Longtime Pennsylvania resident Ted Benna invented the 401(k) plan more than 35 years ago. Now, he has written a road map to cheaper, less complex retirement-savings plans for small businesses and employers.
The 401(k) has become ubiquitous as a tax-efficient method of retirement planning for American corporate employees. Since 1980, when Benna’s invention debuted, other savings vehicles have become popular, as well, including IRAs (individual retirement accounts) and 529 plans (college savings accounts).
And yet, the 401(k) prevails. Just last week, incoming Securities and Exchange Commission Chairman Walter J. Clayton referred to typical investors as “Mr. and Ms. 401(k),” a nod to the fact that the bulk of Americans sock away savings in corporate 401(k) investment plans, as opposed to having traditional pension plans accumulate retirement savings for them.
What does Benna propose? First of all, cheaper 401(k) plans for small businesses.
“Many small employers haven’t established 401(k)s because they are too expensive, complex, and have too much liability exposure,” he said in an interview from his farm outside Williamsport. Close to half the U.S. private workforce doesn’t have access to employer-sponsored retirement plans.
The new iteration, the Benna 401(k), is an answer to these problems, he said. Last week, he released a guidebook explaining how small-business owners can set up their own Benna 401(k)s while avoiding substantial fees. These days, Benna runs a retirement-consulting firm; the guidebook is available for $18.99 at his website, 401kbenna.com.
“It typically costs $1,000 to $1,500 to set up a 401(k) and $1,000 to $3,000 in annual administrative fees for smaller employers,” Benna estimated. Employees covered by small-business retirement plans typically pay between 1.5 percent and 2.75 percent annually in fees — many of which are hidden and hard to understand.
“The new Benna 401(k) plans do not have any set-up or administrative fees, and your employees will have access to a wide range of investment opportunities for only 0.25 percent or less, a small fraction of typical 401(k) plan packages,” he added.
Benna has drawn up three new retirement-savings models that he contends offer the same benefits as a traditional 401(k). One is best suited for married employees with less than $100,000 of adjusted gross income and single employees with less than $62,000 of adjusted gross income. Another avoids the payroll taxes applicable to employer contributions. The third model allows employees to sock away pretax contributions of up to $12,500 under age 50 and $15,500 over age 50, compared with only $5,500 and $6,500 for some other models.
What’s his goal? Attract more Mr. and Mrs. Small Business into retirement plans for their employees.
“The 401(k) has helped more than 50 million employees save for retirement and to accumulate more than $15 trillion in retirement savings,” he estimated. “The matching employer was a big factor. I knew tax savings alone wasn’t a big enough deal to get broad employee participation.
“My primary goal is to show there are attractive alternatives available to the smallest of employers that don’t cost a lot to set up and maintain.”
Solo 401(k), for the self-employed
Don Riley, chief investment officer at Wiley Group in West Conshohocken, likes solo 401(k)s for many of his investors.
“A lot of my clients leave corporate America and then consult. This plan lets them defer more than others,” he said. “Others have side jobs, like teaching, that generate 1099 income, and these also work well here.”
The plan was designed specifically for sole proprietors with no full-time employees (other than a spouse), such as freelancers or small-business owners. Solo 401(k)s stack up well against options such as SEP IRAs (self-employed plans), Riley said. Take, for example, a self-employed person over 50 making $100,000 in annual income. That person could save the following each year: $49,000 in a solo 401(k), $25,000 in an SEP IRA, $18,500 in a simple IRA, and $6,500 in a Roth IRA.
Some advantages of the solo 401(k), according to Riley:
• Easy set-up: These plans act like traditional 401(k)s. Because of their similarities, many people assume that set-up is difficult and expensive, as it can be with a company setting up and managing a 401(k) for its employees. Solo plans, however, can be created for free at a major custodian, such as a bank or investment broker. There are no filing requirements until the plan has more than $250,000 invested.
• Contribution limits: You can put money into a solo 401(k) as an employer and employee, if you are acting in both capacities. Annual contribution limits are $18,000, or $24,000 for those 50 years and older. On the employer side, the maximum tax-deductible contribution can be up to 25 percent of your compensation. The contribution limit annually totals $54,000 for individuals under age 50. Specific details on contribution amounts can be found at https://www.irs.gov/retirement-plans/one-participant-401k-plans.