Surveys of small business owners have consistently shown cost to be a significant impediment to the adoption of a retirement plan for employees, and the SECURE Act includes a massive increase in a tax credit for start-ups. We asked NAPA-Net readers how much impact that might have.
Well, first off, a solid majority – 85% – said that SECURE Act implications was the item that a solid majority (85%) said would top the agenda for Q1 reviews – outpacing an investment review (68%), education plan (45%) and the markets (39%).
What It (Might) Mean
Remember that, under SECURE, the amount of the tax credit is now capped at $250 times the number of NHCEs eligible to participate in the plan, up to a $5,000 annual maximum (but never less than $500), although, as with prior law, the credit is still limited to 50% of the start-up costs. Oh – and “start up” costs include ongoing administrative costs!
Moreover, if the new plan automatically enrolls employees into the plan on a uniform basis (but at no minimum rate), the employer will get an additional annual credit for start-up costs of $500 per year. And all of this is effective Jan. 1, 2020. Yes, effective for new plans beginning now (for more on this, see Instant Analysis: Small Plan Start-Up Tax Credit: 401(k) Plans Half-Off (or Better) Beginning Jan. 1).
As for the impact of the SECURE Act’s significantly expanded tax credit, a majority (57%) thought it would have “some” impact, though half that number opined that it “probably won’t have much impact.” On the other hand, 1 in 10 thought it would have a “huge” impact on new plan start-ups, while the rest (4%) though that while it might encourage more firms/advisors to sell in that market, they thought it might not ultimately impact the number of new plans.
“We work with a fair amount of start-up plans,” explained one reader, who went on to note that “the set up cost has never been brought up as an issue. It’s the ongoing admin and match cost that usually prevents the client from getting started.”
“Start-up costs are minimal to begin with, and probably aren’t the reason an employer is avoiding being a plan sponsor,” commented another reader. “It’s the ongoing workload and direct and indirect costs and potential liability that turns them off to being a plan sponsor.”
Yet another noted that “there is reluctance to start up 401k plans. It is simply the cost and the extra work involved.”
“I believe that the primary obstacle has been the administrative burden and fiduciary liability, as much or more than the costs associated with sponsoring a plan.”
“The start-up costs are only one piece of the puzzle and although the tax credit will help, I think in the small market plans are ‘sold’ not bought and the ROI for an advisor or broker is pretty small,” observed another.
“A tax credit won’t be a driver of new plans per se,” noted another, “but will be considered a nice bonus for those that do.”
“I think it will push some of those on the fence into doing it.”
“I only say that it probably won’t have much impact unless advisors can the lead and get the word out to small business owners that a credit is available” (hint, hint).
“We believe it will help sway some plan sponsors to the 401(k) instead of the Simple plans as similar sponsors have chosen in the past,” noted another.
“For an employer that is already contemplating the adoption of a Plan, this will tip it into the direction of choosing to adopt a plan.”
“I think every small business would like to offer some type of retirement plan – -especially a 401k. The SIMPLE Plans, a nice niche but difficult from a service standpoint, weren’t great – but this credit will leapfrog the 401k over the SIMPLEs,” opined one reader.
“In my experience, this will affect the number of new plans but will take some time for interpretation and implementation. NAPA will help the education but it takes time to get to all of us. I think the timing of the implementation of plans will be a bigger impact.”
“In CA especially with the new CalSavers act where employers with over 100 employees need to choose a retirement solution for their employees or the state will choose for them, this is significantly more impactful,” noted another reader.
“This will be especially impactful in states like California where CalSavers legislation is almost forcing companies without a plan to start one,” echoed another.
“On the very small plans, recordkeeper cost, which is typically borne by the Plan itself, isn't impacted by this credit. Still it will help offset what is often the largest single start-up cost when using a TPA, which is the Plan document.”
However, another reader commented that “If we as an industry get this right, it could have a huge impact. We need to make the startup plan business efficient for everyone involved in order to get retirement plans in the hands of all workers.”
Or, as another reader noted, “If communicated well, this is a game changer!”
Out of ‘Focus’?
Perhaps not surprisingly, those who currently focus on start-ups saw things a bit differently than those outside that focus. While only about a fifth of this week’s respondents said they focused on that specific segment, nearly 6 in 10 (58%) said that while they didn’t focus on start-ups, but did have some in their “book.” As one reader noted, “not necessarily focused on them, but they're part of overall strategy.” The rest, of course, didn’t.
As it turns out, roughly two-thirds (62%) of this week’s respondents had sold between one and five start-ups in the past year, while 13% had done more than 15. Just over 1in 10 (11%) hadn’t done any, with the remaining 13% had sold between 5 and 10.
As one reader explained,“We are fortunate to have great referral sources. Sometimes this means we need to help start-up plans. While not the biggest driver of revenue, philosophically, we do want to see a plan set up correctly from the beginning.”
“We would only focus on start-ups that are willing to pay a flat fee to have the plan managed professionally,” explained one. “Those companies that would only start one based on the tax credits are not likely to be willing to pay to have their plan managed professionally.”
On the other hand, “We don’t turn anyone down,” said another. “Start-ups are priced below our costs. Our way of helping the industry.”
“They are not a target of ours but due to relationships in our area we have earned a name for ourselves as someone that can help get these up and running,” explained another.
“We will do them in certain situations,” said another. “For example, if the client is another client of the firm or the client will be committing to growing their plan correctly.”
“We are just beginning to see employers discuss this,” noted another.
“We will take start-up opportunities when they are referred to us by our Centers of Influence,” noted another.
“I accept startup plans but they’re not my regular target (unless the demographics are right).”
Unfortunately, I started two SIMPLE IRAs last year and currently working on starting two more this week. These are such horrible plans IMHO but cost was the reason when compared to a 401(k). What would REALLY be helpful is if we could use this credit to move from a SIMPLE to a 401(k).”
Or, as another reader commented, “It is really hard to service start-up plans when there is no reasonable compensation back to the advisor.”
Change ‘Parse’?
As for how (if?) the SECURE Act provisions might change things – well it didn’t seem to be a game-changer right out of the block, but a healthy plurality (41%) were “keeping an open mind.” As for the rest:
24% - No, not currently interested, and not enough here to change that.
20% - No, I’m already focused on start-up plans.
11% - Yes, SECURE is going to make a big difference in my focus.
4% - Yes, I was focused on start-ups, but now I’m rethinking that focus.
As for comments on that interest, here’s a (mostly positive/optimistic) flavor:
I will continue to pursue the right startup – i.e. for the relationship for a COI, or a plan that has promise for future growth. CalSavers in California has created the market for startups, not the SECURE Act.
Only if we as an organization end up with a solid PEP strategy.
New focus is on micro to SMID vs Mid to Mega. This just helps solidify and earlier decision on focus going forward.
I think there is a lot of opportunity for start-up when owners understand the benefits, tax savings, and liability protection.
This is an incentive to approach companies that currently only have SIMPLE IRAs or no retirement plan to give them a more affordable way to provide employer-sponsored plans.
We are looking at the MEP world with and working with our partners to identify how we will move forward in the smaller market space.
Will focus on Open MEPs and association MEPs.
I don’t focus on start-ups but I will take them on. I’m still not going to seek them out.
I’ve been invoicing sponsors for start-up plans. This simply makes that conversation “easier.”
Start-ups combined with PEP legislation will make this a more feasible market place to service.
Previously, I didn’t really focus on start-up as the cost was detrimental and I didn’t like SIMPLE Plans. But this will definitely let me offer a new service as it arises.
We will be adding the credit to our proposals so they can see the impact. Very happy about it.
Vary ‘Able’
And then, acknowledging that many factors/variables come into play, we asked readers what their sense of the cost (to a plan sponsor) of a start-up plan for 50-75 workers would be in the first year. As it turns out, their responses were about as varied as those plans are likely to be:
28% - $3,000-$5,000
22% - $5,000-$7,500
20% - $7,500-$10,000
14% - $1,000-$3,000
9% - More than $10,000
6% - I’ve no earthly idea/less than $1,000
As for those variables…
“I’m including an ERISA attorney drafted plan document, not a recordkeeper or TPA provided document.”
“Depending on if the plan is bundled, most RKs or Payroll/RKs have some hard-dollar bill that’s involved. Depending on the contributions involved there is additional asset-based fees and investment expenses that will put them at that level.”
“Depends on provider fees, advisors fee and investment management fees.”
“Above is RK cost. As an advisor I charge an advisory fee of $10k-$25k on a start-up plan because I charge based off services provided NOT assets. I charge many start-up plans more than I charge for a $10M plan because it is MORE work and my clients are willing to pay for what they value. This allows me to provide clients with the service they deserve and puts revenue and profitability of a start-up plan on par with other clients so they don’t get ignored. If a client is not willing to pay my fee then it is not a good fit. Not all clients are good clients. Pricing based off assets doesn't apply to my business model. $0, $10M, & $100M plans many times have the same needs and the only difference is 0’s. In many cases the smaller plans are more time, effort, and work and therefore I charge them more (in some cases double) what I charge a larger plan because it is not about the assets... it is about charging for services provided.”
“It all adds up. Advisor costs. Investment costs. Notice delivery costs. Recordkeeping and administration costs.”
“Set up, first year admin, plus per participant charges…”
“One time doc fee of around $2,000 and 75 times $50/head plus a base fee.”
“$1,600 flat fee. $1,000 advisor. $50 per head.”
“Most employers pay about $2,000 and the participants pay $30-$50 from their account.”
“Document: $2K, advisor: $2K, r/k: $2K, $25/ptp.”
“At least $100/pp.”
“Higher cost to the participants is still an issue. hard to get a decent recordkeeper with $0 start-up assets without higher built-in costs.”
“Depends on the design; if unbundled will definitely be more than 10k, if not it can be lower. Usually if you factor in everything it will total over 10k.”
“Depends upon the platform used, but it is about $2000 plus $30 to $40 per participant.”
“About $4-5k in base admins fees, some asset based fee (between 0.25% and 0.50%) and fee for advisory services.”
“Roughly $5k for recordkeeping and admin plus our fee.”
“Admin/recordkeeping about $2500 and sometimes a TPA about $1500. I would still use R4/A share NAV.”
“Between the actual cost to pay for my services, there is a lot of time spent be the employer to enroll employees, implement the systems to make the plan function properly and lots of hours with owners/executives to determine the best plan design, also picking providers for administration, recordkeeping and financial advice.”
“$5000 minimum for pure fiduciary services. Could be closer to $7500 depending on one-on-one education needs.”
“We figure recordkeeping & admin on a 50-count plan is going to be ~$5K & our firm has a minimum engagement fee of $5K Our experience has been most companies contemplating startups don’t have 50-75 participants though – rather they are 10-ish [or fewer] employees. [Yes SIMPLE IRAs are, theoretically, an option for those companies – but they too have their drawbacks in any number of ways both from a rules & regs standpoint as well as marketplace platform offerings – which are fewer in number & thus generally less competitive in cost and/or flexibility] Even for that 10-person plan typically the fixed cost is going to be nearly $10K combining recordkeeping, admin, and advisory.”
“Cost really varies quite considerably depending on the plan design complexity and technology employed by the plan administrator. My clients opt for the simplest and most inexpensive plan set-up costs. Maybe, plan sponsors will begin opening up their checkbooks more with the larger credit.”
Other Comments
Of course, in addition to all of the comments above – well, we got a lot of comments this week. Here’s a sampling:
“Tax credit will be received well by start-up plans especially since it goes for 3 years.”
“They represent a returnless risk. We have our biggest challenges with our smallest plans.”
“This will definitely create an incentive for advisors to help motivate business owners and key decision makers to want to add a retirement plan for their employees.”
“I think it is a step in the right direction, but as with most things in the qualified plan/retirement plan space it is up to advisors to do the heavy lifting and get the word out.”
“We’re looking forward to the final rule on electronic notice delivery. That will change the game and bring down costs and administrative issues.”
“Anything the can be done to move start-ups forward should be positive. if the government could figure out some way of cutting regulation and intimidation, it would be easier.”
“It is harder to find recordkeepers and custodians who will take start-ups! I’m hoping this will open more of those doors.”
“Even with a tax credit start-up plans tend to be expensive for administration – you may see some movement here if tied to the MEP/PEP strategy.”
“This will help encourage more sponsors to review starting a plan.”
“I wish the vultures would stop coming after the plans I started 30 years ago and nurtured into nice plans now. My sponsors are loyal but, as they retire and bring in new blood, the loyalty is lost. Ah, well. Such is life in the big city. Thanks for asking.”
“SECURE is a significant change that will affect retirement plans for years to come.”
“I still find it surprising that organizations are willing to subsidize small plans to the point where they are run below cost.”
“The expanded credits will definitely help the absolute bottom. Start-up plans usually require some employer spend to offer, so those who have zero budget, this could potentially get them to set up a plan. Unfortunately, a tax credit is delayed gratification, which still doesn’t solve for the cash flow issue of offering a plan. There are many small businesses that just can't spend $500-$2,000 on this as their budgets are already stretched too thin.”
“Allowing a smaller tax credit and up to 100%, versus 50% credit, would have a larger impact.”
“It’s a nice incentive and I think the payroll providers, especially Paychex, will do very well with it. Also, TPAs.”
“Start-up tax credits will definitely help to subsidize costs in early years – but sponsors must get critical mass of assets quickly if they want to help defray plan costs after the tax credits burn off.”
“We expect the tax credit to remove hesitation about setting up a new plan. With the tax credit, employers with lean cash flow may now afford to implement an employee deferrals only 401(k) plan with little to no cost. It is a great way to start some savings.”
“Great job NAPA! in pushing this through. Hopefully this gains some traction for more.”
Thanks to everyone who participated in this week’s NAPA-Net Reader Poll! Don’t forget to keep up with all the SECURE Act updates at our special SECURE resource page: https://www.napa-net.org/industry-intel/hot-topics/secure-act
And congrats to Chris Giovanazzo, who wins the lottery this week – and a free registration to the NAPA 401(k) Summit! Haven’t registered yet? Time’s running out – and today’s the deadline for free kids’ passes! It’s all online at http://napasummit.org.
