Small firms gaining an edge in 401 plans - k

Nation's Business, April, 1996

Competition in retirement plans; correcting your insurance record; deducting start-up costs; assessing a flat tax's impact.

There is good news in the 401(k) marketplace for small companies. Competition is hot. And here's why: More than 96 percent of the really big companies already have 401(k) plans, according to a 1995 study by Access Research, a consulting firm in Windsor, Conn. But only 11 percent of companies with fewer than 50 employees have such plans.

"Most new-plan growth in recent years has been among very small companies, and that is where it will remain," according to a 1995 report by Sanford C. Bernstein, a Wall Street research firm.

That fact has not been lost on vendors of 401(k) plans, who are competing fiercely on service, fees, and investment performance. Although the cost per employee of starting and managing a 401(k) plan remains higher for small firms than for large companies, it has come down considerably.

David Huntley, a principal with HR Investment Consultants, a Baltimorebased firm that publishes the 401(k) Provider Directory, estimates that smallcompany plans can cut a deal for $35 to $40 per participant annually, plus roughly $2,000 in administration fees. (All management fees are tax-deductible.) The perparticipant fee is down from $60 five years ago but still far higher than the $20 to $25 that big companies pay.

To help small companies sort through the options, HR recently published its first small-company directory. It costs $85 and looks at 40 products geared toward companies with 200 or fewer employees. (You can order by calling 1-800-462-0628.)

Despite the emergence of 401(k) plans priced and packaged specifically for small firms, those with fewer than 25 employees may still want to pick one of two retirement-plan options with even lower administrative costs and less complexity: simplified employee pension plans, called SEPs, or salary-reduction simplified employee pension plans, called SAR-SEPs. Both create individual retirement accounts. The first is funded entirely by the employer, and the second is funded entirely by the employee. Both are easy to set up, come with low management fees, and require practically no paperwork.

When comparing these plans with a 401(k), Huntley cautions, "you can't just look at the cost. These plans are not the same." For example, SEPs give employees immediate control of their accounts, while employers may phase in employee control over several years with a 401(k) plan.

Customized Plans

Not surprisingly, the trend in the small-plan 401(k) market is to mimic large plans more closely. That means greater use of technology in transactions, more services, better communication and education, more-frequent valuation, and more possibilities for switching savings among funds included in the plan.

Business owners who are willing to spend the time can set up a customized 401(k) plan that accomplishes exactly what they need. Consider what the Homer D. Bronson Co.--a Winsted, Conn., maker of industrial hinges for automobile glove compartments, washing machines, clothes dryers, and other products--did when it set up a plan on Jan. 1, 1995.

Bronson's first goal was a common one: to heighten awareness among its 63 employees of the need to save for retirement. But Bronson also wanted to use the 401(k) plan to increase productivity and enhance the company's competitive edge in the small, niche business in which it is one of three players.

When Bronson researched retirement plans in 1994, the company was at a critical business juncture, says Walter Schuppe, the chief financial officer. Bronson had just been certified by the International Standards Organization as an "ISO 9002 registered company," meaning it meets rigorous quality standards. To maintain the certification, Bronson must be audited each year.

"It is very unusual for a small firm to get this certification," Schuppe says. "It is strategically important to our business that we maintain it." Partly as a result of the certification, Bronson won a major new account, Ford Motor Co.

Incentive-Based Contributions

So Schuppe wanted a retirement plan that would emphasize to employees the importance of corporate goals and help make them responsible for meeting those goals. Schuppe says he looked at 12 vendors and selected a prototype 401(k) plan for small businesses.

Schuppe and Bronson's CEO, Henry Martin, added the incentive-based match to the plan. "We said the company would match a portion of the first 4 percent of employee contributions," Schuppe says. "It would vary from 10 percent to 50 percent depending on how well we meet certain strategic objectives."

The company specifically wanted to avoid financial goals. "We are a small, private company, and we did not want to release our financials," Schuppe says. Instead, he and Martin picked goals such as improving service for clients and maintaining the company's ISO certification.

The plan was set up at the beginning of 1995 with three initial employee goals: to improve safety, quality, and client service. The company promised to match 25 percent of the first 4 percent of pay contributed for the first six months of 1995. Then it would measure how well employees had performed in meeting these objectives and would increase or decrease the match.