Small Company, Big Plan

By Rebecca Winters

Janet Lasley has always been a pretty impressive boss. President of Lasley Construction, a home-renovation-and-restoration business she founded 14 years ago in Rocky Hill, N.J., she taught herself sign language to communicate with one of her first employees, who was hearing impaired. When she cracked her spine on the job 12 years ago, Lasley hired two extra workers and managed them from bed. After she recovered, she kept the replacements on and found enough new work to keep everybody busy. In 1995 Lasley took another big step--one that is rare in the world of small construction businesses--to secure the welfare of her employees (there are now 23). She signed them up for a group retirement plan. "I knew talented carpenters who were working into their 60s and 70s not because they wanted to but because they had to," Lasley says. "One of my personal objectives when I became my own boss was to get a plan."

Lasley's action is still unusual, but that may be changing fast. Interest in retirement plans is on the rise among small businesses, largely because of a number of important changes in the business climate. The Federal Government has created a simple retirement plan designed for small businesses, the financial industry has begun to use the Internet to help companies administer their plans, and there is a growing recognition by managers that offering retirement benefits is key to recruiting in a tight labor market.

The trend signals an important sea change in the U.S. Even now, only 1 out of 5 small businesses offers full retirement benefits to employees, while 2 out of 3 workers for large companies enjoy a plan. "Small-business owners don't have the same luxury of time or resources that a big business has," says Aida Alvarez, administrator of the Small Business Administration in Washington. "In the past, it was easier for them to offer higher wages or other benefits instead."

At Fidelity Investments in Marlborough, Mass., it's a record year for sales of retirement products to small businesses. In 1998 Fidelity sold just over 1,000 plans to companies with 100 or fewer employees; this year it is on pace to sell twice that many. "It's no secret to most Americans that neither the government nor the company you work for is going to be there for you in retirement," says Peter Smail, president of Fidelity's Institutional Retirement Services Co. This fall Fidelity will begin offering a cyber version of the traditional 401(k), known as the e401(k). It's a full-service 401(k), in which fixed percentages of employee savings are matched by employers in a tax-deferred investment fund administered by the employer through the Internet. The plan, designed for small businesses, includes online services such as record-keeping reports, account monitoring and retirement-planning tools. Fidelity estimates that its e401(k) plans will cost 25% less yearly than the $2,500-to-$6,500 expense of the standard small-business 401(k)s.

In general, though, it's still difficult to estimate just how much a retirement plan will cost a business, according to the Department of Labor, because of the many variables involved. The department is working on a website, scheduled to go online in October, that will help businesses estimate expenses under various plans.

In addition to the traditional and electronic 401(k)s, small companies are trying a wide range of retirement options, from the simple, newer plans to time-tested profit-sharing arrangements that require the help of a financial professional. An option that became available in 1997 is the SIMPLE (savings incentive match plan for employees of small employers) IRA. The plan, open to any business with 100 or fewer employees, allows employers to match employee contributions by filling out one irs form and setting up an IRA. Another alternative is a SEP (simplified employee pension), which allows only the employers to contribute to an employee IRA but has an easy setup. (For more on each plan, see the chart below.) These new plans are a help, but the process can nonetheless be frustrating for someone trying to understand the options and then administer a plan--all while managing a growing business.

Lasley first signed up her construction company for a 401(k) plan in 1995, when SIMPLE wasn't available. She and her staff bravely struggled through the administrative work and rules that accompany a plan designed for businesses that had whole departments dedicated to payroll and benefits. In the end, she relied on the services of an office manager and an outsourced payroll program to administer the benefit. Last year her staff voted to switch to the SIMPLE. In addition to offering easier administration, Lasley says, the SIMPLE was attractive because it doesn't have strict rules about what percentage of employees must participate or how little they can contribute. This gives smaller employers a flexibility that they often need. "The reality is that it's tough to get a 19-year-old kid to say, 'I'm gonna give up my salary now so in 40 years I can enjoy it,'" says Lasley. "We try, but this way we don't have to struggle to offer a plan."

In other industries, the challenge isn't persuading employees to contribute; it's keeping up with their demands for even more generous benefits. Keen competition for technical talent convinced Joanne Carthey in 1995 that she needed to offer a 401(k) plan to the 25 employees of her Scottsdale, Ariz., software company, NetPro. "In high tech, if you don't have a plan, your employees just go next door," Carthey says. By 1996, NetPro began offering stock options as a further benefit in order to keep up with its Silicon Valley peers. Employees buy shares in NetPro at a discount, before the company has gone public, and some hope to retire in part on the gains the business will see as it grows. Today even part-timers on the staff of 103 get options. "I want every single employee to be my co-partner," says Carthey. "This way they're invested in the future success of the company." The strategy seems to work. In the software industry, average turnover is nearly 50%; at NetPro, turnover is 18%.

At some companies, interest in the retirement plan has made mutual funds and compounding interest the stuff of everyday water-cooler talk. At Don Shapiro Inc., a 50-year-old family-owned produce wholesaler in Everett, Mass., about half the 50 employees participate in the company's 401(k), established in 1997. "When that quarterly statement comes in, everybody's talking about it," says Karyn Lockhart, a customer-service representative. But for Lockhart the benefit goes beyond building an impressive nest egg. "At the end of the day, it's nice to know the company I work for cares for people enough to see that their future is secure," she says.

While retaining quality staff is a huge part of the appeal of retirement plans for small businesses, there is also the proprietor's need to prepare for his or her own future, which can be tough. Greg Sullivan found that out the hard way. His St. Louis, Mo., software company, G.A. Sullivan, had five employees when he decided to get a SEP in 1992. "It was obvious that I needed to start saving as an individual," says Sullivan, who was in his 30s and had reinvested his savings in his business. A computer programmer by trade, Sullivan thought setting up a plan would be a snap.

Instead, he found he was baffled by the financial language, unsure where to go for advice and uncertain how he would eventually convert to a 401(k) when the company grew to need one. At the same time, Sullivan was expanding his business, hiring an advertising agency, building a sales staff and recruiting technical talent. The pension plan was an added load he didn't need. Sullivan turned to his accountant and insurance agent for advice, then hunkered down with financial literature. "I remember feeling a lot of pain going through the decision-making process," Sullivan says. "I didn't understand the rules. I didn't know the right questions to ask, and I had a business to run."

Less than a year later Sullivan changed to a 401(k), which his company now administers over the Internet. The process wasn't easy, but looking back, Sullivan strongly encourages any small-business owner to take the time and effort he did to find the right plan. "Do it, no matter how painful it is," Sullivan says. "Talk to everybody, and commit yourself to getting it done." Since Sullivan initiated the SEP in 1992, G.A. Sullivan's yearly revenues have grown from less than $900,000 to $21 million, and his staff of five has ballooned to 235. Today the company is no longer a small business. And that's in large part because of the big steps that Sullivan took in the beginning, when his company was small.