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Laying an egg on retirement Misinformation on 401(k)s, temptation to reinvest profits in business may create headaches in long term

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Business owners offer 401(k) plans to help their employees save for retirement, and to compete for new talent on the job market, experts said. And this year's income tax rate increases also have employers looking at the 401(k) to help lower their own tax bills and build a retirement nest egg after years of plowing profits back into the company.

Small businesses, though, are far less likely than larger employers to offer a 401(k), experts said. The owners may not be able to afford to put money into the plan, and are reluctant to shoulder administrative expenses for a plan that doesn't benefit them. And if the business is successful and growing rapidly, it can be more lucrative to reinvest in the business rather than park extra cash in the 401(k).

In any case, experts said business owners and their employees generally aren't doing nearly enough retirement planning and saving. And the topic is being ignited by talk in Washington of possible changes to Social Security — talk that's making younger workers anxious about a future in which they might not be able to depend on Social Security.

Harvey C. Bass, owner of the executive recruiting firm Stascom Technologies, in Sparta, said at the request of his employees, he is reinvigorating the company's 401(k) plan, and has switched to a new plan provider.

"I have employees who've been here for years, they're getting into their (late) 20s, 30s and 40, and they make above-average salaries, so they have discretionary money to put aside," Bass said.

Bass has some savings in the 401(k) account, but he doesn't intend to make additional contributions, because "as a business owner, I can make more money by investing in my own company than by putting it in a 401(k)."

When it comes to retirement planning for business owners, the driving concern tends to be financial independence — "the freedom to step away and spend more time with the family," said Marc V. Campanaro, senior wealth planning strategist at Wells Fargo Private Bank.

"Clients are looking at the income tax laws, and they see they are going to be paying more taxes: higher tax rates, fewer deductions," he said. For business owners, "A hot topic is figuring out how to save more money on a tax-advantaged basis," which means the 401(k) and other tax-deferred retirement strategies.

John T. Garone, regional director at Wells Fargo Private Bank, said business owners tell him "'We're successful — but the taxes are killing me. I just paid my taxes, and my accountant told me in 2013, I'll probably be paying more.'" Tax-deferred retirement plans like the 401(k) can be a vehicle for reducing current taxes, Garone said. "It's really not a question of retirement; it's a question of 'How can I manage my business and its cash flow on a more effective basis?'"

John Garone, regional director, The Private Bank, Wells Fargo.
John Garone, regional director, The Private Bank, Wells Fargo. - ()

Garone said he's advising business owners not to depend entirely on their business to fund their retirement. "We ask them, 'What are you doing to create the financial independence that you seek?' We don't want to wait for the company to be sold to fund their retirement, because it might not happen that way."

Steven Greenbaum is president of Altigro Pension Services, in Fairfield, which advises about 1,000 companies on their pension and 401(k) plans, including many under-50 employers. He said small employers are much less likely to offer a 401(k), and he blamed a lack of awareness of both decreasing administrative costs and that employers don't have to match employee contributions.

Among small employers, "the percentage that don't have (a 401(k)) is huge — this is the final frontier."

Greenbaum said it generally costs the employer about $1,500 to set up a plan, which the company gets back in tax credits over three years. There are also annual administrative costs: Greenbaum said his company charges about $1,500 per year, plus a fee of between $20 and $25 per eligible employee. Some employers pay those expenses, while others pass them on to the employees who participate in the plan.

"The 401(k) plan has to be sold," to employers, Greenbaum said. "Someone who knows what they are talking about needs to sit down with you and answer your questions."

Given the decades-long decline of the traditional employer-funded pension, "the 401(k) is the only viable savings vehicle for most Americans," Greenbaum said. When he leads workplace enrollment seminars, "young people say to me, 'I'm not counting on Social Security — it's not going to be there when I retire.' And I say, 'If you really believe that, you had better start saving — and if you don't put it in your 401(k) plan, where will you put it?' Right now, it's the only game in town."

Experts said some employers are put off by the complex IRS rules aimed at preventing the 401(k) plan from being "top-heavy," meaning it disproportionately benefits the owners and highest-paid executives. If an analysis finds that the plan is top-heavy, owners and the higher-paid employees may have to contribute less, or not at all. There are IRS "safe harbors" to get around this problem: for example, if the employer contributes 3 percent of each employee's wages to the 401(k), the owners and high-paid employees can make the maximum contribution to the plan.

Steve Wescott, a partner in Sterling Financial Planning, in Sparta, said some employers make the 3 percent contribution to the employee's 401(k) in lieu of a salary increase, which gets a mixed reception. "The younger employees want the money in their pocket, but those over 35 are thinking about what they will have for their future," he said.

Alan Rosenzweig, a partner in the Sobel accounting and consulting firm, said he works with a number of small employers who offer tax-deferred profit sharing plans to their employees, which is similar to a 401(k). And while the 401(k) is less common among employers with fewer than 50 workers, the company size itself isn't the issue: "Some do and some don't — it is really employer by employer."

Attorney Jay Freireich, of Brach Eichler, said employers are motivated to launch a 401(k) by the opportunity to save for their own retirement: in 2013, the maximum contribution is $17,500 — or $23,000 for those older than 50. But he said employers don't think the 401(k) is a popular benefit.

"Some believe that employees don't appreciate money that they can't see and touch, and that it is kind of wasted on them," Freireich said. "If you tell employees they are getting a 2 percent actual raise, they are thrilled, but tell them they are getting 3 percent and it's in their retirement plan, and they're not very happy."

Richard Pasick, a financial planner with C&A Financial Group, in Manasquan, said he urges his clients to confront the need for "longevity planning — having enough income to last throughout your lifetime."

"The real challenge is if you live 20, 25, 35 years into retirement," he said. "Your money has to last over decades, while inflation and taxes are beating you down."

John Campbell is greater New Jersey regional director for Morgan Stanley Wealth Management, whose recent survey of wealthy investors found only 23 percent of retired New Jersey investors said their investment portfolios are performing better than they expected. He said small-business owners are a significant portion of the firm's New Jersey clients and, like other investors, they were hurt by the decline in housing values after 2008.

"During the housing boom, people tended to look at the value of their house and their equity in their house as a great stake toward retirement, so they tended to spend more money," Campbell said.

For business owners nearing retirement age, "We look at how much the business is worth and how much income they believe they will need in retirement," he said. If there's a shortfall, "we help put a budget in place that makes sense," like selling assets or planning to work longer and retire later. "But you can't just ratchet up risk to meet an unrealistic income projection that you would like to have in retirement," Campbell said.

E-mail to: beth@njbiz.com
On Twitter: @bethfitzgerald8

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Beth Fitzgerald

Beth Fitzgerald

Beth Fitzgerald reports on health care, small business and higher education. She joined NJBIZ in 2008 after a 34-year career at the Star-Ledger and has been reporting on business in New Jersey since 1978. Her email is beth@njbiz.com and she is @bethfitzgerald8 on Twitter.

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