As average 401(k) balances reach record highs, how does yours measure up?
For those working in small businesses, chances are the news isn’t great. Big companies typically are the ones with the most investment choices, the lowest fees and the richest match.
A Congressional bill and a recent White House directive aim to give a leg up to smaller plans by making it easier for them to band together, command better pricing and ease administrative burdens. The measures would make other changes, including altering the rules around required minimum distributions to reflect longer life expectancies.
While the RMD reprieve will likely get universal approval from wealthier retirees who would rather not pay taxes on distributions they don’t yet need, the idea for smaller retirement plans has some significant caveats.
It would smooth the way for unrelated groups of companies to form a single 401(k) plan. Among other obstacles, these employers would face disqualification of their plans if one member of the group is found to be violating compliance rules.
But jumping into a pool with other employers raises a host of questions about who is ultimately responsible for making sure the plan is working in employees’ best interest, notes Allison Brecher, general counsel for Vestwell, a new platform that provides 401(k) services. The company contends that technology already is stripping significant costs out of plan design and maintenance, without the need for bundling participants.
Policing the plans is a valid concern, but Alicia Munnell, director of the Center for Retirement Research at Boston College, is skeptical that many small businesses will even get that far.
“We’ve done a lot to make cheap plans for small businesses and the needle hasn’t moved. A lot of these firms are just so focused on getting up and running and their workers are saying they just need cash,” making it very difficult to get plans started, she said.
She does think the current plans’ backing by the financial services industry could help carry the ideas further than previous proposals, including an Obama Administration program to encourage savings through Treasury bonds (now scrapped).
But you don’t have to wait for any of these ideas to come to pass.
If you’re a small business owner, look into whether a SIMPLE-IRA, a Simplified Employee Pension Plan (SEP-IRA) or a self-employed 401k plan might work for your situation.
If you work for a company without a retirement plan, open a Roth IRA or a traditional IRA. They have lower contribution limits than workplace plans, but it’s a start. Just be aware you’ll need to save more in taxable accounts to make up the difference.
How much to save if money is particularly tight? Borrow a page from big employer plans by starting with a small percentage of pay and ramping that up each year or each time your pay increases.
The big advantage large plans have over small ones — other than a company match — is their ability to automatically escalate contributions, making savers barely notice they are putting away more each year. Replicate that small piece and you’re on your way.
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