Pondering a 401(k) plan

Small firms should see retirement benefits as an important tool in the recruiting game.

One of the first questions many small-business owners hear from their accountants at tax time is whether they've started or funded a retirement plan. That's a painful topic during a recession.

A company owner worried about cash flow might feel there is no choice but to forgo starting a plan, or, if the business already has one, cutting back or suspending matches to employees' plan contributions.

Small businesses that suspend or reduce matches join a growing list of companies including Fortune 500 members FedEx Corp., UPS Inc., Sprint Nextel Corp., and Visteon Corp. trying to preserve sagging profits or cut their losses.

Still other companies might be in good financial shape, but are curtailing these benefits because they are concerned about what lies ahead in this recession. Or, they might be shying away from starting a plan, assuming that employees are not interested right now because stocks are down.

People who advise small companies about finances or employment matters generally advocate setting up and funding a retirement plan, even in tough times, because it is good for business. "Especially for a small business, that's becoming an attraction that employees want to have," said Richard G. Rawson, president of Administaff Inc., a Houston company that provides human resources outsourcing. "They want to save for the future."

Retirement plans have been a huge recruitment and retention tool, and cutting these benefits will be painful for staffers. Rawson noted, however, that in this economy, many people are likely to understand. "They're happy to have a job," he said.

Companies continue to start plans despite the recession. Rawson said 78 Administaff small-business customers set up plans in January, compared with 89 a year earlier. And the number of companies starting plans in 2008 rose from the previous year - 755 vs. 719.

If a company really does not have the money to contribute to the plan, it can at least create retirement accounts that employees can fund themselves through contributions deducted from their paychecks.

Americans clearly want to save more: The Commerce Department has reported that the nation's savings rate, as a percentage of after-tax incomes, rose to 2.9 percent in the last three months of 2008, up from 1.2 percent in the third quarter and less than 1 percent a year earlier.

Moreover, Rawson said, "one of the reasons for setting up a plan at this point, with the market so far down, [is] this is a great opportunity for people to be investing."

Of course, there are options besides stocks for retirement plans, so employees who are fearful of the market can still save and get a tax benefit. The simplest retirement plans include savings accounts at banks; more complex 401(k)s typically include a guaranteed-income option that protects a saver's principal. Tax laws provide wiggle room for small businesses that have retirement plans known as SEPs (Simplified Employee Pension) or SIMPLEs (Simplified Employee Pension).

That means 2008 contributions for a corporation do not need to be made until Sept. 15, and a sole proprietor filing a Schedule C along with a 1040 form has until Oct. 15, provided the employer got an automatic extension of the April 15 filing deadline. The IRS has a primer on retirement plans aimed at small companies: Publication 560, "Retirement Plans for Small Businesses." It can be found at www.irs.gov/pub/irs-pdf/p560.pdf.