A 401(k) for everyone Featured

8:00pm EDT June 25, 2008

One of the biggest concerns Americans have today deals with future finances and retirement. People are concerned with whether they will have enough money to live on when they retire. This concern is especially troublesome for employees of companies that do not offer any type of 401(k) option.

Most employees of small businesses are not offered a 401(k) option because larger financial firms are not marketing to small firms. Until recently, if small business owners wanted to offer employees a 401(k) option, they had to invest in plans that were very costly to themselves and their employees, says Thomas Cox, a business banking team leader for FirstMerit Bank.

However, says Cox, there are a few institutions offering new products that give small businesses the same 401(k) services as larger companies, but at a price they can afford.

Smart Business spoke with Cox about the value of 401(k) plans for small businesses and how offering such plans can help attract and retain employees.

How valuable are 401(k) plans today?

401(k) plans are more valuable today than ever. They are the most beneficial retirement plans on the market. Contributions are made on a tax deferred basis and investment earnings are deferred as well. In many instances, employers match at least a portion of the contributions you make. In the current economic environment, it is crucial to plan carefully and save to secure your future. Now, more than ever, is the perfect time to begin saving for your retirement.

How can small business owners use 401(k) plans to attract potential employees and retain current employees?

Small businesses typically do not offer 401(k) plans because they are too costly. With 401(k) programs structured specifically for small businesses, owners can afford to offer a plan to attract a new group of employees and retain employees. These same employees might otherwise move to a larger competitor who is able to offer retirement options. If retirement is truly the No. 1 concern for Americans, then offering such programs will make business owners much more competitive in their community.

For a small business, such as a family-owned carpet company, there is often no retirement plan in place. This means that employees must save on their own and do not have tax-deferred options. If a small business is able to offer a tax-deferred savings option, it should appear much more attractive as an employer, therefore attracting new employees and retaining those employees it values.

What 401(k) options are now available to small businesses?

Now, there is a program designed for small businesses that is very similar to other 401(k) plans on the market. It is a 401(k) program with the same contribution regulations and opportunity for employer matching contributions as are available in larger firms. But its design makes it more understandable to participants and owners and it is structured to be affordable. Each employee directs his or her own investments within a select group of funds. By offering such a plan to employees, business owners can save for their own retirement as well. The employer is often as excited as the employees because they too are faced with the challenge of saving and planning for retirement.

When should people start investing and how much should be invested?

People should start investing immediately. We are all living longer and plan to retire some day. Thus, starting early is critical. You can start small and defer only a small percentage of your income if saving is an issue. Contributions can always be increased as your earnings increase. Unfortunately, no one can guarantee that current government supported retirement plans, such as Social Security, will remain in effect. You can secure your own future by investing in a 401(k) to ensure you are able to maintain the lifestyle you enjoy during your retirement years.

What would you say to people who say they cannot invest in a 401(k) because they need the money for the increased cost of living?

This is a problem because a lot of people think that way right now. But the truth is, you really can’t afford not to save. It’s important to pay yourself first. That is what you are doing when you invest in a 401(k). In today’s market, many investment opportunities are on sale. Investing now means you are buying low and investing for the future, which will likely provide a much better payout than if you wait. You are using tax-deferred money to create a retirement nest egg.

What should individuals consider when planning for retirement?

Start by asking yourself when you plan to retire and what lifestyle you want to live in retirement. Then, evaluate your life plan and determine expenses you will likely have in the future, such as college tuition, housing and medical care. It is important to adjust your investment strategy as you age or market conditions change. Plans change as life changes, so it is important to update and adjust your financial plan often. However, as in just about everything, having a plan is the most important thing you can do right now to secure the retirement of your dreams.

THOMAS COX is a business banking team leader with FirstMerit Bank. Reach him at thomas.cox@firstmerit.com.