Often new regulations have unintended results. With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, businesses have a litany of new requirements to maintain their company’s 401(k), profit sharing or other qualified retirement plan. Just like the song goes, “you got to know when to hold ‘em know when to fold ‘em”. Law makers may not have intended this, but for some, maybe it’s time to fold. Are you one of these employers?
The intent behind the reform that drove passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act had several motivators concerning company retirement plans. Law makers were attempting to create clarity of all fees being charged to participants, clarity of fiduciary responsibilities and clarity of underlying investment products. Noble as these efforts are, these new regulations that mandate more disclosure and responsibility will burden employers and that translates into more time and expense.
So who needs to consider folding? The new retirement plan regulations do favor and protect employees, and for the most part employers will tolerate the change and move on. However, there are some 401(k)’s, profit sharing plans and other qualified retirement plans that are employee only plans. Primarily these are retirement plans where the employer makes little or no contribution to the plan. Employers can be reluctant to terminate non-contributory plans because they do offer employees a way to save on their own and can be a recruiting tool. No retirement plan available at all can be a disincentive to prospective employees.
But there is an alternative that may be a better fit for some. . . . such as a payroll deducted IRA. I am not recommending a particular type of investment. A payroll deducted IRA is a traditional IRA. It has the same contribution and deduction limits. The only difference is that the employer deducts the contributions from the employee’s income and forwards the money to the respective IRA plan.
Payroll deducted IRA’s are not ERISA plans. That means that the employer does not have the same fiduciary responsibilities of a regular ERISA retirement plan like a 401(k). However it would be in the best interest of the employer to have a selection process that justifies the merit of the plan and the provider selected. It would be advisable to select a vendor that has a payroll process in place. If a vendor does not have business processing systems in place to accommodate payroll deducted IRA’s, it could end up being more of an administrative burden than the regular qualified plan.
There are pros and cons to payroll deducted IRA’s versus regular qualified plans. For example qualified plans can allow loans where IRA’s cannot. However payroll deducted IRA’s have no discrimination testing requirements. That means less administration and cost. This short blog is to let you know that there are alternatives and to encourage you to NOT just stop saving for retirement. Remember that in today’s society fewer and fewer employers provide a complete retirement pension. It’s up to the employees to plan for their futures. Employers that can help employees save for their future will create favored places to work. The payroll deducted IRA is a low cost alternative to help employers help their employees.
Securities offered through Triad Advisors, Inc. Member FINRA, SIPC
