Ted Benna, long known as the “father of the 401(k) plan,” has reinvented the wheel for small businesses that struggle to afford a retirement benefit offering. Three new low-cost plan models are explained in a do-it-yourself guide featuring both a Schwab and a Vanguard version that sells for just $8.99. He’s also offering a hand-holding option for $100 for firms that need technical support.
While acknowledging this approach isn’t lucrative enough to pique the interest of retirement plan advisers, he believes it will strongly appeal to brokers who sell voluntary benefits and want to provide added value to their small-businesses clients.
An independent insurance agency in his area just implemented one of those designs for its own employees whose previous 401(k) had cost the employer $1,500 annually to maintain, while participants paid 2.75% annually in fees. Under the new plan, there are no employer fees and participants pay 0.05% to 0.35%, depending on the funds they pick.
“The difference is phenomenal,” Benna says. “It basically eliminates the complications and expenses of a 401(k).”
The Bureau of Labor Statistics estimates that barely half of employees who work for firms with fewer than 50 people have access to a 401(k) or pension. That’s a huge problem, Benna says, considering the looming threat of state-mandated programs such as in Oregon, which would cost more than 100 basis points. Vermont also passed legislation requiring mandated employer-provided retirement savings coverage, while California is contemplating action, he adds.
His point is that small businesses would be far better off adopting one of his models, which are driven by Individual Retirement Accounts, than having to comply with a state mandate.
Benna’s guide, “Set Up Your Own 401(k) And Save A Lot of Money,” includes information on how to add an employer match to a payroll-deduction IRA and Simplified Employee Pension IRA to make these plans more attractive.
The models
The first of his three plan models uses an IRA as the funding vehicle and is the most basic and flexible. Model 1 duplicates the benefits of a 401(k) without any of the baggage that accompanies traditional plan designs (i.e., avoiding the minimum opening balance requirement). Model 2 has complete flexibility in terms of the amount of the match that’s given, but it has to be a uniform percentage of pay for all those who are eligible. While Model 3 requires larger employer contributions, the same is also true for employee contributions, and therefore, it would appeal most to highly compensated individuals.
His guide is drawing rave reviews from some industry observers, and caution from others.
“I think that what Ted is doing is spot-on,” says Mark Iwry, a former Treasury Department official who’s now a non-resident senior fellow at the Brookings Institution and visiting scholar at the University of Pennsylvania’s Wharton School. “He’s making a constructive contribution consistent with his past.”
Student loan repayment, flexible work schedules and retirement funding are among the perks younger workers are looking for from an employer.
One of the virtues of this approach is to emphasize for small-business owners that there are cost-effective investment alternatives available, he says. Benna also is grouping various IRAs loosely under the 401(k) marketing rubric for greater appeal to small employers who usually aren’t deeply familiar with the retirement landscape, according to Iwry.
Small-business 401(k) plans are simply far too expensive and saddled with regulatory and administrative burdens that “encumber the named fiduciary with liability,” observes David Ramirez, a co-founder of ForUsAll, which seeks to bring 401(k) capabilities in the large employer market within reach of small and midsize plans.
“However, I’m not sure the answer is to utilize other sections of the IRS Code instead of using section 401(k),” he adds. “Employees understand the concept of the 401(k) and love their 401(k)s. And the right plan design and technology – coupled with low-cost funds and a low-cost adviser – can accomplish the goals that Ted Benna is laying out in his guide.”
Ramirez would encourage benefit brokers and advisers “to focus on making what is ubiquitous and well understood by employees work for employers.” That means using technology to reduce employer clients’ work and liability, as well as expenses, to help deliver a reasonable fee. Another suggestion is to favor recordkeepers that use low-cost funds.
“I am not ready to throw out the baby with the bathwater,” he says. “I want to focus on improving the current 401(k) market. I think we can make it work.”
