You've probably already heard that most Americans are radically unprepared for retirement, failing to save anywhere near enough to maintain a decent standard of living in their golden years. Who's to blame? Individual savers obviously share a some responsibility. Or you could point the finger at the stock market, but according to one law professor, there's also something you could do to help.
As a business owner, if you're offering your employees a retirement plan, it's probably pretty lousy, University of Connecticut School law professor James Kwak wrote recently on the blog Baseline Scenario recently. Most plans are so bad, in fact, that employees could theoretically sue and win.
In a recent law review article, Kwak explains in the post, he noted that "most defined-contribution retirement plans (of which the 401(k) is the most prominent example) are stocked with expensive, actively managed mutual funds that, depending on your viewpoint, either (a) logically cannot beat the market on an expected, risk-adjusted basis or (b) overwhelmingly fail to beat the market on a risk-adjusted basis."
That's not just bad investing, it's also potentially against the law. He argues that offering these high-cost, under-performing options, "violates the existing fiduciary duty of employers and plan trustees to invest participants’ money prudently." In other words, you're wasting your employees money and they could theoretically sue you over it.
Now, are these lawsuits actually likely to occur? Probably not. Although there are cases brought against 401(k) plans, they generally involve large companies with deep pockets. Furthermore, Kwak doubts that many courts would find an employer liable simply for offering expensive, poorly performing investment options in its plan without the Department of Labor first clarifying its guidelines. But that doesn't mean his research has nothing to offer business owners except food for thought.
In an email, Kwak explained to Inc. that there are simple steps employers who don't want to waste their employees' money can take to make sure they're offering sensible retirement plan options.
"401(k) plans can be expensive to set up and administer," Kwak noted, before offering an option that solves both the problem of wasteful plans and reduces the cost for small business owners.
"If a small business owner wants to set up a retirement savings plan for employees, one option is the Simple IRA. A Simple IRA allows employees to make elective contributions up to $12,000 per year (in 2013), with taxes deferred until retirement. The employer must make contributions (either matching employee contributions up to 3 percent of salary, or contributing 2 percent of salary regardless of whether the employee contributes), so this does increase the employer's costs modestly, but employer contributions are deductible business expenses. If you set up a Simple IRA with Vanguard, for example, your employees can choose from Vanguard's low-cost mutual funds as investment options; the only other fee anyone pays is $25 per mutual fund per year," he explained.
If you're dead set on a 401(k), payroll service providers can often help you out with setting up a plan, but "you should look carefully at the administrative fees and at the investment options that are available," he warns, cautioning that "401(k) plans themselves can be expensive, and you have to think about whether they are worth the cost."
For more insights, check out the blog where Kwak and several other experts write regularly about these and other economics and policy issues.
When's the last time you thought about the retirement plans you're offering your team?