Legislation out of Washington, often with temporary changes, is keeping small business retirement plans in flux
For the small business owner looking to provide and maintain a good retirement plan for employees, keeping one eye on Washington has become more important than ever before.
Denver-based retirement specialist Bruce Tanner could only chuckle when asked about the latest trends in small business retirement plans.
“Confusion, misunderstanding and lack of communication,” he said.
Tanner had just finished an audit with Internal Revenue Service officials and, needless to say, he did not find the experience enlightening.
“I find the more encounters I have with the IRS over some of these issues, the worse it gets,” Tanner said. “The IRS has been tripping over itself trying to figure out whether or not these legislative acts have been reviewed and they really don’t understand whether or not they have been finalized.”
While regulations over retirement plans have been evolving over the past few decades, they underwent major revisions in 2001 under the Economic Growth and Tax Relief Reconciliation Act.
While most of the hoopla surrounding the bill centered on the sizable tax cuts that President Bush pushed through in the wake of his victory the previous year, there were nonetheless several major changes in limits that many retirement specialists felt went a long way toward encouraging savings.
Among the changes enacted were beneficial provisions such as higher contribution limits for 401(k) and similar plans, a $5,000 catch-up contribution for individuals over the age of 50 and the saver’s credit for low-income workers.
But many experts in the field feel the temporary nature of these changes make retirement planning these days more challenging than ever.
Ed Ferrigno, vice president of the Profit Sharing/401(k) Council of America, says that many of the provisions will expire at the end of 2010 or earlier unless they are made permanent by Congress.
“Employers need the certainty that EGTRRA permanency will provide, and baby boomers need to take advantage of increased savings opportunities beyond 2010,” Ferrigno says.
Other favorable EGTRRA changes include improved portability for workers switching employers and what Ferrigno terms “partial relief under the top heavy rules that continue to dampen retirement plan coverage in the small business community.”
Josh Wood, a retirement specialist based in Amarillo, Texas, says his fellow associates in Steve Wood Associates will be stressing the advantages next year that Roth 401(k)s will provide future retirees looking to supplement their regular retirement plans.
“This will probably be our biggest issue next year,” he says.
While encouraging workers in their 20s and 30s to go for shrinking paychecks now in favor of a more secure future later is always challenging, Wood thinks the case can be made for the new savings vehicle.
“Unlike traditional 401(k)s, funds are taken out after taxes are deducted,” Wood says. “A lot of people have built up sizable 401(k)s but are reluctant to withdraw the funds when they are eligible because of the taxes they have to pay,” Wood adds.
While Tanner may heap some good-natured scorn on the raft of changes coming from Capitol Hill, he does look forward to one in particular that could provide some real incentives to small business owners looking to provide for their employees.
Differing bills introduced by Sen. Jeff Bingaman, D-N.M., and Rep. Rahm Emanuel, D-Ill., will encourage automatic enrollment in defined contribution plans and automatic increases in participation.
In introducing his bill, Emanuel noted that automatic enrollment was an option in only 8% of all companies that offered 401(k) plans in 2003.
The legislation would preempt state law and expand fiduciary protection for plan sponsors that give so-called life cycle funds and managed accounts to employees who don’t choose other investments. It would also guarantee employees the right to opt out whenever they wish.
“I think these hold more promise in our field than anything that has come down the pike in a long time,” Tanner says.
Tom Foster, national spokesman for the corporate retirement plans for The Hartford, says one outcome of EGTRRA was the opportunity for small businesses such as medical practices to take advantage of the defined benefit option. “The problem with the small business owner is that the defined benefit market always was perceived to be the big case market,” he says.
The Solo Defined Benefit Plan provision in the act gives the workers getting closer to retirement the chance “to get a little bigger bang for my buck.”
“Even though in the old days if I wanted to have a defined benefit plan, if I chose to do so, they just made it a little easier for me,” Foster says.
For Foster, along with an army of brokers, agents and specialists he serves, the main challenge remains persuading the estimated 75% of the small business market that offering retirement options is not only affordable but not as complex as once thought.
“If I look at a picture, and I see the picture constantly changing, I am going to have a hard time understanding it,” Foster says. “Our job is to let them know there is help available to lessen the complexities.”
Retirement plan regulations underwent major revisions in 2001 under the Economic Growth and Tax Relief Reconciliation Act