On Retirement

Tackling the challenge of 401(k)s for small businesses

A new plan design and technology aims to expand access, reduce costs

Jun 22, 2015 @ 12:01 am

By Mary Beth Franklin

One of the biggest challenges to retirement savings in America is having access to a 401(k) or similar savings plan at work. Workers who have a workplace-based savings plan are four times more likely to have saved for retirement compared to those who don't, according to the Employee Benefits Research Institute's 2015 Retirement Confidence Survey.

Many employees who don't have access to a 401(k) work for small businesses that don't have the money or the staff resources to sponsor a retirement savings plan. In fact, only 14% of small businesses provide a 401(k) versus 89% of large companies, meaning about 78 million Americans don't have an employer-sponsored retirement plan, according to EBRI.

But thanks to technological advancements and a plan design inspired by the latest behavioral finance research, a 401(k) plan is now within the reach of a local hair salon, small manufacturing firm or start-up tech company. A new company based in San Francisco, ForUsAll, Monday announced the launch of a next-generation 401(k) plan specifically designed for small businesses and their employees.

6% DEFERRAL RATE

The ForUsAll plan automatically enrolls employees at a 6% salary deferral rate (double the typical initial contribution rate) with an automatic escalation of 1% per year up to the federal maximum of 15%. Employees are automatically defaulted into a Vanguard target date fund appropriate for their age but can customize their investments from a broad selection of Vanguard index funds.

All-in costs for employees are 0.5% — on par with the average 401(k) fees paid by employees at Fortune 500 companies and a far cry from the typical 1.3% or more paid by employees of small companies. There is no set-up fee and employers pay $94 per month for up to 10 employees.

Independent financial advisers and registered investment advisers shouldn't view this as a threat but an opportunity, said David Ramirez, co-founder and chief investment officer of ForUsAll.

“We have been very fortunate to receive referrals from private wealth managers and 401(k) advisers who often take on small 401(k) plans to serve their high net worth clients,” Mr. Ramirez said in a telephone interview. But that good-will gesture can also involve a lot more work and a lot less profit than many of those advisers anticipate.

ALLAYING FEARS

“We provide a turnkey solution for those small business clients, and we don't offer a competing wealth management services,” Mr. Ramirez said, allaying any fears that a financial adviser might lose business to the competing 401(k) plan adviser who might attract the client's private assets.

The ForUsAll 401(k) plan can minimize employer burdens by linking cloud-based payroll systems to automatically deduct 401(k) contributions and enroll new employees when eligible. It also handles plan administration including signing and submitting all retirement-related government forms.

From the employees' standpoint, they get access to an interactive communication program nicknamed Dave, which has the soothing voice of Hal, the computer featured in the film “2001: A Space Odyssey” with none of the malevolent motives. Dave can explain the features of the 401(k) plan and allow clients to make changes in their contribution rate, turn the auto escalation feature on or off, switch from a traditional to Roth 401(k) or customize their investment choices via their smart phone.

The folks at ForUsAll must be doing something right. Since launching the company at the start of 2015, employee participation rates at client firms far exceed industry averages. Although company officials won't disclose the number of their clients, they report a 90% participation rate compared with the industry average of 74% and an average savings rate of 10%, about twice that of the typical 401(k) participant.

Serial entrepreneur Jeff Freund, chief executive officer of Akoonu, a San Francisco-based technology start-up, is one of ForUsAll's first clients.

7 MINUTES

“When I went through all these benefit decisions with the first company that I founded 15 years ago, it was a lot of work,” Mr. Freund said. “This time around, the world has changed and the options that small companies have are much more appropriate for them.” Mr. Freund added that he watched one of his six employees interact with “Dave” and it took just seven minutes from beginning to end.

Nick Culbertson, co-founder of Protensus, a Baltimore-based firm that helps hospitals protect patient privacy, wanted a rich but affordable benefits package to attract a top team of scientists and engineers.

“We went to a local insurance broker to get health, vision and dental benefits, but when we asked about a 401(k), we were told it would cost a lot of money,” Mr. Culbertson said. “But then we found ForUsAll, and we are able to keep our costs low while offering competitive retirement benefits.”

(Questions about Social Security? Find the answers in my ebook.)

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