Retirement Plans for Small Businesses – Interview with Nate Moody
In this episode of “Small Business Big World,” we explore retirement plans for small businesses with our guest, Nate Moody from Lebel and Harriman Retirement Advisors. Join us as we break down different retirement plan options, review defined benefit versus defined contribution plans and discuss tax credits for employers. Nate provides his expertise on simplify the complexities of retirement planning, ensuring you’re equipped to secure a stable future for yourself and your employees.
Chris Cluff (host): Welcome to another episode of Small Business Big World. Today, we have Nate Moody here with LaBelle and Harriman, one of our financial advisors, great retirement advisor here in the state of Maine. Thanks for coming, Nate.
Nate Moody (guest): Thanks for having us.
Chris: So just a little housekeeping before we get going. Reminder, be sure to like, follow, subscribe on all the socials, Instagram, TikTok, YouTube, Spotify, Apple podcasts, all that fun stuff. Or go to our website, smallbusinessbigworld.com, and subscribe. Feel free to leave us any feedback or shoot us an email to podcast@papertrails.com. We also have our Small Business Big World podcast community on Facebook. You can certainly join that. We’ll invite our speakers, certainly ask questions, kind of get that engagement going. If there’s any questions on there, feel free to join that as well. So today we’ve got to talk about retirement. It’s kind of, for both of us, it’s in the long view, but certainly something we should think about regardless.
Trends in small business retirement plans
Chris: I think there’s a lot of folks that get to the point where they’re actually thinking about retirement and they’re not ready, right? So, we certainly talk with a lot of small businesses about their needs and trying to figure out what might be best for them. What trends are you seeing in the retirement space for small business owners and for small businesses in general?
Nate: Well, first I guess I’d say, when most people think of the retirement industry, they think of a very stodgy sort of old, slow moving space. And I think the first trend that we’ve seen is just an unbelievable increase in the velocity of change in what has historically been basically the same industry since like 1974 when ERISA was first passed, which is the law that governs a lot of employee benefits. So really, we’ve seen a ton of legislative change, both at the state and the federal level, which I know we’ll sort of dive into a little bit.
The other big trend we’ve seen is, for better or for worse, we’ve just had a very tight labor market for a very, very long time. And I think most employers are realizing that it’s not going away anytime soon because there’s not necessarily a lot of employees on the sidelines, although there probably still are some. It’s really a demographic shift, right? We have, whatever the stat that people love to throw around. It’s 10,000 baby boomers turning 65 every day and there’s just not enough workers coming up behind them. And so every business in lieu of maybe potentially wage increases is looking at their benefits. And so we’ve seen the goalposts for what makes a competitive benefits package continue to get pushed back. So that’s a really major trend is a lot of companies taking a fresh look at their retirement plan.
And then the last piece is certainly on the tax side. I think there’s a lot of expectations that tax rates probably have nowhere to go but up in most cases. And business owners would prefer to pay less taxes than more and qualified plans continue to be one of probably the best tax mitigation options that are still available. Even those are starting to be reduced a little bit.
Defined benefit vs defined contribution plans
Chris: Certainly we see a number of different plans out there. Can you give me a little overview on some of the different plans that are available to small businesses? What the most common ones are and a bit about the features and benefits, things like that?
Nate: Yeah, I’ll sort of start very high level and we’ll slowly kind of work our way into a little bit of the details. At its highest level, you have basically individual based plans, like a payroll deduction IRA, which I think will be important as we get into these state-mandated IRA programs, and then you have employer-sponsored retirement plans. So that’s sort of the highest two categories. Within the employer-sponsored retirement plan umbrella, you have defined contribution plans and defined benefit plans.
Chris: And what’s that? Because we hear these words, but what does it mean exactly?
Nate: So in a defined benefit plan, which are not nearly as popular and common as they once were.
Chris: That’s a pension, right?
Nate: A pension plan, exactly right. It’s where the employer is defining your future benefit. Basically, you go work for a business, you work for them for 30 or 40 years, and they define that benefit, which might be 70% of your three highest earning years for the rest of your life. And it basically was incumbent upon the employer to save enough money on your behalf to make sure they could pay that benefit.
Chris: Which sounds really expensive.
Nate: It was, and unfortunately, a lot of employers promised more than what they were actually able to fulfill. And so you saw a lot of these pension plans basically blow up for lack of a better word. There was a big shift throughout the ’80s and ’90s from defined benefit plans to defined contribution plans. Instead of defining that future benefit, you define what you contribute now. And depending on how much you contribute, both as an employer and as an employee, that basically determines how much you get down the road. It really shifted the onus of responsibility for saving for retirement from employers to employees.
Types of defined contribution plans
Chris: But just because it’s a defined contribution plan doesn’t mean that the employer can’t put something in, right?
Nate: Correct, and many employers do. I would say that if you looked at what they were putting towards their defined benefit plan versus what they were putting towards a defined contribution plan, it’s probably much less unfortunately nowadays, although that pendulum’s starting to come back a little bit. And part of it depends on what type of defined contribution plan. And this is where we’ll start to get into some plan types that I think most people who are listening will be familiar with.
So you sort of have the most streamlined and pun intended simple option, which is a simple IRA plan, which I’ve always hated that name because A, they’re not as simple as people would think they are, as payroll providers can appreciate. And B, it has IRA in it. So it’s super confusing cause everybody thinks of it as an individual-based plan, but it is truly an employer plan. And then you have 401(k) and 403(b) plans. So, 401(k) is for-profit. and 403(b) plans generally are for not-for-profit. That would be sort of like the Cadillac of the defined contribution options. And then you have things like profit haring, safe harbor, we can kind of get into the nitty gritty as well, but those are typically the most common defined contribution plans we see.
Defined contribution plan flexibility
Chris: So with a simple – I tell clients it’s simple because it’s the same for everybody, right? Every employer that has a simple IRA has the same rules they have to follow, same eligibility rules, same matches. All that stuff is exactly the same, right? So, it’s typically a 3% wage match of their own contribution, right? So, you’re only putting money in if employees are putting money. And certainly the eligibility is, correct me if I’m wrong, $5,000 in any two years, that they’ve worked for them. So, there’s a little bit of a delay in getting people enrolled. I think for a lot of smaller businesses, newer businesses, that’s probably a little more palatable, right? Do you guys see that in your clients?
Nate: Yes, that’s exactly right. So you can always be a little bit more generous than that. Technically you could allow an employee to participate earlier than two years. It’s usually either immediate, if they expect to earn 5,000 or more, one year or two years. We do often see, businesses do the two years just because it’s easier, and it kind of strips out some of those employees who might not be there at least two years. Defined contribution plans are funny, 401(k) plans, because everybody likes the idea of having choice and flexibility until they then have to administer it. And so that’s where simple IRAs can be really nice. People sometimes get frustrated with the lack of flexibility until then they actually don’t have to administer it. It’s very nice versus 401(k) plans where you can literally fully customize them but then you actually have to administer them and that’s where most plan sponsors start to run into trouble. That’s also where they don’t always appreciate how many people have to be involved with helping them administer that 401(k) plan.
Who helps small businesses administer retirement plans?
Chris: So, that’s one of the things we get hit up for all the time. How many people have to be involved with it and what is this TPA? What is that third party administrator? And like you said, how do I know what rules I have to follow? How do I know when and how to enroll people and all that kind of stuff? Because with these, if you set strict enrollment requirements, basically you say, some people say it’s 1,000 hours of service, some people say it’s 21 years of age, all those kind of things, someone’s got to keep track of that, right? And so that’s the role of the third party administrator, right? Who else is involved in that process among other things?
Nate: They do a lot more than just that but yeah 100%. I guess I’ll take it back for a second then I’ll answer your question. There was a law passed in the 70s, which I referred to earlier called ERISA. It’s an acronym for Employee Retirement Income Security Act of 1974, I hate that I have that memorized. That law was passed actually in response to a car company that maybe some of the more mature listeners will remember, which is Studebaker. And Studebaker was a very massive car company and it actually went bankrupt in the sixties. And when they did, they actually took money out of their employees retirement plan to help try to foot their bill, which nowadays you would never ever imagine. But the reason why you would never imagine is because this law, ERISA, passed in response to that. And what ERISA did was basically hold employers to incredibly high responsibility and standard for stewarding their employees’ money, right? If employees were going to save their life savings into this plan, they wanted to make sure that employers who were overseeing it were taking that seriously. And so what it did was basically introduce a ton of red tape regulation.
And any time you have more regulation, generally speaking, you have more people that need to help a business owner navigate it. And so fast forward 50, 60 years, we have this entire industry built around helping plan sponsors with their retirement plans, of which there’s a lot of people involved. So you typically, with any 401(k) plan, you generally have three major providers, and then you have a couple sort of secondary that are supporting them. Generally speaking, you have your recordkeeper, which is a mandatory provider, and that’s who provides the platform. And that’s gonna be your Fidelity, your Vanguard, your John Hancock.
Chris: The big signs at the Red Sox Stadium.
Nate: Exactly. That’s exactly it. And then you often will have a third party administrator who, as Chris had mentioned, helps you with the compliance. They help you with certain non-discrimination tests that your plan might be subject to. They help you with some of your required documentation, your tax filing for the retirement plan. And then the last sort of leg we often referred to as a three-legged stool is your advisor, and they are typically helping with the investments that are in your plan. They’re helping educate and enroll your employees, and then certainly they’re helping you oversee your other providers as well. Some advisors take a little more of a hands-on approach, and then you have all these other providers around that are interacting with the plan. So you have a payroll providers helping you submit contributions and tracking contribution changes. If you mess up your plan, there’s a correction program and you might have to have an ERISA attorney help you with that.
Chris: Hopefully we don’t get to that point.
Nate: Yes, exactly, that’s the goal. I’m trying to think who else would be involved. And then you obviously as an employer, probably more involvement than what you would like to have, especially nowadays with all the new regulations. And I think we’ll probably talk about Secure Act 2.0 here in a second. But what we’re starting to see as I get another trend that I didn’t mention at the very beginning is, you know, with every new piece of legislation, 401(k) plans become more unwieldy for your typical business owner who’s busy running their own business. And so we have seen a ton of really like a resurgence of focus on streamlining administration because especially from an HR perspective who typically benefits gets kind of dumped onto, they’re just spread more thin now than ever. And so being able to provide them with one less thing to do throughout their day is a very huge value add.
The introduction of more legislation
Chris: So it’s good to know the players involved, right? So what’s, you know, there’s a lot of changes. The regulatory environment right now is moving so fast across the board, but especially in the retirement space. What’s going on with that right now?
Nate: I think part of it is in response to, you know, we talked about that stat earlier, right? The 10,000 baby boomers turn in 65 every day. Here in Maine, that’s especially the case, but it’s a nationwide epidemic. And what we’re seeing, unfortunately, is for many of them have a serious unpreparedness for retirement, if unpreparedness is a word. I think it might be. And so what we’ve seen the federal government do is take it upon themselves to try to solve that sort of retirement savings gap through legislation. And part of it really, I think, stems from that shift we talked about earlier, from defined benefit plans to defined contribution plans, from pension plans to 401(k), from the employer saving to employee saving. And the challenge was, particularly during the ’80s and ’90s, when that phenomenon was occurring, there really wasn’t very much information on 401k plans. A lot of them were what we call balanced forwards. You couldn’t even view them from a day-to-day basis. They didn’t have the online access like they do now and barely even had the internet at that point. And so you had this whole generation of workers who really are serially under-saved and under-prepared, that’s the word I think I was looking for earlier, for retirement. And so in response to that, we’re seeing a flurry of legislative bills, both at the state level, but certainly at the federal level.
So there’s a law passed back in 2019 that was called Secure Act. And then there’s a law passed in 2022, right at the very end of the year, that was called Secure Act 2.0. They’re very creative in Congress, because it builds on the first law passing back in 2019.
Chris: And in general, this is the law passed back in 2019. actually one of the quite bipartisan bills that we’ve seen in a long time, right? Both sides of the aisle, everyone seems to kind of get on board with these.
Secure Act 2.0
Nate: Extraordinarily. And there’s already talk of a Secure Act 3.0 working its way through Congress. And I would say that the vast majority of the bill, or I guess now it’s the law, is centered around a few different themes. The first is trying to get more companies to offer retirement plans. Trying to get more employees enrolled in those plans. And then trying to get those employees to save as much as possible between now and retirement.
And I think there is some angst out there, or I guess what’s the right way to put this in a politically correct way. I think there’s a lot of business owners who view this as the federal government’s last ditch effort to prop up the private pension system over some concerns with the solvency of Social Security. I don’t really buy into those fears, but it’s something we hear from clients a lot. And what I will say is for those business owners and for those employees who are more cynical about Social Security, that means that the only person that’s going to pay for your retirement is you. And so it’s even more incumbent that you actually take that seriously and start putting some money away.
Chris: I mean, I can tell you, I’m not planning on Social Security being there when I get there. Or if it is, it’s not going to be the same it is today, right? We got a long way before I have to worry about that. Yeah, so you talked about the encouragement for businesses to start these plans, right? I know there’s a lot of tax credits that come with them. What are those kind of look like?
Nate: That’s exactly right. So Secure Act 2.0 significantly increased the tax credits available for small businesses that start a plan. And they actually introduced a totally new tax credit as well for small businesses that start a plan and provide an employer contribution. So, you’re always able to make tax deductible employer contributions, but this actually provides a tax credit. And very quick sort of accounting lesson, a tax deduction, you’re able to deduct against your income that gets taxed and then a tax deduction. A credit is actually a dollar-for-dollar offset in your tax liability. So it’s basically the federal government’s way of paying you dollar-for-dollar back.
Retirement plans, as you would imagine, when you have so many different players involved, can often be more expensive than what you would like to see them be, especially nowadays, just as there’s more liabilities, more regulation. Every provider nowadays is charging a minimum fee or even more expensive than what you would like to see, increasing their base fees. And so typically what you’ll see is, you know, the recordkeeper will charge a base fee, maybe a per participant fee, the TPA will charge a fee, and then certainly the advisor will charge a fee. So once you add all three of those together, those tax credits, I mentioned, help offset that cost. And it’s a component of how many employees you have, and specifically how many non-highly compensated employees you have, which is some something the IRS defines on an annual basis. It’s always fun.
Yearly limit amounts
Chris: Yeah. And those numbers change every year. I mean, one of the things we haven’t talked about is how much can you put in these, right? So certain limits defined by the government every year, they adjust for us every year. This year, I don’t have my little cheat card, I’m going to break down here. I don’t have it. But certainly, simple IRA has a lower limit, 401(k) has a higher limit. But there’s catch-ups on both of your over 50 employees, so certainly those are our benefits as well, which help your employees, but also help you as a business owner. If you want to maximize those benefits, you can do so, right?
So, we’re seeing a big trend right now with states getting involved in retirement as well. What’s that landscape look like right now? I know we’re experiencing that shift right here in Maine right now. Last week, we went through and launched a new program. But what’s going on around the country with the states?
Nate: Yeah, I think the unfortunate reality is that there are still quite a few employees out there who do not have access to retirement through their employer, especially in the smaller to medium-sized business marketplace. I think here in Maine, the access gap, which is what they’re calling it, is around 40%. It’s almost one out of two Maine private companies with employees don’t have access to a retirement plan through work. And there’s a bunch of crazy stats that AARP has released that just show how much less likely you are to save for retirement if you don’t have access to a plan through work. But more than that, what you touch upon with the limits is the individual retirement account, IRAs limit for 2024 is $7,000, which is a lot of money for a lot of people, but certainly is probably not enough to retire on down the road, especially with where inflation has been going for the last couple of years. For a simple IRA, you’re able to do $16,000. So a lot better, and that could be pre-tax, Roth, we can talk about that as well. 401(k) for this year is $23,500.
So you just look at the disparity between those that have to save on their own versus those who are able to save through their employer. And so in response to that, you’re seeing more and more states, and I think it’s up to 14 states have now passed some form of legislation that’s basically mandating that employers either start their own retirement plan or automatically enroll their employees into what’s a state-run retirement program, which is technically an IRA-based program, at least that’s where the majority of the states have leaned towards.
State-mandates on small business retirement plans
Chris: In those states, we call them the auto IRA programs, what do those look like?
Nate: It’s usually there’s a auto enrollment, if you’re going into that plan, your employees have to enroll, or they don’t have to enroll, they’re going to be automatically enrolled unless they opt out, right? I mean, those are the types of things, but it’s an IRA, so there’s… all sorts of different income restrictions and things like that that haven’t really been quite figured out yet.
Chris: I don’t think on that level, but yeah, I mean, how are you seeing these rollouts going? Have you seen participation across the country going, well, in these auto IRA programs? Are you seeing people going into the private plans, into the defined contribution plans?
Nate: Yeah, so I want to back up and just talk about automatic enrollment for a second, for anybody who’s maybe not familiar with it. Which we’re gonna have that’s a Secure Act 2.0 term. That’s where it ties all together. So again, not to kind of keep going back to go forward, but when we look at the old defined benefit the pension system, it was basically an automatic enrollment system. The difference was that it was your employer saving automatically on your behalf. And it was really not something you ever had to think about or worry about and then we shifted over to define contribution plans, 401(k) plans and 99% of them were opt-in. So what does that mean?
Once you become eligible for your retirement plan, most companies have some sort of waiting period. We call it an eligibility timeframe. Some people call it a probationary period. You have to actually take an action to save for retirement. And unfortunately, for a lot of people, most people want to save for retirement, right? Most people want to retire. But people don’t for a number of different reasons. They don’t think they can afford to. They weren’t taught any financial literacy in school. They’re intimidated by it, or they just keep meaning to, and they just keep waiting, and they don’t appreciate how valuable time is when it comes to saving for anything, but especially for retirement. And so one of the big trends we’re seeing in the retirement industry is a move away from the opt-in and towards the opt-out. And so with Secure Act 2.0, I promise I’ll get back to your original question. Secure Act 2.0 is mandating that for any new 401k plans started after that law was passed, which was December 29th, 2022, we’ll have to have automatic enrollment in it. So now once you become eligible, unless you opt out, the default is now that you’re going to start saving for retirement.
And that’s the same framework that the state IRA will be following as well. So the vast majority of them have centered around an automatic enrollment rate of at least 5%. And then on top of that, an automatic increase, which means, okay, you automatically go into the plan. If you still continue to do nothing, a year later, we’re going to bump you up to 6%. If you still do nothing a year later, we’re going to bump you up to 7%. And then all the way up to 10%, which 10% to 15% is what a lot of the industry experts agree is sort of that ideal savings rate to try to replace at least 70% of your income in retirement, which is sort of what you can expect to need at least to maintain your standard of living.
What should new business know about starting a retirement plan?
Chris: Which seems like a lot of money from, a long time from now, right? We gotta get that going, but what, so new business or young business comes in, maybe they’re gonna be forced into one of these auto IRA programs. They want to do something more than that. They want the flexibility, they want the better benefit to their employees. What’s that process look like when someone comes into your office and says, I’d like to start retirement? What’s that look like? What’s required of the employer? What’s the kind of evaluation, the thought process? What goes into that?
Nate: Yeah, we usually look at sort of two main kind of pillars. The first pillar is the goals of the business owner. And the second are some of the important considerations that can come with a retirement plan. So on the goal side, it’s sort of, what are you looking to accomplish? Do you just want to start a plan just to start a plan? Do you want to start it because you want to genuinely prepare your employees for retirement? Do you want to start it because you’re struggling with recruiting and retaining employees and you’re starting to get people asking about it? So that’s usually the goal size where we start.
And then the next piece is the considerations. I think this is probably the part that a lot of service providers glaze over, which is, these businesses don’t have an infinite budget. They don’t often have a very deep HR bench, and there are some administrative requirements. And then certainly, you know, one of the things, and I think, you know, not to get too into the weeds on the, the legislation side, but as I controlled groups, and what we’re starting to see is a lot of business owners nowadays might own multiple businesses. And that can cause a whole host of additional complications, as I know Chris can appreciate on the retirement plan side. And so generally speaking nowadays we see most businesses going with the defined contribution and it’s typically going to be the simple IRA or the 401k so again it’s really just helping business owners understand of those three options right. The state mandated if you’re in a state that has a mandate, the simple IRA, or the 401k. What’s going to make the most sense? What’s most valuable to you? Is it, you know, giving your employees a little bit more savings potential through something like a 401k although it’s going to cost your organization a little bit more? But on the other side, it’s going to give you a little more flexibility. So there’s sort of all these pros and cons to each. And the approach that we’ve taken at LaBelle and Harriman is just a very consultative approach, just to kind of help them understand what exactly can be the right plan for you, which is the first step. Then the next step is what are the right service providers to assist you with actually executing on that plan.
Why retirement plans are a lower cost benefit for employers
Chris: Yeah, I mean, I always tell people that generally speaking, a retirement plan is a relatively affordable benefit to offer, right? If you’re looking at simple IRA, you’re looking at 3% on $50,000 a year is $1,500, right? And in general, whereas a health plan could be $500, $600, $1,000 a month, right? That’s the really generous piece, but overall, you’re looking at a pretty low barrier to entry cost-wise on these plans. So, and those are the expenses to the business. So, now certainly every business is unique. If there’s turnover, and if you’re a restaurant and you have turnover, you turn over 70% of your staff every year, there’s different considerations, of course. But overall, it’s affordable. I mean, now certainly when you get into those 401ks, there’s other third-party fees, right? We’ve noodled around those a little bit, you know, cause the third-party ministry is gonna wanna chunk. The advisor’s gonna wanna chunk. The record keepers going to want to chunk everyone’s looking for their slice of the pie. Which can sometimes take away from earnings on the plan, right? If there’s depends on how you structure it right because there are there are options for that to take out of the participants, right? Some of those admin fees might come out of their participants.
Nate: That’s exactly right. So as a plan sponsor you have the option to either pay the fees yourself as a business owner and take it as a tax deductible expense or to pass it on to participants. And there’s really full flexibility with which fees you pass on, which ones you pay. Generally speaking, what we often see, particularly for smaller businesses, where the business owner likely will have one of the largest balances in the plan, because most of the fees that are paid out of the plan are usually assessed what we call pro rata, which means your pro rata share of the overall plan, you pick up that share of the fees. And so for most business owners, when they’re faced with, I can either have my business pay this and I can take a tax deduction, or I can pay it out of my own retirement balance, and most of that’s gonna come from my account. Generally speaking, we like to see them pay it, or most business owners tend to pay it right out of the corporate expense account. But you do have that option to pass it off. And especially early on, when you still have those tax credits available to you, I know we didn’t get too much into the weeds, but it’s a three-year tax credit program. Plus, there’s that new employer contribution tax credit, so actually five years. So for those first three to five years, it often is in a business’s interest to pay those and then to be able to claim the tax credits, because often they’ll be able to offset almost all, depending on the size of the organization, all of those plan expenses through those tax credits.
Advanced features of 401(k)s
Chris: And what are some of the more advanced features we see with the 401(k), it is a Ferrari, right? It’s got lots of room behind it. It’s got lots of options. I always say lots of bells and whistles, right? What are some of those higher end things that folks are using within those plans to benefit their employees themselves, their tax situation, all those kind of things? I mean, safe harbors and profit shares and all that kind of stuff. What do those look like?
Nate: Yeah, so I guess the great lie that’s told out there is that high income employees have all these different ways to avoid taxes. And that might be true for– I don’t know.
Chris: If you watch everyone on TikTok. Exactly. Grant Cardone.
Nate: Grant Cardone. Every day. You’re doing it wrong, Chris. Section 179 deduction buy a Cadillac, December 30th. Yeah. But that might be true for the .001%, but unfortunately, there are very limited ways for both business owners and higher-income employees to be able to defer and avoid income tax. But one of the best ways– ways is through retirement plans. Now the caveat to that, particularly with 401(k), 403(b) plans is something called non-discrimination testing, which is basically IRS’s way of saying, hey, business owner, if you start this retirement plan, it’s supposed to be not just for the benefit of you, but also your staff, your rank and file. And so they look at how much your rank and file saves versus how much you save, and how much your family members save, and how much your highly compensated employees save. Now the way around that is through something called Safe Harbor, which is basically IRS’s way of saying if you as a company put in a generous enough contribution, we don’t care how much you save. We’ll sort of absolve you from that non-discrimination test and then that way your business owner and your high income employees are able to defer up to that, you know, $23,500.
Employer match trends
Chris: And what are you seeing? What are you seeing for matches today? You know, it used to be the good old 3%, but I mean, nowadays, I feel like we’ve got all these different, particularly with the Safe Harbors, we have different tiered matches. I mean, we see clients that sometime are 6, 8, 10% of that. What’s, I mean, what’s the average you’re seeing?
Nate: Yeah. So it used to be the 50% up to six, right? It was called the stretch match is what every single business did almost didn’t matter what the industry was. And then we’ve seen a huge gravitation towards the Safe Harbors. But now that almost everybody’s going towards the Safe Harbor. Now, as I mentioned, the goal post being pushed back. Now, every company is looking to increase that. So it’s still, I would say, the most common match formula is that traditional Safe Harbor, which is a little bit of a quirk you want. It’s a tier that’s 100% on the first 3% of an employee’s savings, 50 cents on the dollar for the next 2%. So basically, if an employee saved 5% or more, they’d get 4%. I’d say that’s still probably the industry standard and certainly differs by industry. Professional services, you’re starting to see, you know, large profit sharing or non-elective contributions being layered on top of that. But I would say still that 4% or 5%.
But where we’ve seen probably the biggest change in planned design over the last couple of years is with employee eligibility. In part of that is a result of Secure Act 2.0 in this provision which Chris will grit his teeth at, which is you can no longer exclude part-time employees, generally speaking, from your retirement plan. So in light of that, plus I think just more and more employees are wanting to participate in retirement plans, you know, you joked about TikTok, maybe the one good thing from it is I’ve never seen a generation that’s more knowledgeable and interested in investing in savings. Cause everybody opened up their Robinhood account and started investing in GameStop and whatnot, which probably work out. The good news is, I’m always so surprised by the amount of 20-year-olds calling us, asking us, ‘Hey, when can I sign up for my employer’s 401(k) plan?’ Much more than what I’ve seen over the last few years. And so we’re seeing employee eligibility used to be, you know, every company made people wait a year. And why make them a wait a year, especially if you don’t have that much turnover. And so we’re starting to see that be, you know, 30 days, 60 days, maybe in line with some of your other benefit waiting periods. So that way it’s a little bit easier on the eligibility tracking side of the equation. But that’s probably where we’ve seen one of the biggest changes. In addition to looking at the employer contribution is around that employee eligibility and just allowing people to save earlier.
Profit sharing through retirement plans
Chris: That’s right. What about like, we talked about profit share. What’s that look like? I mean, that’s another tool in the toolbox, right? For these 401(k)s?
Nate: 100%. And I have to laugh for a second because if you look at a lot of provider websites, they’ll call all of these things separate things, right? They’ll say, Safe Harbor 401(k), 401(k) Profit Share. It’s all built around the 401(k). So think about the 401(k) plan as like the hub and then off of that you have different spokes and you can have a Safe Harbor feature on your 401(k) plan. You can have a profit sharing feature on your 401(k) plan. Now a Safe Harbor requires an employer contribution and that’s required, right? Profit sharing can be discretionary. So it provides you as a business a ton of flexibility to the extent that you have an awesome year to be able to reward your employees and say, ‘Hey, listen, you guys all chipped in. I know it was a busy year or maxed out’ probably most business owners 2023 to be honest. ‘We’re going to put a little bit of extra into the plan and oh, by the way, that’s tax-deductible.’ So not only are employees not paying income tax on that amount, but as an employer, you’re avoiding payroll tax. So it’s an incredibly efficient way for you to compensate your employees while also candidly protecting them from them. Because most people, and I put myself into this camp, once that money hits my checking account, it finds a way to get spent. It does not find its way into an IRA or retirement plan. It’s coming from a retirement plan advisor. So, you know, be able to put some of that into the plan is not only more tax efficient, but it also helps, you know, make sure that there’s something, you know, adding in. Plus, it’s a nice benefit.
Chris: So one of the challenges in full transparency, we’ve had a great couple of years at Paper Trails as well. We’ve been able to participate in some profit sharing as well and we’ve thrown money at our employees, which is everyone has been well received. I think the first year we did that, the reaction was, oh, I can’t touch that money, right? It was the same thing, right? Like, oh, I can’t get it, right? But there are mechanisms. You could take a loan on your 401(k) if you really need it, right? There are some mechanisms, early distribution, which you pay the taxes, you negate that tax benefit, but certainly, I think it’s a different way of thinking for the employees as well.
At least in our experience, we see that with some of our clients that do it too, that they say, great, your employees are grateful that they got this money, but they’re not gonna realize it until 20 years down the road. And then they’re really gonna be really grateful, I think. They’re gonna come back and say, gee, Chris, you were really a great boss back then. I hope that’s what they say anyway.
Nate: And you can be flexible as a employer. So, you know, certainly a bonus has certain benefits, right? Which is money now. And you can use everything. You don’t have to just do profit share. You could do bonuses, you could do everything. Plus, with the plan designed, you can give employees the ability to defer a bonus into the plan. So it’s kind of best of both worlds, right? So maybe you put a little bit of money directly into the plan because it’s more tax efficient and it protects people. But then you can also just pay out a bonus out of a portion of that profit sharing amount. And then for those employees who would rather just have it all into the plan, they can defer it into the plan. For the employees who might be paycheck to paycheck at that time period, they can take it and certainly that’s going to be a nice benefit for them.
What is an ESOP?
Chris: That’s awesome. So we’re just about running out of time here, but what else are we having for us? Anything exciting that’s coming down the road from retirement? Anything that you think business owners need to do, save early, save often?
Nate: Yeah, I think we just continue to see more and more business owners exploring complementary, qualified plans. So I know we were talking a little bit earlier about ESOPs. And then we talked a little bit about defined benefit plans. And so defined benefit plans are actually sort of heavy sort of a renaissance right now. And specifically, something called a cash balance plan. And the cash balance plan is almost like the love child between a defined contribution and a defined benefit plan, but it provides unbelievable tax benefits to a business owner. So I think I called the 401(k) a Cadillac. I think I would have reserved Ferrari for the cash balance plan. They’re finicky. They can break down. So you got to be very careful before you move into one. But the tax shelter ability of it is incredible. Really unparalleled for anything you could ever see in the 401(k) world.
Chris: Write that down, did you get that for your next talk?
Nate: I’m surprised you haven’t talked about it before, which is probably why people actually use them. And then on the ESOP side. So we’ve seen a proliferation of them across the country, but particularly up here in Maine, we’ve seen a ton on ESOPs, or an employee stock ownership plan. For those aren’t aware, is basically a way for you to transfer some or all ownership of a business into a retirement plan, into a trust in which your employees, through working, earn those shares in that ownership. And so that’s certainly something we’ve seen. And again, it is technically a qualified retirement plan at its core. So you’re just starting to see more and more of these secondary retirement programs being put in, some for tax benefit benefits, some as a succession plan.
Chris: I’m going to have to have you back on a whole episode of ESOPs. I feel like there’s a lot of that.
The decumulation of small business retirement plans
Nate: I think so. And then I guess the last sort of major trend we’ve seen is a lot of what we’ve talked about today is all about the accumulation phase, right? Getting more people to save for retirement. Where our industry has really dropped the ball, where I guess the next ball we need to pick up is on the decumulation, right? A lot of businesses are starting to do a pretty good job of getting their employees to retirement, and then once they’re ready to retire, they basically are, all right, good luck. Don’t let the door hit you on the way out, and good luck figuring out how to make that money last, how much you can pull out in a year, what to do when the market’s down.
We really don’t provide any support, so what do most people do? They roll their money out of their 401(k) plan where they have institutionally priced investment options, where they have fiduciary oversight, where they might have economies of scale. They roll it into an IRA, where they have none of those. They go hire an advisor, paying 1% plus retail price investments, and it chews away at what that money, how long that money can last. Or they don’t have any support, and then they might end up running out of money early. So that’s really the next big piece, and ironically, a lot of that stems from Secure Act 1.0, which introduced the possibility for what are called life income solutions within the retirement plan, which is basically a euphemism for annuities. And I know when people hear annuities, the hair on their necks stands up, but this would be institutionally priced annuities within the fiduciary framework, which is I think where they operate best as opposed to the sleazy salesman going door-to-door selling an annuity to your grandmother, which is what everybody pictures when they hear annuity salesman. And so that is probably it. What we’re most excited about is helping to design a system that can help with the decumulation, just like with automatic enrollment, has helped on the accumulation side.
Conclusion
Chris: That’s awesome. Lots and lots still to keep digging into this. The time of worlds is just crazy. There’s like I said, lots of changes coming. I’ve already come through that we’re all trying to figure out together. So thank you very much for joining us today, Nate. People want to find you online. How do they get in touch with you? Instagram? website? What’d you got?
Nate: Yeah, so Nate Moody again at LaBelle and Herman retirement advisors. You can go to our website, www.lebelharriman.com. You can also find me on LinkedIn. We’re not on Instagram or Facebook. Financial regulation makes it pretty difficult to run social media pages in today’s day and age. Which is how you know for anybody on TikTok that’s given advice probably isn’t a licensed advisor because they’re on TikTok. But, thank you.
Chris: Awesome. Well, thanks again. Just a reminder, everyone, make sure you like, you follow, you subscribe to us on all the social medias, smallbusinessbigworld.com, keep us posted, and otherwise we’ll see you next week. Thanks for listening to this week’s episode of a Small Business Big World.
Thanks for listening to this week’s episode of Small Business, Big World. This podcast is a production of Paper Trails. We are a payroll and HR company based in Kennebunk. Kennebunk, Maine, and we serve small and mid -sized businesses across New England and the country. If you found this podcast helpful, don’t forget to follow us at @papertrailspayroll across all social media platforms, and check us out at papertrails.com for more information. As a reminder, the views, opinions, and thoughts expressed by the hosts and guests alone. The material presented in this podcast is for general information purposes only and should not be considered legal or financial advice. By inviting this guest to our podcast, Paper Trails does not imply endorsement of or opposition to any specific individual organization or product. or service.