Reward Workers By Starting 401(K) Retirement Savings Plan

A firm’s most important, off-balance sheet assets are its employees.

Most entrepreneurs take great pains to nurture and care for this precious resource. While intangible support through job enrichment and performance recognition can go a long way in this regard, tangible considerations like salary, benefits, and material perks are equally important.

For small, struggling companies, the range of affordable, tangible rewards is limited and they must be selected carefully.

Q: My firm is three years old, has just become profitable, and has 14 valuable employees who presently enjoy no benefits beyond group health insurance. What’s the next most productive, cost-effective benefit I should consider?

A: At this point, a 401(k) retirement savings plan probably will do more for you and your employees than any other benefit with similar cost parameters. As a retirement vehicle, a 401(k) will give your employees a measure of security and will demonstrate that you’re all in this venture for the long haul.

Importantly, in the early years, if your firm is unable to contribute to the plan, your employees can still build a retirement program with tax deferred contributions of their own. When financial circumstances permit, your firm can elect to match some or all of their individual contributions.

A recent survey by the Employee Benefits Research Institute found that more than 70 percent of queried employees would rather have their employer put funds into a retirement plan than distribute the money as wages. Remember, the owner of a business can participate in such a plan as well.

There is another significant benefit for the young, growing firm. Plan documents can be structured so that company contributions to the plan can be directly related to the profitability of the firm.

The formula by which an employer matches the contributions of his employees can be determined by the profit performance of the company. Under one approach, only the workers who contribute to the plan become beneficiaries of the employer’s success. Another version, more akin to a traditional profitsharing plan, requires that all workers participate in the profit distribution, without regard for their personal contributions.

Profit-based design features of 401(k) retirement plans allow your workers to become “virtual owners” since they are entitled to a piece of the action. That can be important at the stage your company’s at. A contributory retirement benefit tied to company profitability can give your employees the incentive to go that extra mile for you.

A growing number of insurance, securities and financial institutions are offering 401(k) plans today. Usually there’s a set-up fee in addition to an annual administration charge and per-employee fee. Fierce competition among providers has kept these costs reasonable for the small employer.

There probably isn’t a better bang for the benefit buck. But make sure the plan format you choose gives you the option to make discretionary contributions that can be related to the profitability of your firm.

Also, I’d suggest that you select a format that takes advantage of ERISA Section 404(c) which went into effect last year. This provision will give your employees a degree of control over investment decisions and will relieve you of most of the liability for investments that perform “less than ideally.”

Q: My company needs some additional working capital and I’ve had expressions of interest from several bank lending officers. Any suggestions about what I should look for as part of the loan package?

A: Try to find a bank that uses a team approach to servicing your account. Your goal should be to build a long-term relationship with an institution that really wants to get to know you, your firm, and it strengths and vulnerabilities. There’s quite a bit of turnover in lending departments, so get known by more than one officer.

Make sure the bank is willing to structure a package of loan vehicles that is custom-tailored to your needs. To start, a modest term loan coupled with inventory and receivable financing should be deigned to meet your immediate and intermediate needs as well as your available cash flow.

While the bank will surely want your personal guarantee, try to avoid having your spouse co-sign. If she is not required to sign, make sure that your home is jointly owned by both of you.

Also, check to see that the bank attains a defensible credit interest in your business assets. If the “worst” happens, and the bank is forced to move on your business assets, you want them to be able to get them without interference from other unsecured creditors. If the bank has to get in line with other business creditors, it will be more inclined to act on your signature, thus putting your personal assets in jeopardy.

Most importantly, all assurances, promises and commitments should be in writing and checked by your attorney before any agreement is executed. As my ol’ uncle Ollie used to say: “Personal chemistry is everything, but it works better when you have the formula written down.”

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