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For small business retirement plans, confusion reigns

Frank Armstrong, president and founder of Miami-based Investor Solutions, wrote this guest post for The Starting Gate:

Frank_Armstrong,_headshot,_updatedFidelity recently surveyed small business owners about their plan features. More than half could not answer the most basic questions about contribution limits, reporting requirements, and/or employee contributions. It follows that these business owners are probably not tapping the full potential of their retirement planning possibilities.

That might be amusing cocktail party conversation if we weren’t in the middle of a retirement crisis for a good part of the Boomer generation. During the same week that Fidelity published their results, another survey by Merrill Lynch found a large number of people have shifted their projected retirement date to as late as 85 or “whenever they have enough”. Having failed to plan for 65 they will presumably fail to plan for 85 as well.

Of course, the overarching problem is that across the entire American public, no one is saving anything. Savings rates are grossly inadequate to provide for retirement, even if that was the single objective a family had.

Retirement plans, if properly used, provide both the carrots and sticks to help solve the savings shortfall. Tax incentives in the form of current deductions and deferred taxation in traditional plans, or tax free income from Roth Savings are compelling, while penalties for early withdrawal help keep the funds at work over the lifetime of the participant.

However, perhaps the biggest advantage retirement plans offer is a “forced” savings on autopilot. We know, for instance, that families with a 401(k) have considerably higher net worth than families without access to one. Families that save first are much more likely to accumulate wealth than those that try to budget and save what’s left over because in today’s consumer society there is always another iPad to buy.

Given the wide variety of tax favored retirement planning opportunities available for businesses from one to several million employees there is certainly a plan to fit any business model. None of this does any good unless business owners research the various plans and select appropriately. If they don’t feel qualified they might well consult with a qualified fiduciary advisor to assist them to wade through the options and make the very best choice. With such a huge savings and retirement shortfall, it’s certainly worth the effort.

Frank Armstrong, CLU, CFP®, AIFA®, is the president and founder of Miami-based Investor Solutions, an independent, fee-only fiduciary investment management firm.