401k for small business owner

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drted
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Joined: Tue Aug 07, 2018 8:11 pm

401k for small business owner

Post by drted » Wed Aug 08, 2018 10:21 am

This is my first post.

I have a small business with 20 employees. We do not have a 401k but are looking into getting one for the company. Does anyone have any advice for picking out a group to help us administer it? How would we know if they charge high fees or not? I had a brief conversation with Vanguard but am still not clear on the best way to pick out a plan.

I'm thinking that we would not do any matching to begin with as employers. Not sure if there is an advantage to matching when you are on the employer side. My understanding is that it helps us as employers in that we can get more invested into a 401k.

I have a trusted friend who suggests that it is better to pay tax now while tax rates are low rather than waiting to pay tax in the future as tax rates will probably increase over time. Thoughts on this way of thinking?

Thanks!

Ted

Silk McCue
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Re: 401k for small business owner

Post by Silk McCue » Wed Aug 08, 2018 5:41 pm

drted wrote:
Wed Aug 08, 2018 10:21 am

I have a trusted friend who suggests that it is better to pay tax now while tax rates are low rather than waiting to pay tax in the future as tax rates will probably increase over time. Thoughts on this way of thinking?

Thanks!

Ted
Welcome to Bogleheads.

I can only provide input on the last part of your question. Let’s say your tax deferred savings is in the 12% bracket (as opposed to 22 etc). When you stop working and begin to draw down on your savings and eventually Social Security the first $24k for a married couple (by example) is untaxed (that number will of course be indexed to inflation). Therefore you paid no tax decades ago and now you will pay no tax on a decent portion of your withdrawals. Twice-blessed.

If your tax deferred accounts were substantial, and let’s say some of your deferred savings were in the 22% bracket. You might be in a position in the early years of retirement to convert some of this to a Roth up to the top of the 12% bracket so that once Social Security and RMDs kicked in they wouldn’t be taxed at 22% and would cause some of your Social Security to become taxable as well. So you saved 22% when you invested and only paid 12% when you converted it.

Once you start RMDs you can make charitable contributions via a QCD (Qualified Charitable Distribution) and pay zero tax on that amount without itemizing.

If someone is in the 10 or 12% bracket and wants put that money in a Roth IRA or 401k that may be a reasonable thing to do if they were so inclined.

As you can see there are ways to reduce or eliminate taxes and there most likely always will be.

It’s tough to predict the future and everyone’s situation is different but most everyone can benefit from tax deferred investing.

Cheers

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ruralavalon
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Location: Illinois

Re: 401k for small business owner

Post by ruralavalon » Wed Aug 08, 2018 6:49 pm

Welcome to, the forum.

drted wrote:
Wed Aug 08, 2018 10:21 am
This is my first post.

I have a small business with 20 employees. We do not have a 401k but are looking into getting one for the company. Does anyone have any advice for picking out a group to help us administer it? How would we know if they charge high fees or not? I had a brief conversation with Vanguard but am still not clear on the best way to pick out a plan.
For a small company 401k, I would look at Vanguard, Fidelity and www.employeefiduciary.com.

drted wrote:
Wed Aug 08, 2018 10:21 am
I'm thinking that we would not do any matching to begin with as employers. Not sure if there is an advantage to matching when you are on the employer side. My understanding is that it helps us as employers in that we can get more invested into a 401k.
Employer contributions and employer match ease the administrative burden of annual tests intended to ensure employee participation. The idea is that the plan should not benefit only the higher paid manager or owner, but should also benefit less well paid employees. The Balance, "What Is a Safe Harbor 401(k)? "


drted wrote:
Wed Aug 08, 2018 10:21 am
I have a trusted friend who suggests that it is better to pay tax now while tax rates are low rather than waiting to pay tax in the future as tax rates will probably increase over time. Thoughts on this way of thinking?
I agree with the conclusion, but not your friend's reason.

The income tax code is progressive, with a lower tax rate for lower income. Retirement usually means that employment income has ended. Therefore, most people are in a lower tax bracket in retirement and for most people traditional 401k contributions will probably be better. In addition when you withdraw from your 401k in retirement, your income is not all taxed at your marginal tax rate specified for your tax bracket. TFB blog post, "The case against Roth 401k". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)."

Wiki article, "Traditional vs Roth".
"Tax considerations:
* If your current marginal tax rate is 15% or less, prefer a Roth.
* If you expect to have higher marginal rates than your current marginal rate for most of your career, prefer a Roth.
* If you will have a traditional account or a pension large enough to meet your expected retirement expenses (and you expect to take that pension shortly after retiring), prefer a Roth.
* Otherwise, prefer a traditional account."
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

aristotelian
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Re: 401k for small business owner

Post by aristotelian » Wed Aug 08, 2018 7:19 pm

The reason to match as an employer would be to offer competitive benefits so as to attract and retain good employees.

On the employee side, it is a great benefit if you are in a higher tax bracket since most of us do not have much taxable income in retirement. Taxable income is almost always higher during your peak working years.

JBTX
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Re: 401k for small business owner

Post by JBTX » Wed Aug 08, 2018 7:43 pm

viewtopic.php?t=246289

We are going through similar exercise for similar size company. Employee Fiduciary, Ascensus/Vanguard, Guideline are all good options, depending on level of service needed. I suspect we will go with a local advisor and an associated plan because management wants more hand holding than those 3 provide.

Spirit Rider
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Re: 401k for small business owner

Post by Spirit Rider » Wed Aug 08, 2018 8:31 pm

If you are not prepared to make employer contributions, you probably should not bother with any employer retirement plan.

You as the owner will automatically be considered a Highly Compensated Employee (HCE). An employer retirement plan can not discriminate against Non-HCEs (NHCEs).

A standard 401k plan will be subject to Actual Deferral Percentage (ADP) and Actual Contibutuon Percentage (ACP) testing. Without employer contributions it will most certainly fail ADP testing. HCE (your) contributions will be limited to average NHCE contributions + no > 2%.

A safe harbor 401k plan is exempt from ADP and ACP testing. A safe harbor 401k plan requires minimum employer contributions. This can be a match of 100% of the first 3% of compensation and 50% of the next 2% of compensation.

This will be a total match of 4% on the first 5% of compensation. In addition a 401k plan with 20 employees will have minimum setup costs of $500 - $1000 and minimum administrative costs of $2K - $3K/year.

You might want to consider a SIMPLE IRA at Fidelity with no setup or administrative fees. A SIMPLE IRA requires no ADP/ACP testing, but like a safe harbor 401k requires minimum employer contributions.

This is 100% of the first 3% of compensation. However, it can be as low as 1% in two out of five years including the first two. So you could do 1% the first year, 2% the second year and 3% the third and subsequent years. Kind of like training wheels for a 401k.

The SIMPLE IRA plan maximum employee elective deferral is only $12,500 instead of a 401k plan's $18,500, but the employer's setup/administrativeñ and staff employer contribution savings are considerable.

Note: A safe harbor 401k can use a 3% non-elective contribution as an option and a SIMPLE IRA can use a 2% non-elective contribution as an option.

JBTX
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Re: 401k for small business owner

Post by JBTX » Wed Aug 08, 2018 9:15 pm

Agree with spirit horse. If you provide no or low match, participation will be really low, and likely the amount you will be able to contribute will end up much smaller. This is what happened with us.

If your main goal is to maximize YOUR savings, if you have no safe harbor you won't be able to contribute much. If you do have safe harbor your employee costs will likely increase 3-4%, which will exceed what you contribute to your personal 401k.

However a safe harbor match will increase participation, is an attractive benefit, especially for longer term employees. It may be worth it. If you are concerned about new employee churn, you can delay partipation for a year (or longer depending on when hired during the year)

Ultimately we will probably go with a simple safe harbor plan.

smitcat
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Re: 401k for small business owner

Post by smitcat » Thu Aug 09, 2018 8:23 am

JBTX wrote:
Wed Aug 08, 2018 9:15 pm
Agree with spirit horse. If you provide no or low match, participation will be really low, and likely the amount you will be able to contribute will end up much smaller. This is what happened with us.

If your main goal is to maximize YOUR savings, if you have no safe harbor you won't be able to contribute much. If you do have safe harbor your employee costs will likely increase 3-4%, which will exceed what you contribute to your personal 401k.

However a safe harbor match will increase participation, is an attractive benefit, especially for longer term employees. It may be worth it. If you are concerned about new employee churn, you can delay partipation for a year (or longer depending on when hired during the year)

Ultimately we will probably go with a simple safe harbor plan.
"If you do have safe harbor your employee costs will likely increase 3-4%, which will exceed what you contribute to your personal 401k."
Not close in our case so YMMV.

We have had a plan now for about 5 years - small company about 30 staff and two of us as owners.
Without a safe harbor plan or match the participation was very low - 3 other staff.
With a safe harbor plan and a match the participation rate was initially 2.5 times that - 7 other staff.
After the first year the participation dropped to 5 staff of which 4 we consider key employees.
Observations -
- most will not enroll
- a measurable number will drop out
- the 401K plan fees are a writeoff against taxes as well
- the 2 of us max out the 401K plus the over 55 catchup allowance
- the 2 of us also recieve a large portion of company match
- our selected funds have much lower fees over a larger portfolio than our past employer plan
- we have a state tax now but will not in retirement
- this company 401K allowed us the ability to complete a larger backdoor Roth

Please anayze all of your relative pros and cons before making a decision such as this.

stxman
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Joined: Wed Jan 03, 2018 11:22 pm

Re: 401k for small business owner

Post by stxman » Thu Aug 09, 2018 8:43 am

I have not found a better cost structure than guideline.

$500 initial setup fee, then something like $8/user/mo participation fee. Zero AUM and uses mostly vanguard admiral funds.

smitcat
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Re: 401k for small business owner

Post by smitcat » Thu Aug 09, 2018 9:34 am

stxman wrote:
Thu Aug 09, 2018 8:43 am
I have not found a better cost structure than guideline.

$500 initial setup fee, then something like $8/user/mo participation fee. Zero AUM and uses mostly vanguard admiral funds.
I am not familiar with guideline - either positive or negative.
We have had employee Fiduciary now for about 3 years - cannot complain about anything :price , service, simplicity.
For the base fee we get to select up to 30 investment funds and could add more for a small extra fee. Our selected funds are mostly Vanguadr and Fidelity but we have others as well. No limits as to what we choose for our plan.

pshonore
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Re: 401k for small business owner

Post by pshonore » Thu Aug 09, 2018 10:09 am

When I was doing taxes, I was always amazed by the small number number of people who contributed to retirement plans (401K, 403b, IRA, etc). Most of those who did contribute were either public employees or well paid corporate folks. A single parent making less than say 40 - 50K just can't spare those dollars. After rent, food, car payments, child care, etc, there is usually no money left. Its a sad situation. Any small business owner who can provide a 401K is doing those people a great favor and should be commended. Of course, I also saw lots of folks who emptied out their 401K after leaving a job.

Spirit Rider
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Re: 401k for small business owner

Post by Spirit Rider » Thu Aug 09, 2018 10:13 am

smitcat wrote:
Thu Aug 09, 2018 9:34 am
stxman wrote:
Thu Aug 09, 2018 8:43 am
I have not found a better cost structure than guideline.

$500 initial setup fee, then something like $8/user/mo participation fee. Zero AUM and uses mostly vanguard admiral funds.
I am not familiar with guideline - either positive or negative.
Not a lot of reviews, but those there are have been mostly positive. With an occasional grumbling that they don't offer the option of advanced plan design features. Which is off-based considering that they promote themselves as a low cost no frills administrator offering low cost index funds.

If you want a basic safe harbor 401k plan they seem like a viable option. If you want New Comparability Method profit sharing or after-tax contributions go somewhere else and pay for it.

scorp_pccorp
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Joined: Fri Mar 20, 2015 10:18 am

Re: 401k for small business owner

Post by scorp_pccorp » Thu Aug 09, 2018 10:31 am

This discussion is very interesting to us because we are also mulling a new 401k for our office. A couple questions from my side:

1. We have only 4 employees including the owner. But we may grow to 8 or more employees in a year or two. In this case, is it preferable to go with 401k or SIMPLE IRA? We are leaning toward 401k.
2. Once a 401k is established, is it possible to cancel it in the future if our costs are too high and we cannot continue to provide matching contributions for any reason? If so, what happens with the employee accounts in the 401k plan?

JBTX
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Joined: Wed Jul 26, 2017 12:46 pm

Re: 401k for small business owner

Post by JBTX » Thu Aug 09, 2018 12:51 pm

Spirit Rider wrote:
Thu Aug 09, 2018 10:13 am
smitcat wrote:
Thu Aug 09, 2018 9:34 am
stxman wrote:
Thu Aug 09, 2018 8:43 am
I have not found a better cost structure than guideline.

$500 initial setup fee, then something like $8/user/mo participation fee. Zero AUM and uses mostly vanguard admiral funds.
I am not familiar with guideline - either positive or negative.
Not a lot of reviews, but those there are have been mostly positive. With an occasional grumbling that they don't offer the option of advanced plan design features. Which is off-based considering that they promote themselves as a low cost no frills administrator offering low cost index funds.

If you want a basic safe harbor 401k plan they seem like a viable option. If you want New Comparability Method profit sharing or after-tax contributions go somewhere else and pay for it.
Agree re Guideline. They have lowest annual fees and probably second lowest fund fees (vanguard Ascensus has vanguard institutional rates). Guideline sets up various recommended age related portfolios. They don't have target date funds because they want to claim to have the lowest fees and target dates have slightly higher. They don't do new comp profit share plans.

They are very website driven. They do have online demos if you want to see one.

JBTX
Posts: 3571
Joined: Wed Jul 26, 2017 12:46 pm

Re: 401k for small business owner

Post by JBTX » Thu Aug 09, 2018 1:00 pm

scorp_pccorp wrote:
Thu Aug 09, 2018 10:31 am
This discussion is very interesting to us because we are also mulling a new 401k for our office. A couple questions from my side:

1. We have only 4 employees including the owner. But we may grow to 8 or more employees in a year or two. In this case, is it preferable to go with 401k or SIMPLE IRA? We are leaning toward 401k.
2. Once a 401k is established, is it possible to cancel it in the future if our costs are too high and we cannot continue to provide matching contributions for any reason? If so, what happens with the employee accounts in the 401k plan?
The main issue is fees. There are some fixed annual fees with 401ks including plan administration. That is too small for vanguard Ascensus fee wise, you are probably looking at employee Fiduciary or Guideline. Also depends on AUM. If there is only $100,000 the $1000-$2000 total fees seem relatively pretty high.

A new comp profit share could make sense with 4 employees. When you get to 8 it could start getting expensive.

JBTX
Posts: 3571
Joined: Wed Jul 26, 2017 12:46 pm

Re: 401k for small business owner

Post by JBTX » Thu Aug 09, 2018 1:05 pm

Spirit Rider wrote:
Thu Aug 09, 2018 10:13 am
smitcat wrote:
Thu Aug 09, 2018 9:34 am
stxman wrote:
Thu Aug 09, 2018 8:43 am
I have not found a better cost structure than guideline.

$500 initial setup fee, then something like $8/user/mo participation fee. Zero AUM and uses mostly vanguard admiral funds.
I am not familiar with guideline - either positive or negative.
Not a lot of reviews, but those there are have been mostly positive. With an occasional grumbling that they don't offer the option of advanced plan design features. Which is off-based considering that they promote themselves as a low cost no frills administrator offering low cost index funds.

If you want a basic safe harbor 401k plan they seem like a viable option. If you want New Comparability Method profit sharing or after-tax contributions go somewhere else and pay for it.
In terms of new comp, have you found the new tax law has made them less attractive? They typically make most sense the higher the owner compensation, but the new 20% pass through really makes it more advantageous to lower owner salary as much as legitimately possible.

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