Employee benefit plans can be complicated.
If you read the sentence above and you’re still with us, we’re guessing that you’re probably one of the business leaders who understands their importance, even despite the complexities. (Well done!)
It’s true that offering retirement plans to your business’s employees comes with costs, responsibilities, and the task of adding new words and acronyms to your vocabulary, but is it worth it? Do businesses really need to offer benefit plans? Where should a company even start?
In this episode of The Wrap, our hosts talk to retirement plan experts Steven Causey, CPA, AIF and Kyle Bonds, ERPA, QPA, QKA about the fundamentals that businesses should know about offering a retirement plan to their employees.
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Intro (00:00) Welcome to The Wrap, a Warren Averett podcast for business leaders designed to help you access vital business information and trends when you need it so you can listen, learn and then get on with your day. Time is tight, that’s why our advisors have wrapped up today’s most timely topics into a podcast with actionable advice. Now let’s get down to business.
Paul (00:21) Hey, Melanie.
Melanie (00:23) Hey, Paul.
Paul (00:24) Clearly, I did not say, “Hi, Kim,” I said, “Hey, Melanie.” Today we’re so happy to have Melanie Nichols sitting in today for my cohost, Kim Hartsock. Melanie is a Member and Senior Client Consultant within our Warren Averett Asset Management group. Today’s topic is perfect for you to be here so we’re so happy that you’re here with us.
Melanie (00:39) Thanks. I’m so glad to be here.
Paul (00:42) And today we’re talking retirement plans with Kyle Bonds and Steven Causey.
Melanie (00:44) Steven Causey has been with Warren Averett since 1991 and has served as Vice President of Warren Averett Asset Management for the last 20 years. Steven works closely with clients to provide 401k solutions. Steven, we’re happy to have you here.
Steven (00:57) Thank you.
Paul (00:58) And with Steven today is Kyle Bonds. Kyle Bonds has over 18 years of experience designing and consulting businesses on their benefit plans. Kyle manages Warren Averett Asset Management’s Benefit Consultants division, which provides retirement plan design and administrative service is for clients across the country.
Kyle (01:11) Thanks for having me, Paul.
Paul (01:13) Glad to have you all here with us. Now, we’re all familiar with retirement plans, and I’m sure many of us participate in these plans. As a business owner, do I really need to offer a retirement plan to my employees?
Steven (01:23) You know, that’s a great question. I think the first thing people would look at is pensions are no longer around, and retirement plans, 401k plans in particular, are the way employees now have to save for retirement. When you look at the numbers out there, though, it’s critical with small companies, a lot of large companies offer plans. The statistics will show that only 32% of Americans participate within a 401 K plan. I think the focus here needs to be for that number to be higher, but it’s the small companies, that’s where the struggle is.
Paul (01:58) So Kyle, what are some of those key considerations a business owner should have when deciding on the type of plan for their business.
Kyle (02:04) Paul, I think you just did a podcast a few weeks ago regarding the war on talent. In the war on talent, having that 401k plan increases the ability of employers to retain, as well as recruit, top talent.
Paul (2:20) So that’s a really good benefit to kind of provide to your employees.
Steven (2:26) You know, a lot of business owners view their company as their retirement plan, but a retirement plan can aid both the employees as well as the business owner as a way to save outside of their business.
Paul (02:36) Makes perfect sense.
Melanie (02:38) Steven you mentioned earlier at pension plans, but I think most of us are most familiar with 401 K plans. Can you talk about the different types of retirement plans?
Steven (02:48) Sure. There’s an array of types of retirement plans that companies offer all the way from things like simple IRAs or just standard traditional IRAs, all the way to true 401k plans. A lot of times it’s dependent on the company’s size as to how they feel like the type of plan that’s appropriate for them. But in this day and age, 401k plans have become available to almost all companies of all sizes, and it seems to be the most applicable.
Paul (03:15) Steven, once somebody’s chosen a type of plan, do they have to stick with that?
Steven (03:20) That’s a great question. Some businesses will actually start with a smaller plan to just get started. The smaller plans often involve less administration, but once they realize the importance of the plan, particularly as the business may grow, they then move to more of a 401k type setup.
Paul (03:36) Costs always come up when you’re when you’re trying to determine what type of plan to do. So what are some of those costs that are associated with these types of plans?
Kyle (03:45) A lot of those plans are simplified retirement plans and so they have no cost other than a very small investment expense cost. And then, as you get into the 401k plans, you have some administrative costs. There are some IRIS forms that are required to be filed and then you have just the investment expenses also applies to the 401k plan as well.
Steven (04:10) Yeah, on different size plans, I read an article one time that said everyone should pay at least 1% or less for a retirement plan. Size of a retirement plan usually dictates the cost, both number of participants as well as the asset level. I think we could use a generality of you’re going to be looking at typically paying a percentage, and that percentage might be anywhere from, say, 1 to 2% for a million to 2 million dollar plan.
Paul (04:36) And is it the business covering those cost or is that the participants?
Steven (04:39) Historically, the costs are oftentimes built into the fund expense, so the plan or the participants essentially absorb the cost, but many structures out there for plans do allow the company or business to play a part or all of those expenses.
Melanie (04:55) So Steven, what is the business owner’s responsibility as it relates to the retirement plan? And are they a fiduciary?
Steven (05:02) Well, the business is always the main fiduciary when it comes to a plan. They have abilities to outsource some of those responsibilities, but they have varying levels of responsibilities anywhere to, Kyle mentioned to 5500. There are tax returns and informational returns that need to be filed every year. They obviously need to make sure the amounts coming out of the employee paychecks were deposited in a timely fashion. But more than that, the government does expect retirement plans, businesses in particular, to review the plan to make sure it’s still appropriate. Things change over time. You need to make sure that your costs a reasonable. They want you to benchmark that against some reasonable cost level. The underlying investments, one of the big topics lately as fiduciaries when it comes to investments. Do you want an expert out there to be responsible for those responsibilities? Or is the company willing to take on that?
Paul (05:54) You made a good point that sometimes they can outsource some of that process. They still have to know who they’re outsourcing to, and they still have to do their own review of those folks, right? So that they can’t ultimately give all responsibility as fiduciary, or is there a portion?
Steven (06:11) Now there always is a responsibility because they make the ultimate decision of who serves in those roles. The more you outsource, the less liability the company often has, but they will always have the ultimate liability of reviewing those that they’ve hired to serve in the various roles.
Paul (06:26) So Kyle, any recent changes to the whole retirement plan world that businesses need to be aware of? Constantly things are changing and evolving with laws and regulations of anything new.
Kyle (06:37) Yeah, actually, in December of last year, Congress tacked on to the budget bill what’s called The Secure Act. It was probably the most significant retirement plan changes in the past 15 or 16 years. There were some real positive changes that came out of that. Steven mentioned the lack of coverage for the American worker. Probably the biggest for employers that don’t currently have a retirement plan is the availability of a tax credit of up to $5000. I’ve had my accounting friends call me on the tax filing deadline for the prior year and ask, “Can we set up a retirement plan for the prior year?” The answer to that historically has been no. With this Secure Act in recent legislation that was passed, we can now answer that yes. You have up until the tax filing deadline to actually set up a plan retroactively for the prior year. A big change. I know my tax accounting friends will be happy with that answer going forward. There were some other changes. Historically, an employee or participant was required to start taking a required distribution at age 70 ½, with employees working longer, they’ve increased that age to 72. So a participant can now delay those required distributions to age 72. Along the lines of IRAs, historically, an individual could not make an IRA contribution after 70 ½, that’s gone away now so they can make those contributions.
Steven (08:15) One thing I’ll say about the Secure Act though is that we still don’t have great guidance as to what some of these terms really mean or what they’re going to clarify as to how you are able to operate. One other item that they mentioned is a lifetime income option within retirement plans, but once again, we don’t know what that looks like. Essentially, that could be an annuity option within a 401k plan for people when they retire.
Kyle (08:40) Good point, Steven. One of the other things that came out of this to increase coverage of what’s called a pooled employer plan, which historically hasn’t been allowed, there had to be some common nexus between the employers. There’s still a lot of gray area out there. We’re waiting on the final regulations, but basically it would allow employers to pool their assets and create one plan for a group of unrelated employers.
Paul (09:07) So, basically by industry or something of that nature?
Kyle (09:09) By industry, or really no common nexus at all
Paul (09:12) Interesting, that’s really interesting.
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Paul (09:25) So when we did our podcast on tax law changes and tax planning, the planning of the year was always a big discussion where let’s plan for what we’re going to do for this coming year. And I would assume on the retirement plan side, that’s very consistent.
Steven (09:40) I would agree with that. The retirement plan takes planning. You need to know what your objectives are. You need to look and see what changes may be occurring in your businesses to are there any changes needed in your plan? One of the things we always talk about is how do people know if they even have the right plan in place? Just because you had a 401k plan doesn’t mean you’re good for the future. We always encourage people to get some sort of assessment periodically. There are plenty of consultants out there who will come in and look at your plan, benchmark it, as I said in many different ways. Is it built appropriately based on what you’re trying to do? Have things changed legislatively that would cause you to potentially make changes within your plans? I think a constant review is always in order.
Melanie (10:26) So Steven, you mentioned that we need a review of plans. Do you see that the needs of a company as it relates to their retirement plan changes as the employer gets larger or smaller?
Steven (10:38) Absolutely. The more employees, obviously the more diverse their group, the more diverse the group of employees, the more things within your plan might need to change. Once again, the smaller the plan, oftentimes they could go with the more simplistic plan with less administration. The larger your company gets, the more diverse your objectives get, the more a 401k will allow you to have those flexibilities built in.
Kyle (11:01) Good point, Steven. I would even encourage small employers to find a consultant that they can lean on because these plans have a life cycle similar to a business cycle. You know, you might start with a simple or a SEP as you’re getting started just to attract and retain talent and then as your business grows and matures maybe you’re not putting much capital back into it so you’ve got a little cash to do something with – putting it into a retirement plan, that not only benefits your employees but could benefit the owner as well. Those changes occur over the life cycle of these plans, so I would encourage employers to find a consultant that they can reach out to and maintain these plans so that they are consistently meeting their goals.
Steven (11:47) To even add on to that, one of the things I think businesses fail to look at is the success of a plan should be dictated by how successful are their employees saving. As you have employee turnover and things throughout the years, that’s going to change. One of the things we try to look at is are employees prepared for retirement, and that should be your ultimate indicator of success when it comes to a retirement plan.
Melanie (12:10) Steven, I’m glad you mentioned that because early in the conversation you talked about the low percentage of people who participate. Even if they have a 401 K at their business, how can employers encourage their employees to save? And do you have any suggestions for business owners?
Steven (12:27) Well, there’s several things that could be put into place to help motivate. Education, as with many things, is one of the major keys. If you can educate employees about the benefits, the tax savings, the fact that they need money when they retire, that’s really step one, and a lot of times we see education as the first hurdle. You’ll get a lot of folks just by educating them about the plan. Secondly, companies can motivate employees by some of their contributions, particularly if they offer a match. It’s amazing how the percentages jump in participation when you see a company offering a match to the 401k versus when they don’t. So yes, companies can take an active role because, ultimately, they decide and control how well their employees are educated.
Melanie (13:17) Alright, Steven, one last question for me. We’ve talked a lot about the benefits to the employer for setting up a plan, employee retention, attractability, you know, hiring good talent. The owners have an opportunity to say for themselves What are some benefits to the individual participants that we haven’t really talked about?
Steven (13:35) You know, that’s probably the main focus when it truly comes to 401k plans, or should be, is the success for the employees. People just don’t save money like they used to. I joke about our parents and our grandparents, who they saved first and spent what was left over, and we now spend and then save what’s left over. That’s the definition of most of our employees in America these days, so the real benefit is saving for their retirement one day. But there are some other side benefits, particular the tax deferral money that gets put into the plan they do not pay the current income tax on that. Some employees will then comment on, “Well, I’ll have to pay tax on it one day,” but what they don’t realize is, oftentimes, the tax in retirement is at a much lower rate because they have less income. So that tax deferral, I think could be huge. And then once again, it adds to lower stress. Employees have a lot of stress in their life, particularly when it comes to finances. We found that those who have prepared well for retirement just have a little less stress, at least in that area, because they’ve prepared financially.
Melanie (14:41) I know you and I often run into folks who are saying, “Well, I guess I better get started saving retirement and I’m 40 or 45 years old.” How do you help educate folks to start as soon as they possibly can?
Steven (14:54) I think it comes back to that education having meetings at the business where it’s mandatory and you discuss these benefits, just showing the time value of money and how little saved starting at early ages adds up to, in many cases well over a $1,000,000 for people starting in their twenties. Testimony from those in the room who are in their forties or fifties, who will say, “Yes, I wish I had done that back when I was in at those ages.” Goes a long way as opposed to hearing it from the person who is standing up there telling them they need to save.
Kyle (15:30) A lot of this younger generation has heard that social security is not going to be around, and whether we agree or disagree that social security is going to be around or not be around, I think we can all agree that the amount we receive in social security is not going enough to sustain us in retirement. I think a lot of this younger generation just getting that information out to them. There are some things you can do with the plan to increase participation, education is definitely one of them. The IRS kind of gave their blessing a year or so ago, as far as the availability to match student loan payments. So plan design, that’s another area to increase that younger generation’s participation.
(16:11) One last thing I’ll say about that is the retirement plan industry has now focused on the end goal, as opposed to statements being generated showing how much you have today. Most providers will show, particularly with the young folks, here’s your retirement estimate and it will show if you keep doing what you’re doing today what will that look like at retirement age. It’s a little easier for a 25 year old who saved $1000 to be, you know, maybe not as excited. But when they look at their estimate and say it’s going to have a $1,000,000, they’ll keep doing what they’re doing. So I think the industry has focused on the right thing, which is projecting out what this can be one day, not just what it is today.
Paul (16:52) That’s an interesting point. It kind of motivates you to want to jump back in and do more. You know, as we’ve done these podcasts, there’s been some common things when we talk about cyber security, when we talk about retirement plans, when we talk about some other things, education always came up, right? It’s education, education, education. That’s what I keep hearing, I’ll say. When I think of successful businesses, retail businesses, I think of what the three things were our professors used to tell us in business school – location, location, location. In retirement plans, I think its allocation, allocation, allocation, is that right?
Steven (17:26) That’s a significant part, absolutely, going into the retirement world. But participation, participation, participation. You know, to have an allocation, you have to have money in the plan and so participate, participate, participate is probably our key.
Paul (17:40) That’s pretty good. So here on The Wrap, we like to wrap it up in 60 seconds and ask our guests what is that one thing you want the business owners and executives to leave this conversation with when they’re thinking about retirement plans?
Steven (17:55) I think my summary would be that businesses who put an emphasis on helping their employees be successful, particularly financially for retirement, end up getting the real benefit because they have successful employees and those employees help make their businesses more successful. So it’s a circular thing that if they’ll help their employees, their employees will help them.
Kyle (18:16) Yeah, you know, just the lack of coverage is high on the government’s mind right now. There are some states that have mandated employer sponsored retirement plans or state sponsored retirement plans. So I would encourage employers that don’t currently have a retirement plan to find a consultant, figure out what the cost would be, and just at least dive into that.
Paul (18:40) Steven, Kyle, thank you all very much for being here. Melanie, it’s been a pleasure to host this with you today. I hope you had fun and you’ll come back again sometime.
Melanie (18:48) I’ve had a great time and I look forward to coming back.
Steven (18:50) Thank you for having.
Kyle (18:51) Thanks.
Close (18:52) And that’s a wrap. If you’re enjoying the podcast, please leave a review on your streaming platform. To check out more episodes, subscribe to our podcast series or make a suggestion for other topics to cover, visit us at warrenaverett.com/thewrap
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