Shopping for Retirement
It's not easy to find retirement plans suitable for entrepreneurial companies. Ask Brooke Dickinson, the president of Ditco, aKent, Wash., company that designs and manufactures electronic control systems for industrial equipment. Dickinson, whosecompany employs 15 people and logged revenues of $1.2 million in 1998, investigated 401(k)s and other retirement plans forabout a decade before finding the right companywide plan. She and her husband, Jim Bitondo, Ditco's general manager, wereconvinced that "after health insurance, this was the most meaningful benefit we could provide." But the costs andcomplications kept scaring them off.
"We wanted to go with a 401(k) because we liked the borrowing option and wanted new employees to be able to roll overexisting 401(k) savings into our plan," Dickinson explains. "But we kept running up against a big hurdle, which was thetreatment of so-called highly compensated employees."
In 1998, when Dickinson launched Ditco's plan, those employees were defined as anyone who owns 5% or more of thecompany or earns more than $80,000. Regulations for standard 401(k)s restrict such employees' savings levels in proportionto those of lower-paid employees. Those restrictions, Dickinson says, "would have limited Jim and me to saving less thanwe would have with a regular IRA, which just didn't make sense."
In January 1998, Dickinson and Bitondo finally implemented a retirement plan: a SIMPLE 401(k), which was a fairly newoption at the time. The two liked the SIMPLE 401(k) because it allows anyone in their company to contribute up to $6,000 ayear, regardless of ownership status or salary. The payoff? In early 1999, all but one of Ditco's employees were participatingin the plan.
Although the SIMPLE 401(k) works for Ditco, other companies may need different types of plans. Dan Maul, president ofRetirement Planning Associates, in Kirkland, Wash., offers this advice on how to comparison shop for a retirement planamong insurance companies, mutual fund houses, and other providers:
- Focus on identifying the right kind of plan for your company. "Once you figure out the type of plan that works best andunbundle the services you're shopping for, it's remarkable how quickly everything else falls into place," Maul notes. Don't letyourself get bogged down with figuring out where you should invest your (and your employees') retirement savings, Maulurges. "You'll have millions of investment options. The thing to decide first is which type of plan is right for you."
- Unbundle the services you need. "Companies basically require two types of services: the administrative ones, whichinclude setting up the paperwork, filing taxes, and conducting compliance testing; and the investment services, whichbasically boil down to investing participants' savings," Maul explains. "Plenty of companies will offer to provide bothservices, but it's easier to compare costs and negotiate for lower prices when you've broken them down and shopped themseparately."
- Get tough on investment costs. "You need to compare investment options by breaking them down into three components:transaction costs (or what you'll be charged for buying and selling shares), ongoing operating costs (or the charge forservicing each account), and performance results."