Are retirement benefit plans worth the hassle for Northeast Ohio’s entrepreneurs?
Retirement benefits are not a luxury reserved only for midsize and large businesses - smaller companies in Northeast Ohio are offering 401(k)s as a means of attracting talent and saving for the future.
Numerous plans are available for small businesses, including a traditional 401(k) where employers match pretax dollars contributed by workers. Although the differences among solutions are subtle, The Wine Spot owners Adam and Susan Fleischer wanted to offer security for the members of their growing team. A financial advisor suggested starting a traditional 401(k) to give enrollees more investment options as compared to a Simple IRA, which caps employee contributions at a lower amount.
“This was our first foray into small business, so we didn’t anticipate a lot of things,” said Adam Fleischer. “What we found out very quickly is that as we grew the team, our employees had houses, they had families, they had expenses. Retail historically has not been an industry that pays very well, so we started from the perspective of making it more of a career than a seasonal or transitional job.”
Benefits at the Cleveland Heights retail beer and wine business are part of a larger financial package that includes healthcare and paid time off, noted Susan Fleischer. The couple worked with a plan administrator on details like matching employee contributions up to 3% of a worker’s annual income. As of 2023, the contribution limit for workers who participate in a 401(k) is $22,500, according to the IRS.
Wine Spot employees must be at least 21 years old to join the plan. Additionally, they are required to have worked a year at the business for at least 1,000 hours.
“What that does for us is we’ll have college kids coming in for the holidays, and we don’t want to include them in this,” Susan Fleischer said. “It’s just the people who have been here for the entire year. As a business, you can decide those employment requirements for yourself. The only thing you have to do is make (the plan) available for everyone.”
Find your purpose
Only about one-third of small businesses in the U.S. offer employee retirement packages, according to Fidelity Investment’s 2023 Small Business Retirement Index. With most owners unable to afford the plans provided by bigger companies, entrepreneurs thinking about benefits must answer several crucial questions, according to James Wineland, a portfolio manager with Johnson Investment Counsel in Independence.
“One of the first things you want to identify is the purpose of the plan,” James Wineland said. “Is the plan for the employees, or is it for the business owners? What are the demographics of the employees, and what are competitors doing in this space with their 401(k)?”
Setting up a 401(k) that is straightforward, manageable and affordable can be a hurdle for the typical entrepreneur, Wineland said. Owners will need a brokerage firm or mutual fund company to provide record-keeping and third-party administration services for their 401(k).
Cost depends on complexity, Wineland said. Entrepreneurs can set up an account with the Charles Schwab brokerage company for hundreds of dollars, while a more hands-on administrator may cost a company with 20-40 employees between $3,000-$6,000 annually.
Benefit plans are also highly regulated, a process that encompasses disclosure documents to participants and government entities alike . Employees receive updated information on plan adjustments as well as their basic rights and responsibilities under federal retirement law.
“The government doesn’t want business owners to get all the advantages, so there’s lots of rules and regulations in place to ensure employees are being taken care of,” Wineland said. “To make it more complicated, there’s many styles of 401(k)s and profit-sharing plans to maximize how much a business owner can put in.”
Simple IRAs, specifically designed for businesses with 100 or fewer employees, have contribution limits lower than traditional 401(k)s. IRA participants are 100% vested, potentially giving them more financial security than 401(k) plans that have different vesting rules for employer contributions, said Wineland.
“All these plans are geared around empowering employees and making sure they feel confident in their finances,” Wineland said. “(With education), we can go a little deeper than just on the 401(k) side.”
Thinking about the future
Companies set “vesting” schedules to dictate how long it takes for matching contributions to fully belong to the worker. Taylor Evans, president of Rust Belt Recruiting, is considering an abbreviated vesting period for his company’s 401(k).
“We’re now evaluating making that shorter, or moving toward a safe harbor where we can say, ‘Hey, these funds are here, and we’ll put them into your account,” said Evans, whose Rocky River firm supports hiring in the manufacturing industry.
Through a safe harbor, contributions to workers’ accounts must always be fully vested, meaning they cannot be returned to the employer even upon termination. Modifying a benefit program as needed is also a way to lure skilled employees in a tight labor market, Evans said.
“By no means is our plan the end all, be all,” said Evans. “It makes you competitive, and I see it as something our team should and can benefit from. I want them to be putting money away and thinking about retirement.”
Evans “actively encourages” workers to enroll in the program, although he is not asking for a huge or unrealistic commitment, he said.
“Each year you can bump (your contribution) up 1% so it won’t shock and rock your paycheck,” Evans said. “As far as I know, the future is expensive, so you’ve got to be thinking about it as much as possible. As an employer, it’s a shared responsibility to set up my colleagues for the long term.”
While establishing a 401(k) is initially time consuming, a little outside help makes the process less painful, said Susan Fleischer of The Wine Spot.
“You want to work with a plan advisor you fit with,” Fleischer said. “Talk to other small businesses and get a handle on what the fees will be, then work with your accountant and make sure the plan makes sense for your business.”