Why Small Employers Need to Upgrade Their 401(k) Plans

Motivated by the need to offer workers an enhanced package of retirement benefits, small companies are looking to shore up their plan offerings.


When Pattie Curry arrived at ILMO Products Co. in 2006 as ILMO’s first director of human resources, she found the most minimal retirement savings plan a company could have and still call it a 401(k). The Jacksonville, Illinois–based distributor of compressed gases for medical, scientific and industrial use had first set up a plan through its payroll company in 1992. Employees were merely given a form to complete if they wanted to sign on. There was no program in place to encourage participation, no investment education or access to an adviser.

“It was horrible,” says Curry. “There was nothing to it.” One of her first projects at the family-owned, then-76-employee firm was to remake the retirement plan with features that would enable workers, whose educational backgrounds ranged from high school GED holders to college graduates, to truly be prepared for retirement.

ILMO was far from the only small business in this predicament. “You can tell which of two categories a plan sponsor is in,” notes Karen Sanchez, the partner-in-charge of the employee benefits practice at Chicago-based Sikich, a professional services firm with registered investment adviser, investment banking and accounting components. “They’re either interested in achieving the goal of having enough money for employees to retire — or not.” Over the past decade — particularly since the Pension Protection Act of 2006 was passed — private employers who were interested in enabling their employees to save for retirement have been given an increasing number of tools, such as automatic enrollment, by the Department of Labor and the Internal Revenue Service to bolster savings and plan participation. Having ended their defined benefit pensions — and in some cases faced lawsuits related to poor 401(k) plan design and high fees — the largest U.S. corporations were the first to make use of these tools to develop more sophisticated retirement programs. Today a number of forces are motivating smaller employers to improve their once meager savings plans.

Some of the pressure on small defined-contribution-plan sponsors to upgrade is coming from investment services providers and RIAs with retirement plan practices. “If employees can’t retire, it will have an impact on the company,” posits Joe Connell, the director of retirement plan services at Sikich. And, he points out, it hurts morale if you can’t promote people from within. “Plan design will help get you there,” he adds.

Others see a more dire need for retirement plan improvements. “The 401(k) system is coming under siege,” says Holly Verdeyen, director of defined contribution investments at Russell Investments’ Chicago office. Verdeyen believes that, as 401(k)s have morphed from tax-advantaged savings plans for top-earning executives to the sole retirement benefit for a spectrum of workers, “it’s extremely important for employers to take their plans from average to excellent” or risk an end to the current system. That end, Verdeyen says, could arrive with the advent of state or nationally sponsored plans such as the one being established in Illinois or a national retirement system like the superannuation funds in Australia.

There is still a long way to go to improve retirement savings plans at small companies. When performing plan restatements and audits as required at regular intervals by the IRS, Sanchez notes that she often finds an employer so unconcerned about its plan that the documents cannot even be found. “We take a request and turn it into an opportunity to make sure you’re doing what you should be doing,” she explains.


Of course, these problems are within companies that at least have a retirement plan. Given that only about half of the U.S. workforce participates in any kind of plan, according to data from the Bureau of Labor Statistics, the U.S. still has a long way to go to ensure future retirees a solid nest egg.

This reality worries some plan providers. “We need to demonstrate that a private system can work for employees,” Verdeyen says. “If you can’t improve the metrics, the system will be deemed to be not working,” she warns, pointing to the need, for example, to increase the savings rate from 6 or 7 percent to 10 to 15 percent. Also, she says, “employers aren’t setting the right example in how they’re structuring their contribution and their match.”

Far away from the national debate over the future of retirement security yet in many ways on the front lines, ILMO’s Curry was given the green light to remake the company’s 401(k) plan. After issuing a request for proposals, in 2008 the company hired Unified Trust Co. as its plan provider and Sikich as plan administrator. To oversee the plan’s functioning, ILMO established a plan committee that includes truck drivers, gas pumpers and store managers as well as the company’s owners and chief financial officer. With the help of ILMO’s adviser, the building of a viable retirement plan for the firm began. Today it includes auto-enrollment and auto-escalation — a feature that increases a defined-contribution-plan participant’s contribution over time — as well as a safe harbor to enable an employer matching contribution and education programs such as “lunch and learn.” The goal, says plan adviser Sanchez of Sikich, is “to make it look and feel more like a defined benefits plan.”

For the most part, Curry is satisfied with the results of the plan changes thus far. Assets in the employee retirement fund have grown from $4.5 million in 2006 to $10.3 million as of mid-February. Offered a 4 percent match on a 5 percent contribution, the 96-employee-strong workforce has moved its deferral rate up from an average of 6.18 percent to 8.6 percent. According to plan metrics, 66 percent of employees are on track to achieve their retirement savings goal. With 95 participants in the plan, Curry’s only complaint is, “I wanted 100 percent participation.”

This story is the first of a three-part series on improving U.S. workforce retirement security.

Follow Frances Denmark on Twitter at @francesdenmark.

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