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Practice Management

Tips for Small Employers Considering a Retirement Plan

John Iekel 

Why might a small employer not have a retirement plan in place? A retirement services professional offers some insights into what obstacles give them pause and how they may address those concerns.
The most common roadblocks, says  Joni L. Jennings, a Retirement Services Compliance Manager at the brokerage firm Newfront, in “401(k)ology — Small Employer Plans,” are time and cost. She suggests that they may pursue low fees at the expense of assistance that could be helpful. Further, she adds that small employers may lack knowledge and expertise they need to be in compliance with regulations plan sponsors must follow. 

Jennings suggests that small employers may find it helpful to consider a variety of factors and questions. 

Employer Contributions

Is the employer going to make contributions to the plan? If so, it needs to decide what percentage of compensation the employer is willing to contribute. Jennings adds that the employer may consider matching the contributions participating employees make to their accounts as a means to encourage employees to save for their retirement. 

Service Providers

An employer needs to identify the services it will need in providing retirement plan coverage to employees, Jennings says. She observes that what services will be provided, and by whom, depends on the plans that the employer decides to make available to employees. 
Jennings writes that best practices in selecting service providers include: 

  • Exercise great care and due diligence. 
  • Research service providers.
  • Check to see if a potential service provider is being investigated by government agencies, especially the Department of Labor. 
  • Read service agreements with providers. 
  • Carefully note the responsibilities that the employer and the service provider will fulfill. 
  • An employer should read the legal plan documents before signing them and make sure it fully understands its provisions, especially those concerning employer contributions.
  • Understand available internal resources and the amount of assistance needed.  
  • Obtain multiple quotes.
  • Make sure you understand services provided and the fees charged for them.


Fees can vary, based on the size of the service provider, plan provisions, and the number of employees the plan covers Jennings notes, adding that the initial costs associated with a plan can be high. Nonetheless, she argues that an employer should not sacrifice qualify in the process of seeking to keep costs under control. 

Fiduciary Duty 

More is at play than economics, Jennings points out — considering the fees charged for services provided also is a fiduciary duty the employer must keep in mind and discharge. ERISA requires that fiduciaries act with care and diligence, she reminds, and act in the sole interest of the plan participants. “A fiduciary has the duty of care and prudence with respect to the investments offered in the plan and a duty to monitor the service providers, fees, and investment performance on a frequent and regular basis,” she writes.

Jennings argues that it is “vitally important” to have a team in place to make sure that the plan and its operation are in compliance with fiduciary obligations, and notes that investment advisors, third-party administrators, recordkeepers and plan document providers each have distinct parts to play in that process. 

Owner’s Coverage 

The owner of the business also needs to decide how much he or she would like to set aside for their own retirement. 

Jennings writes that there are unique plan design opportunities if (1) the owner is older than the average employee population by more than 10 years, and (2) the employer is willing to commit to employer-funded contributions for the employees. She says that this is usually done by through a combination of a safe-harbor 401(k) plan and a profit-sharing contribution. 

Nondiscrimination Testing

Jennings reminds that it is possible that the plan may be subject to annual nondiscrimination testing, depending on the type of plan the business adopts. Among those tests are the following: 

Actual Deferral Percentage (ADP) Test. If a plan includes 401(k) salary deferrals, they must satisfy the ADP test. A plan may prove nondiscrimination if (1) the average of ADPs for the highly compensated employees (HCEs) is less than or equal to 1.25 times that for the non-highly compensated employees (NCHEs), or (2) the HCE ADP is less than or equal to 2 times or 2% plus the ADP of the NHCEs.

Actual Contribution Percentage (ACP) Test. If a plan includes 401(m) matching contributions, the match must satisfy the ACP test. An ACP is calculated for each participant and is the ratio of the match for the year to annual compensation. The plan may prove non-discrimination if: (1) the average of ACPs for the HCEs is less than or equal to 1.25 times that for the NHCEs, or (2) if the HCE ACP is less than or equal to 2 times or 2% plus the ACP of the NHCEs.

Participation/Coverage Testing. Retirement plans are required to make benefits available to a non-discriminatory group of employees. A plan may demonstrate minimum coverage by satisfying either (1) the 70% ratio percentage test or (2) the average benefits test.

Top Heavy Test. A plan is top-heavy for the current year if (1) the account balances of the key employees are at least 60% of the total plan account balances as of the last day of the previous plan year, or (2) in the case of the first plan year, the last day of the current plan year.