Small Company 401(k) Plan = Big Opportunity For You
Are you one of the many Americans who work for a small company? Don’t be surprised, but chances are if your company doesn’t employ thousands of workers, it may qualify as a small company. It all depends on your industry.
The Small Business Administration defines at what size a business can be classified as “small.” For many industries, the magic line is 1,500 employees. Certain industries, however, have a lower threshold. For example, the utilities sector and the wholesale trade sector are capped at 250 employees. The retail trade sector can’t have more than 500 employees. These numbers represent the top end, as subsectors within specific industries can have even lower limits.
It’s a commonly held view that if you work for a smaller company you lose out on perks and benefits.
On the face of it, this can certainly seem the case, especially when it comes to the company 401(k). Assuming it even offers one in the first place, a small company might not be able to afford all the bells and whistles that larger firms can, including the most important bell and/or whistle nearest and dearest to your heart (or at least your wallet).
“If a small business employer is offering a 401(k) to their employees, and if that plan is costly, it may prevent the employer from offering a match contribution,” says Don Osmond, CMO at SaveDay in Austin, Texas. “Additionally, if participant expenses in the plan are high, the employees may not realize much growth in their retirement investment account because they are paying too much in fees.”
At least that used to be the case. Today, thanks to many improvements within the retirement plan industry, smaller companies can often operate their plans at lower costs.
“401(k)s used to be priced in a way that made it difficult for smaller companies to afford plans, but fortunately there are many providers offering affordable plans designed to fit the needs of small employers,” says Edward Gottfried, Director of Product at Betterment for Business in New York City.
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This is important. Smaller companies have the same objectives as larger companies, and the 401(k) plan fits neatly within the strategy common to all firms.
“There are great advantages for plan participants and plan sponsors of all sizes when it comes to retirement plans,” says Sharon Scanlon, SVP, Customer Experience and Producer Solutions at the Lincoln Financial Group SBFG in North Radnor, Pennsylvania. “A 401(k) plan is a huge recruitment and retention tool and it offers tax benefits to both savers and plan sponsors.”
Still, you probably have this gnawing belief that you might be at a disadvantage when it comes to your small company 401(k). Actually, the truth may be closer to the opposite.
If you know where to look.
“The main advantage for employees of a small plan is the ability to have an impact on the decision-making of the plan sponsor,” says Nicholas Tzoumas, President of ClearscopeHR based in New York City. “A few people speaking up about their needs as participants of a small plan is more meaningful for the decision-makers than if the plan has hundreds or thousands of participants.”
This is the classic case of not getting lost in the sauce. It turns out there are many other avenues to make a difference, not just for the plan in general, but for you specifically.
“More opportunity for education on the plan and how it works can be seen as a big advantage of smaller plans,” says Jason Field, Financial Advisor, CFP, Van Leeuwen & Company, located in Princeton, New Jersey. “Employees are not just numbers on paper, and plan sponsors can tailor the plan to the specific needs of the employees.”
Beyond direct contact with the plan sponsor, you likely also have closer interaction with plan service providers. This means your questions won’t be answered in a generic manner via some impersonal 1-800 number, but, instead, in a face-to-face way that addresses your particular circumstances.
Who knows, your friendly demeanor might even be enough to earn that extra service only the best customers get!
“Small company employees often have personal access to the plan’s financial adviser,” says Paul Swanson, Intermediary Distribution at CUNA Mutual Retirement Solutions in Madison, Wisconsin. “This is a huge advantage not only for the employee who takes advantage of this resource but also the employer. Financial stress is a problem for employers. Especially in 2020.”
Of all the service providers you can talk to, the one you’ll be in touch with most often is the recordkeeper. That’s the entity that administers the portal to look at your account, change your allocation, and increase your deferral amount, among other things.
But that’s not the most important financial professional you’ll be speaking to.
“Employees in a small 401(k) plan are more likely to receive individualized attention and assistance,” says Josh Simpson, a financial adviser with Lake Advisory Group in Lady Lake, Florida. “When you can meet with your plan adviser once or twice per year, it is much more likely that you will be able to develop a relationship with them. This means that instead of just being an account number who has to call a center in another country when you need help, you will be able to call and talk with someone you know and have met before.”
In the end, it’s not about the bells and whistles, even if they are there. It’s about something that means more to you than anything else.
“For employees, having access to a 401(k) plan, no matter the size of their employer, can be a huge positive,” says Scanlon. “These plans give them an opportunity to save more than they would be able to in an IRA, and many of the options available to participants in large plans are now available to participants in smaller plans. Most importantly, a 401(k) plan offers employees the opportunity to grow their money for retirement.”