Everything you need to know to run your business in today’s economy

: : : : : : : : : : : A MONTHLY GUIDE TO POLICIES,

There’s no doubt that a strong retirement benefi t is a powerful tool for luring and retaining talented and dedicated employees. In fact, it confers a signifi cant edge on small outfi ts, since only 15 percent of companies with fi ve to 99 employees offer “defi ned contribution plans,” as the IRS calls 401(k)s and IRAs.

Of course, given the costs associated with administering such a benefi t and the matching contributions to your employees’ accounts, it’s also a fairly expensive way to keep your people happy. Yes, the government helps defray a signifi cant portion of those expenses. All participants, company owners included, defer taxes on the wages they direct into a defi ned contribution plan. And your company can deduct its matching contributions and plan expenses. Still, it’s well worth your time to be sure that any retirement plan you set up makes the most of your investment.

The pages that follow will help. They contain a step-by-step guide to picking a plan, a primer on the fees you can expect to pay, questions to ask a prospective investment adviser, and resources for further inquiry. Please read on.

LAUNCH YOURCOMPANY’S401(k) PLAN

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LAUNCH YOUR COMPANY’S 401(k) PLAN : : : : : : : : :

PICKING A PLAN 1. Evaluate Your NeedsIf you want to encourage your employ-ees to contribute to their retirement, there are two options: a so-called SIMPLE (savings incentive match plan for employees) or a full-blown 401(k). Which you choose depends on how much your company can a! ord to match, how much you intend to save for yourself, and how likely your em-ployees are to participate. " e last of these, in fact, might dictate the choice—and, according to St. Louis–based retirement-plan consultant Pat-rick Shelton, “If someone is 30 years old or younger or makes $30,000 or less per year, they typically don’t participate in retirement plans.”

The SIMPLE Option For businesses with up to 100 employees, SIMPLE IRAs and the similar SIMPLE 401(k)s are, indeed, fairly simple. You Þ ll out a two-page IRS form, pay a small fee (at Fidelity Investments, for example, the largest administrator of SIMPLE and 401(k) plans, it’s $350 plus $25 per participant), and that’s about it. In most cases, participants (including employ-ers) can put away up to $10,500 in a SIMPLE IRA and $10,500 in a SIMPLE 401(k) in 2008. (In both instances these are pretax dollars.) " e company must match at least either 3 percent of the salaries of employees who participate in the plan or 2 percent of the wages of all eligible employees, including those who do not participate—and this employer match is immediately fully vested. Brokerages and investment companies o! er SIMPLEs—judge them on fees, breadth of potential investments, and customer service.

The 401(k) Option A 401(k), by contrast, generates a lot of paperwork, costs several thousand dollars per year, and requires more thought. But partici-pants can put away up to $15,500 per year (again, these are pretax dollars),

provided the company makes a slightly more generous match than the SIMPLE requires. (If you don’t make these so-called safe-harbor matches, the amount owners can defer is limited by how much employees elect to defer.) On the other hand, 401(k)s without safe-harbor matches require no employer match at all, a potential plus for early-stage companies. (And you can always revisit the matter later.)

e Rule of umb: Generally, a full 401(k) makes sense once a company reaches a payroll of about $500,000—or, alternatively, when you and your participating employees combined contribute at least $20,000 in salary deferrals and company matching.

2. Get Professional AdviceA 401(k) is not something you want to tackle on your own. Two kinds of guidance are in order: investment

advice and plan design and manage-ment. Some professionals and investment companies perform both of these services. Others specialize, in which case you’re opting for an unbundled, or open architecture, plan.

The Package Deal Mutual fund companies, banks, and insurers o! er bundled plans that allow harried entre-preneurs to quickly put the whole issue out of mind. You might not even need to cut a check, because the fees o# en come out of the plan’s assets. " at doesn’t necessarily mean bundled plans are cheaper—though it can be hard to

tell, because the fees are o# en buried (see “Figuring Out the Fees” on the following page). One thing you gener-ally won’t get in a bundled package: speciÞ c recommendations about which funds to o! er. Also note that, for better or worse, bundled plans typically give you fewer investment choices.

À La Carte Services Unbundled plans, which o# en let you deal locally with other small businesses, tend to empha-size service—in particular, custom-designed plans and investment advice. But it takes a little more work to go this route. First, you will need a third-party administrator, who creates the plan and manages it. " ese consultants can design a plan that will not only save a company money but also ensure that the owner gets the maximum allowable beneÞ t from the plan. You will also need an independent registered invest-ment adviser, who can negotiate the thicket of fund companies and indi-

vidual funds. Some advisers are reluctant to take on small plans, but with patience you will Þ nd one (see “Resources” on the following page).

What to Expect:Whichever option you go with, you should get a letter that speciÞ es what the adviser is expected to deliver—a projection of how many em-ployees will begin contributing to their retirement and how much money they will contribute, as well as goals for in-vestment returns and fees—and how much it’s all going to cost. At year’s end, expect a letter that explains what the adviser did to meet these goals.

What about individual stocks and bonds? Not a good idea. Educating employees about all those options is all but impossible given the complexities of the market.

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3 QUESTIONS TO ASK AN INVESTMENT ADVISER

ResourcesFor information from 401(k) basics to small-biz-specifi c issues, check out 401khelpcenter.com or benefi tslink.com.

For a searchable database of fi nancial advisers accredited by the Center for Fiduciary Studies, go to fi 360.com.

The National Association of Personal Financial Advisors certifi es fee-only fi nancial professionals. Search for members at napfa.org.

Financial Service Standards certifi es advisers with the Professional Plan Consultant designation. Search for PPCs at 401kservicesolution.com.

Will you take fi duciary responsibility for the plan?A 401(k) plan is set up for the exclusive benefi t of participants, who may seek redress if the plan isn’t suited to their investment needs, doesn’t provide the proper guidance, or performs poorly rela-tive to the market. If your adviser doesn’t assume responsibility, then the plan’s sponsor—namely your company and its offi cers—is at greater risk of being held liable. In which case, fi nd another adviser.

Do you take compensation from an investment company?A sales commission from a plan provider may cloud your invest-ment adviser’s judgment; he or she might steer you toward a provider that may or may not be the best match for your company.

Are you certifi ed by a professional organization?It’s no guarantee, but hiring an adviser who has been vetted by a standard-setting organiza-tion (see “Resources,” below) increases the odds that he or she will follow best practices in maintaining your plan’s integrity.

A basic 401(k) plan ought to begin with a basket of funds, including:

n A large-cap value fundn A large-cap blend fundn A large-cap growth fundn A mid-cap blend fundn A small-cap blend fundn At least one bond fundn A fi xed income fund, such

as a money market n An international fundn Three to fi ve asset-allocation

funds targeted to employee retirement dates

What about individual stocks and bonds? Not a good idea. A plan must o! er prudent investment choices, and educating participants about all those options is all but impossible given the complexities of the market. If you or your em ployees want to bet on individual companies, do it outside your retirement plan.

FIGURING OUT THE FEES Fees for 401(k)s are a hot issue right now—participants are suing, regulators are tinkering with the rules, and Congress is considering a rewrite. It’s a complex topic, but suffi ce it to say: Don’t believe it if an adviser says his services cost nothing—you’re paying for it, one way or another. Here’s a breakdown of the fees to watch for.

MUTUAL FUND FEES Hidden fees are especially common among fund companies competing in the small-business market. They embed administrative fees in the fund expense, for instance. When insurers wrap funds in annuities, they add features—including a guaranteed income option and an easy annuity rollover—but often layer extra fees on top of the usual expenses. And brokers collect commissions, which fund companies recover by selling a share class with higher expense ratios.

UP-FRONT VS. EMBEDDED FEES Retirement-plan consultant Shelton urges clients to avoid embedded costs and arrange up-front fees when possible. Company owners ultimately pay that expense, either as the plan’s sponsors or as its leading participants; better to take it as a tax deduction than to have it eat away at investment returns.

ADVISER AND ADMINISTRATOR FEES Investment advisers generally charge fees as a percentage of plan assets; fi gure a quarter of a percent to 1 percent of assets, depending on the services offered, and more if they’re taking on an administrative role. Third-party administrators typically charge a base fee of about $1,000 plus $25 to $35 per participant. Sometimes those fees are partially offset by commissions paid by the fund companies to the plan administrators.

3. Pick a Fund PlatformVirtually every fund company, bank, or brokerage in the 401(k) business can o! er the basic mutual funds any deÞ ned contribution plan should have. An independent investment ad-viser will compare fund performance, of course, but he or she will also give weight to other ways in which the fund will serve your business. One key factor should be fees, which vary widely and can be quite large. Among the other considerations: Can the vendor conduct educational seminars in multiple locations or provide materials in Spanish?

" ere are many types of investment vehicles for a 401(k), but mutual funds are by far the most popular. Insurance brokers o# en sell funds packaged within what’s called a group variable annuity contract. As the market consolidates, the menu of o! erings is looking ever more similar from company to company.

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This information is not intended as legal advice and may not be used as such. Nor does this information reflect a full andexhaustive explanation of all relevant statutes and standards. You should seek the advice of your own legal counsel on any legal compliance questions.