New Rules for Retirement Plans

What the 2006 Pension Reform Act guidelines, which went into effect on Jan. 1, mean for small-business owners and their employees

I own a small S-corporation and I would like to set up a retirement plan for myself and perhaps eventually for any future employees. I am married, filing jointly, and we have about $200,000 in annual income—the majority of which comes from my spouse's job. What are my options for opening an IRA or 401(k) plan through my business? I'm very confused about the new laws.

—F.E., Long Island, N.Y.

You're not alone. A recent survey conducted by PricewaterhouseCoopers Private Company Services (PCS) showed that a majority of chief executive officers of the nation's fastest-growing private firms are not knowledgeable about the 2006 Pension Reform Act guidelines that took effect on Jan. 1. And although the legislation creates an automatic enrollment feature for employees, only 5% of the CEOs surveyed planned to take advantage of that feature.

"The pension reform act was passed to help companies boost plan participation and do right by their employees," says Paul Bracaglia, investment advisory partner with PCS. "The lack of knowledge regarding the new guidelines means that…companies are not taking advantage of the opportunity to provide employees with the best options available to help them save for retirement."

Most Popular Plans

For an entrepreneur with no employees, a solo 401(k) plan tends to be the simplest and least expensive retirement plan to administer, experts say. However, you should research your options thoroughly, particularly if you are considering adding employees as your company grows. Talk to your accountant or tax preparer about the various retirement plans available.

If your CPA is not knowledgeable about the topic, she or he will likely be able to refer you to someone who is. Be aware, however, that it's always smart to get a couple of opinions. Some of the plans out there will not be right for you, depending on your age, how many years you have before you plan to retire, and the additional retirement resources you and your spouse have already accumulated.

The 401(k) plan is the most popular pension plan in use in the U.S. today, according to the Internal Revenue Service. The PCS survey, which targets the fastest growing entrepreneurial and family-owned firms, showed that 92% of respondents offer retirement plans, and 85% of them offer 401(k)s. Nationally, smaller firms and startups are less likely to offer retirement plans for their employees.

Background Check

Many companies—80% in the PCS survey—retain independent investment advisers to manage their plans and complete the paperwork involved, which can be substantial. Firms that do this kind of work include: third-party administrators, brokerage firms, benefits consulting firms, banks, and accounting firms. You can find more information on many of them online but again, talk to more than one provider. You may find that some groups charge far more than others to do the same work, and you also want to ensure that any adviser you hire is independent and not selling the investments she recommends.

"Ensuring that the investment advisory firm is independent involves scrutinizing the adviser's accreditation, fee structure, and investment methodologies and philosophies," says Bracaglia. "Company owners want to make sure that the adviser is bias-free; for example, has no financial compensation tied to the plan assets. Every company should ask to review its investment adviser's Part II of Form ADV which is filed with the SEC [Securities & Exchange Commission] to determine precisely how the firm is compensated. An investment adviser [who is] is paid solely for advice creates a relationship that will be truly independent."

For more information on 401(k)s, visit the IRS Web site,,,id=120298,00.html, the U.S. Department of Labor Web site, Details on the PCS survey can be found at

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