For example, Principal Financial Group, a company that manages retirement plans for employers, will provide SIMPLE IRA or SEP accounts for small-business employees for $15 per person per year, with no set-up fee. The company also could set up a "paperless," all-electronic/online 401(k) account for an employer for $500 in set-up fees and a $20-per-person annual record-keeping fee. To manage a 401(k) that allows employees telephone access to a customer-service rep, the cost is $1,500 a year.

As long as you're working and you meet the income limits, you can save money for retirement in a traditional IRA or a Roth IRA, as described in this IRS publication on IRAs. In 2002, you are able to contribute up to $3,000 -- or if you are 50 or older, $3,500 -- to the account. But if you're a small-business owner or employee, you should investigate other plans that would allow you to sock away much more money on a tax-deferred basis.

If you work for a small business without retirement benefits, Russ Orban, assistant chief counsel of the Small Business Administration, suggests that you take the initiative by collecting information on the various types of plans, and then "go to your boss and say that you'd like to be covered in the future." The easiest plans to set up and operate are the Simplified Employee Pension (SEP-IRA) and the SIMPLE plans, which come in the form of either an IRA or a 401(k).

"WINNING SOLUTION." If you're the boss, you should take on the research task yourself or seek help from your tax adviser. A good place to start is with the descriptions in the new CD-ROM, "IRS-SBA Business Resource Guide 2002." You can order a free copy from the IRS online by clicking here.

Other government information sources include a Labor Dept. chart listing the key features of each type of plan and

a special Web site, sponsored by the USDOL, the U.S. Chamber of Commerce, and Merrill Lynch. The ASEC Web site has a "small-business quiz" to test your knowledge, and many financial calculators to help you plan.

Tough as it may be for small businesses to fund retirement plans, owners should realize that if they "want to retain employees and make them happy, it's a winning solution," says Christina Lundberg, program manager of the SBA's Small Business Development Center in Martinsburg, W. Va. And as Americans become better educated about the long-term benefits of compounding their retirement savings, the more both owners and employees will realize that a retirement plan is a necessity, not a luxury. Hoffman writes Your Retirement only for BusinessWeek Online. She's the author of The Retirement Catch-Up Guide and Bankroll Your Future Retirement with Help from Uncle Sam, and you can contact her through her Web site,

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