Fred Dunayer: Welcome to the SCORE small business success podcast, Been There, Done That. To get free mentoring services as well as to see the wide variety of resources available for small businesses, visit our website at www.score.org or call 1-800-634-0245. Now, here’s your host, Dennis Zink.
Dennis Zink: Episode number 30, retirement planning for small business. Fred Dunayer joins me today in our studio as co-host, SCORE mentor and our audio engineer. Good morning Fred.
Fred Dunayer: Good morning Dennis.
Dennis Zink: Our guest today is TJ Houppert with Paychex. Welcome to Been There, Done That, TJ.
TJ Houppert: Thanks for having me guys.
Dennis Zink: TJ Houppert has been at the corporate headquarters at Paychex in Rochester, New York for over 12 years. TJ has trained over 800 benefits consultants throughout United States under retirement plan design and implementation. As an accredited retirement plan consultant, TJ enjoys educating business clients and their employees on saving for retirement and making retirement dreams come true. TJ, let’s start. You talk with small business owners about saving for retirement and designing a plan that fits their needs. What motivates you to do the job that you do?
TJ HOUPPERT: There’s two sides to this answer. There’s the very factual side of things and then there’s the very personal side for me. Let’s start with the factual. Saving rates for Americans really could use some work. Currently, they are at 5% and they hover right around there for the last year. When we were in that economic downturn, it was actually in the negative. Americans need help saving and I feel like it’s my life’s mission to help us figure out a way to make it easy and systematic. That’s the factual side as we aren’t saving enough, 5%, probably not get at your goals if you’re saving it for retirement and there’s the personal side.
I was a typical young girl and grown up with 2 parents and a brother. When I was very young, my father had a major illness. We thought we were going to lose him. Thankfully, we didn’t. It really changed our family structure where my mom went from being a part-time nurse to being a full-time nurse, the leader of the family and a caregiver for my father. What I saw from afar is incredible strength of course, but then I also saw something over time that led me to where I am today. I saw their diligence in saving. What I learned was it wasn’t so much about how much you save. It’s how long you save it. Even in some of those really rough patches of their lives, they save something. What I’m happy to say today is that both my mom and my dad are enjoying a very comfortable retirement because they set something aside over many years. That motivates me to help spread that message to other people who should be doing something as well.
Dennis Zink: That’s very admirable, TJ. I’m glad your parents are doing well. Many Americans aren’t aware of how much money they actually need in retirement. You mentioned that 5% number, but how do you determine a realistic number for your retirement goal?
TJ HOUPPERT: There’s lots of different ways to figure out what your number truly is. The first thing is take that step. Find something to help you. There’s a lot of retirement calculators that I’ve tried over the years. Some of them are very simple and leave you wondering a little bit about what the rest of the picture is. Then, there are some that are so detailed that you could spend like a day trying to complete them. I have a great suggestion for someone right in the middle that gives you a good idea of what the picture looks like, but doesn’t overwhelm you too much where you want to just give up.
If you go to www.paychex.com and you hover over employee benefits, there is a retirement calculator that will pop up. It’s very easy to use and very user friendly. Enter some very basic information about yourself like age, your current wage, how many years until retirement, and it gives you a real-time answer for how much you would potentially have based on how much you want to save. You can change things. You can manipulate the data to make it better and maybe help you reach your goals and your family’s goals. That’s the first thing I recommend.
Once you know your number, the second thing I recommend is think about what your latte is. There is an author whose name is David Bach. He has a book called The Automatic Millionaire. There’s lots of great things in this book, but one concept really stood out to me and it’s called the latte factor. I will tell you just a quickly a little bit about it. What he is basically saying with the latte factor is that if you were to stop at your favorite coffee shop and get a latte every single day, it’s about $4. If you were to take that $4 latte, skip it and put it in a 401(k) plan instead. Over time, you would become a millionaire. A small sacrifice for the long-term gain of your retirement goal is what he is encouraging people to do. Maybe a latte is really not your thing, but everybody has got something along those lines that they can make a small sacrifice for the long-term gain.
Dennis Zink: It sounds like you have a latte money doing it that way.
Fred Dunayer: I heard somewhere one way of calculating how much you need is to recognize the fact that investment advisers don’t recommend that you take out more than 4% of your nest egg per year once you’re retired. For example, if you have a million dollars, that means you can take out $40,000 a year as part of your income that plus social security, that sort of thing. Do you subscribe to that or is it over simplistic?
TJ HOUPPERT: No. I think that’s a great way to understand where you are at currently because anyone who has money earmarked for retirement if you take a look at that 4%. I’ve also heard 5% so they are both very conservative numbers. You look at that and it comes down to $40,000 a year and you’re currently living on say a hundred. You got to take a look at, “Okay, what am I doing and do I want to live the life of a $40,000 income? Or do I want to figure out a way to make it so that I can get a way closer to what I am currently earning today so that I’m comfortable in retirement?”
Dennis Zink: We are primarily going to talk about the accumulation phase as opposed to spending it at this point. Many of small businesses believe that a 401(k) is a big company benefit. Is that really the case, TJ?
TJ HOUPPERT: It’s not and that’s a common misconception that we see especially in small business America and we see it every single day with the benefits consultants that we have throughout the U.S. The reality is that if you are a business owner, you can have a 401(k) plan. It could be just you starting a business. You could be a freelancer and have a 1099 working for another company or many companies. You have the right to start a 401(k) plan because you’ve taken on that risk as a business owner. It’s very affordable and if you compare it to some of the other retirement vehicles out there, it allows you the most flexibility and savings power too.
Dennis Zink: What’s the most you can sock away in the 401(k)?
TJ HOUPPERT: It changes every year. There’s different numbers every single year. For 2015, we are looking at $18,000 out of your own pocket, but the ability to save up to $52,000 is there if you build in some of the other ways to get money into a 401(k) plan.
Dennis Zink: What are some of those other ways?
TJ HOUPPERT: One of the other things that we commonly hear and it goes to your question is the match, the perception is that it’s required in a 401(k). The reality is that it’s not required. A lot of employers offer it because they too are an employee of that company so they are matching anyone who anties up and puts something into the plan, but they are also matching themselves. Match would be one of the things that helps contribute to that total of up to $52,000 a year. Our typical match just to give you an idea is right around 4%. That’s one way. The third way is through profit sharing, which is a really great option that business owners and even a lot of tax people in the world, CPAs, aren’t aware of. They have the ability at the end of the year to take any money that they want to offset for tax purposes. They can put it into the 401(k) instead. They give some to themselves and maybe some to their employees. There are some creative ways where we can structure it that the business owner would take the majority there.
Dennis Zink: What are the myths that you hear about that are typical from small business owners regarding their retirement plans?
TJ HOUPPERT: A lot of business owners think they have to give the plan to every single one of their employees and that simply is not necessarily the case. It’s always going to be driven based on the tenure of the employees and how many hours they’ve worked. A restaurant is a really great example. The restaurant owner, a few full-time managers and maybe some supervisors who are also full-time. They would have access to the plan. Let’s say we have a bunch of servers, hostess, people that work very minimal hours a week. They have low tenure perhaps. They wouldn’t necessarily have access to the plan. The plan would really truly be about the business owner and those full-time employees that you want to hang around. That is a big thing that business owners tend to think is that it’s for everybody and it’s not necessarily the case.
Dennis Zink: What about heavily compensated employees? How does that fit into the equation?
TJ HOUPPERT: There are some interesting ways to work past highly compensated employees in the 401(k) plan. There’s an option called the safe harbor that allows you to offer a 4% match to your employees. If you offer them that 4% match, we don’t necessarily worry about highly compensated employees being the majority of the plan. It’s like you offer the match, you are off the hook if you want to defer a lot as one of those high earners.
Dennis Zink: TJ, what other advantages are there for the business and for the business owner?
TJ HOUPPERT: I mentioned earlier the ability to profit share. That’s where when you have that discussion at the end of the year with your tax guide. They tell you to offset your income with some expense. A 401(k) plan can be a great option to make that happen. We see today a lot of CPAs recommend go buy extra supplies or go buy new computers. You as a business owner may sit down and think, Oh, well, I don’t really need those things right now, but I need to do it because uncle Sam is gonna get his hands on this money otherwise. A great option would be to look at the 401(k) plan instead. It has the same purpose. It has the same result. It gives you that write-off for your business taxes, but helps fund your retirement and instead of maybe something that is a depreciating asset and something you ultimately don’t need. That’s something to definitely consider.
Second thing would be any expense relative to 401(k) plan is also a write-off. If you fund a match, any of the administrative costs which typically are very minimal, they are all write-offs for the business as well. Finally, there is a tax incentive for small business owners to start 401(k) plans. This has been in place for some time now. The Bush administration put it in place. It’s a tax credit for starter plans and you get $1500 over 3 years’ time for just starting a 401(k) plan. It’s that little extra incentive because we don’t really know what’s going to happen with Social Security long-term. They are trying to incentivize small business owners to continue to put these plans in the hands of their employees and themselves as well.
Dennis Zink: In retirement, sometimes 401(k) plans are transferred into IRAs. What would be the reason for that?
TJ HOUPPERT: The reason ultimately is very personal. Some people want to transfer it to the hands of a financial adviser that they’ve worked with for many years. The IRA may be one of the ways that they do that. Maybe a place where they have other money that they’ve accumulated over their working career as well. They want to consolidate it in together. Others like the diversity of thinking “Okay. I have some money in this IRA. This money in the 401(k).” Maybe a spouse has money in a different plan because they have different investment options. There’s more diversity there. It’s a very personal decision and there’s not a right or wrong answer as what you should or shouldn’t do.
Fred Dunayer: I know that one issue that companies suffer through as well as individuals is company loyalty. Back in the day when people had pension plans, their success in retirement depended on their company’s success. Now, with 401(k), the employee’s success in retirement depends more on the success of the stock market. It seems like some sort of stock options or employee profit sharing would be an incentive to go back towards more company loyalty.
TJ HOUPPERT: I 100% agree with that thought. Profit sharing is a great way to incentivize employees. The business owner can sleep at night feeling good about the fact that they helped their employees save something additional for their retirement. Indirectly, this is a great benefit to a profit share as well. It’s discretionary. If you have a really great year, you use it. Then, if you have a year where things are a little rocky, you can skip it. It’s there when you need it.
Dennis Zink: If you don’t want to set up a 401(k) plan and you just say, “Hey, you know, I want to keep good people and let you feel that you’re part of the success of the company. Why don’t we just take 10% this year? We are having a good year and divvy that up amongst the employee. Maybe we come up with a formula. We take all the salaries and see what percentage you are of the total and that’s the percentage you get of that 10% that’s being distributed.” With the 401(k), how would that be different?
TJ HOUPPERT: It wouldn’t really be much different. The only difference would be … If they gave you 10% of your wage in the form of a check and said “Congrats. You’ve had a great year. Here is some money.” Uncle Sam likes that and he likes to tax it at very high rate. Whereas if you were to fund it into the 401(k) plan, it would go in whole. Let’s say that 10% ended up being, just for example sake, a thousand dollars. A thousand dollars would then go into your 401(k). You wouldn’t have uncle Sam hitting it first.
Dennis Zink: So, the real advantage is tax advantaged as being pre-tax, correct?
TJ HOUPPERT: That’s correct. The second indirect benefit is that the employee doesn’t have a chance to go out and spend it. For anyone who’s had profit sharing at a company that they’ve worked at in the past where they cut those checks. A lot of times people used that money as a way to buy something that maybe they’d ultimately don’t need or maybe it’s around the holidays and they use it for those types of expenses. This guarantees that that money is pretty much there for them at retirement and that feels pretty good.
Dennis Zink: Which is deductible to the company? Is it any more deductible if it’s done outside of a 401(k) or within the 401(k)?
TJ HOUPPERT: There wouldn’t necessarily be a difference. There both would be a write-off for the business. The business owner may get more because they tend to earn the most. Indirectly, that would be a benefit to that business owner.
Dennis Zink: Why do employees want these kinds of plans?
TJ HOUPPERT: I’ll just use myself as an example. This is something that is just as important as a benefit like health insurance to me. The reason being is we go back to Americans aren’t really great at saving. This gives them a systematic way to save. What I mean by that is every time you’re paid, the money goes directly from the employer’s account into the 401(k) plan and I don’t have a chance to spend it. It gives me that systematic way to save and it takes away the extra to-do of going and getting that money to a financial adviser or into the market however I choose to do it. It makes it simple and it gives me access to the ability to have that balance accrue compound interest. Then, finally, also access to mutual funds that maybe I wouldn’t have access to as an individual investor. Those are all reasons why I want a 401(k) plan and it’s a deal breaker for me if an employer didn’t have one because I need all of those things.
Dennis Zink: Are there any statistics that you have that show what the retention might be for employees that where a company has a plan versus a company that doesn’t?
TJ HOUPPERT: I don’t have the actual retention statistics for you that you are looking for, but what I could tell you is there is definitely a disconnect between a business owner and what their employee believes and they believe to be important in that employee’s world. 35% of employees rate saving for retirement and having the ability to do so through a retirement vehicle like a 401(k). They rate that as a high priority for themselves. When we ask business owners what your employees believe to be important, they say only 8%, so single digit percentage of employees want access to the things like a retirement plan. There’s a disconnect between what a business owner believes to be important and what those employees actually do believe is important.
Fred Dunayer: I know that one of the decision factors for me was the amount of employer matching. When the 401(k) first came out, it seem like the employers would match that employee contribution up to some percentage. A lot of times now, they either don’t or they do a much smaller percentage. Does that make a big difference to the employees?
TJ HOUPPERT: That money can add up over time. However, I would say that the bigger thing is that they gave you a systematic way to save. Most people wouldn’t take that money to the bank or to the financial adviser to invest it in the first place. Systematic savings is A number one and of course any match that you get from a business owner is of course going to benefit you in retirement and can make a great impact. The bigger thing is that you are saving.
Dennis Zink: TJ, often a business owner will have real estate attached to their business either the building or the land that the building is in. Wouldn’t this provide a primary source of income in their retirement?
TJ HOUPPERT: It’s true that business owners who spent their life working 30+ years at a company that they designed and worked hard to put in place that it definitely can provide something. What I challenge business owners to do is think about “Should that be my only option?” For most people, their answer is no. Yes, count on your business yielding something, but then also look to supplemental plans like a 401(k) to balance that out. If you were a business owner who is looking to retire in 2008 and 2009 and sell your business, it probably wasn’t worth what you expected. What if you were in that position in the future where it’s time to retire and we are in economic downturn. That 401(k) can help bridge that gap from what you thought to reality. That’s one thing I challenge a lot of business owners because that belief is out there and pretty prevalent as well. It sets up another source of income by putting that 401(k) plan in place. You’ve got the business and then you’ve got that real estate or that equity in your company to sell as well.
Dennis Zink: I agree diversification is a wonderful thing as long as it’s not di-worse-ification. How expensive is it to design a retirement plan?
TJ HOUPPERT: It’s going to be dependent on what makes the most sense for the business. What we tell people is that it’s around the cost of a cell phone bill a month. Think about that like walking down the street, everybody is holding smartphone in their hands. You got to ask them and their other hand is their 401(k). A lot of times the answer is no. The deal is that we really challenge people to say “They say I can’t afford it.” Okay, you’ve got smartphones sitting next to you. It’s going to cost you right around the same amount of money. It’s one of those things that gives you peace of mind and security just as much as a smartphone does for some people.
Dennis Zink: TJ, you work for Paychex which is a payroll and human resource company. What’s the number one value of running a 401(k) plan through Paychex?
TJ HOUPPERT: Because we do payroll and the majority of our clients who run 401(k) plans through us, they connect payroll and 401(k) together. If you were to run a 401(k) independent of your payroll company, you’d find yourself doing a lot of administrative task. Every time a payroll runs, you would have to get the money from your bank account to the market and you have to do it in a timely fashion or that can become a liability. You have to make sure that if Fred asks for an increase in his 401(k) contribution or a decrease, you have to make sure you do that in a timely fashion, or again, another liability. There’s many.
I could talk for another half an hour about all the different tasks, a business owner or the person who runs the 401(k). All of the things that they have to do. In working with Paychex, we connect that payroll and that 401(k) together so it’s a seamless transition between the two. You report payroll to us. We get the money into the 401(k). There’s minimal work. We may ask you to sign a document and hit a submit button on an annual basis. We may ask you to just review information to ensure that it is correct. It takes away a ton of extra time that you would have if you ran the plan through somebody else and time is money.
Fred Dunayer: I know that running through a company like Paychex is a good idea simply because you guys are on top of the regulations which are changing all the time. Trying to do that in-house can be problematic somewhere down the road just for that reason.
TJ HOUPPERT: That’s a 100% correct. We are a Fortune 500 company that has shareholders that hold us accountable to our standards and we live to those standards every day as well. We’ve got a team that stays directly tuned in to everything happening relative to compliance. When something changes, we know it and so do our clients. There’s peace of mind knowing that you’re going to be well taken care of and that somebody like Paychex had your back.
Fred Dunayer: TJ, is there anything that we did not discuss during the course of this session that you’d like to get out?
TJ HOUPPERT: The last thing I would just say is that it’s really important that if you’re that person that’s thought about saving and it’s just really fallen to the bottom of your to-do list. For many years or even if you graduated from college yesterday and you started your first business today. Now, is the time to start saving and you got to take action. Make it a priority just like you would make a priority if you were planning a family vacation. Make this something that comes first and make it systematic.
Dennis Zink: TJ, thank you for being our guest today on Been There, Done That and for enlightening our audience on retirement plans.
TJ HOUPPERT: Thank you for having me. I had fun.
Fred Dunayer: Thanks TJ.
Fred Dunayer: You’ve been listening to the SCORE small business success podcast, Been There, Done That. The opinions of the hosts and guests are theirs and do not necessarily reflect those at SCORE. If you would like to hear more podcasts, get a free mentor, view a transcript of this podcast or would like more information about the services we provide, you can call SCORE at 800-634-0245 or visit our website at wwww.score.org. Again, that’s 800-634-0245 or visit the website at www.score.org.