Questions & Answers
Small Business Retirement Planning

This week’s guest is Tanner Stepp, CFP®, AIF™, here to talk about some important considerations for small business retirement planning. Tanner has past experience and a real passion for this topic, and is a terrific resource for both owners and their employees in regards to making the most of their workplace retirement plans.

Hi Tanner, thanks for joining me for this topic. I know that it’s one that you’ve been especially focused on during your time at Clarify. What is it about small business retirement planning that you enjoy so much?

To me, it something that really benefits both the clients and the community. I love working with employees that are just getting started with their retirement savings and see retirement as a long way away. Or, as is increasingly becoming more common in our country, they haven’t saved much for retirement to this point and a new resolution is to change that.

A lot of employees who contribute to their workplace plan, whether it’s large or small, might be offered services for free within the plan that they aren’t even aware of. One thing that comes to mind that plans may offer at no cost to the participants is working with an advisor.

Business owners often are incredibly busy managing their business. Retirement planning for their employees, as well as for themselves, is often far down on the daily priority list. This is something that can offloaded to an advisor, whether it’s making the necessary legal changes to comply with the recent fiduciary standard, or creating a new plan. Most owners want the best for their employees in a way that makes the most sense for the business. Knowing I can help play a small part in that is very satisfying for me.

To begin the discussion, let’s focus at first on some things for the employees themselves to be aware of. For someone investing in their workplace retirement plan, what are the one or two things that are most important to know?

Probably the most important thing is making sure you have your beneficiary designations set up properly Employees often complete this step in their first day or two on the job, when there are other tasks demanding their attention. It’s not unusual for employees to choose their beneficiaries on their first day and never revisit them until they are 10 years into their career with the company. Your beneficiary designations, contribution amounts and investment choices may have been made when you were at a very different time in your life.

The second thing that I would say is the most important is to approach your investment choices in the right way. It’s very common to choose investments based on a recommendation from a friend who did well in the past with a certain investment, or choosing them based solely on their past returns. Continuing to contribute for a decade into funds that have too much risk can result in years of savings being erased in a single bear market. It’s important to approach investing by understanding your personal level of comfort with the ups and downs of the market, match that tolerance for risk with your savings rate and time horizon, and come up with a strategy to reach your goal of retirement.

A popular investment option over the past decade is saving in a Roth IRA. As an employee, can I still contribute money into a Roth IRA if am contributing to a workplace plan?

Yes, as long as you’re below the family adjusted gross income restrictions that say whether or not you’re allowed to contribute to a Roth. Saving in your workplace plan AND saving in a personal IRA such as a Roth is a great way to jump start your savings, catch up if you’re getting started late, and both types of savings have appealing pros and cons.

One thing that might not be widely known is that if you don’t need the tax benefit of putting money into something like a tax-deferred 401k acct, a lot of plans actually offer a Roth 401k option. This allows you to still participate in the plan, have money automatically come out of your paycheck, and your contributions come out tax-free at retirement. It can be a complex topic to choose what strategy works the best for you, but making the right choices early on can have a dramatic impact at retirement.

That’s a great point about the importance of choosing your investments, and that a lot of investors still have the same funds they did when they first started with the company. How should an employee choose their investments in their workplace plan, and how often should they change them?

Whenever I work with an employee of a workplace savings plan, I am typically looking at a few different factors. To decide on what to invest in, I would consider what investments are available in the plan, and how you can create an investment portfolio that is aligned with the amount of stock market risk that you are comfortable taking. I would want to ensure that the investments have a broad and diversified exposure to several different markets; striving to get some return on your savings when the market is doing well, but also have some ways to possibly mitigate the losses in the event of a market crash. Monitoring your portfolio should also include periodic rebalancing, which is essential to making sure those higher risk, higher return investments don’t grow so large that they dwarf the investments that might be lower risk and growing more slowly.

For an investor who has been on autopilot with their retirement savings for 20 years, often their portfolio has grown to a point where the amount of risk in the account is far beyond what they’re comfortable with. Rebalancing regularly can be a timeconsuming job, but often times the horror stories you hear about people losing large portions of their retirement savings in a market crash a couple years before retirement could have been largely avoided through proper management.

If you don’t want the additional responsibility of making these changes yourself, many workplace plans offer the ability to have your investments managed by a professional, which in those cases may be a good option for you. If an employee has the knowledge and time to rebalance and manage their accounts properly, they can generally avoid any type of advisory management charge, if one applies in the plan. For these investors, building a diversified portfolio with lower cost funds that they understand can help to keep them on the right path with their savings.

Speaking of low fees, the financial industry as a whole has been very focused lately on offering investment choices that are as low cost as possible. What kinds of fees are there in a workplace plan?

Typically in a plan, there are costs that apply to both the business owner, and the employee. For example on the employer side, a new company has startup costs and plan establishment costs, like record keeping and paperwork. Additionally, when a business owner decides to establish a retirement plan for their employees, they can offer additional services and benefits within the plan to the employees if they choose.

Often, business owners will elect to offer services to the employees and pay the fees for these services such as advisory service so that the employees can take advantage of these perks with no cost to them. From the employee standpoint, there are usually fees for transactions that occur within the account, such as loans or withdrawals. Most investments in the plan have an internal cost, commonly called an expense ratio, which is essentially what you’re paying to the company that owns the investment in exchange for their management of the funds. However, what you’re paying to keep your money in a mutual fund within a workplace account is often less than owning the same fund in a personal retirement account like an IRA.

For this reason, workplace plans can often offer an advantage to investors who are very fee-conscious. It’s always a good idea to review your accounts at least quarterly. If you see you’re being charged for something you’re not sure about, ask!

You mentioned the fiduciary standard. I imagine it’s something a lot of people heard about a few years ago, but might not be aware of how it works. For the sake of brevity, can you sum up the fiduciary standard in 10 words?

Whoever manages your account must act in your best interests. That’s 10 words right?

Perfect. Let’s shift the conversation now from a focus on the employees, to focus on the owner of the business. When should a small business owner decide to start a retirement plan?

Even if you’re a sole proprietor, you should be at the very least saving for your own retirement. Many business owners feel that their business is too small to qualify or necessitate a workplace retirement plan, which is simply untrue. A lot of workplace plan options have significant advantages beyond what’s offered in an individual retirement savings account, so even if you have no employees, opening a plan in the name of your business to save for your own retirement can be beneficial.

If you do have employees or are growing and plan to hire additional workers in the future, taking the time to start your retirement plan now, and choosing the right one, can be essential. Not only can this small step help you potentially attract and retain employees, it can offer some competitive advantages from a tax standpoint. If you are a small business owner, and don’t have a retirement plan, you’re doing yourself and your company a disservice not to explore the option.

How does a small business owner choose the right type of retirement plan?

If you’re a small business owner and you’re wondering if your company is offering the right kind of plan, or you’re looking at creating a new plan from scratch, it comes down to the priorities of the business, and weighing the pros and cons of the several types of workplace plans available for your business to choose from.

Are you looking for a plan that offers little in terms of investment options and services at the lowest possible cost, or are you looking for a higher cost, higher service plan to benefit your employees? How many employees do you have that will actually be taking advantage of the plan, and are you going to offer any kind of employer match for their savings? Certain types of plans can be slightly more involved to administer and maintain, while others are less labor intensive. Getting an understanding of what you want to accomplish with the plan will help define the type of plan that best matches these priorities.

So if you own a small business, you’ve been putting off spending time looking at your retirement saving and call an advisor, what kind of help could you receive?

Typically, you should feel confident picking up the phone or sending an email, even if you don’t know what exactly you should be asking. Most business owners have so much to focus on. The chance to get help with something like this can not only take some responsibilities off their shoulders but can also make sure they’re making the most informed decision possible. I’d encourage anyone who has questions about retirement plans to give us a call. We may be able to help.

So last question from me, since I’m not located in Lafayette, Indiana, which restaurant do I need to try out the next time I come into town?

Hmm- one of my favorites if the East End Grill. Right downtown, they’ve got lunch, dinner and a nice bar.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.