Consider offering a 401(k) SDBA for participant balance and control

by Ric Lager

Tips

Small business owners that offer 401(k) retirement plans to their employees might want to take a look at some new, more flexible products that offer participants more options and flexibility while not tremendously impacting the overall employer cost.

Tips

1. Set a realistic goal for when you want to break even. This will help you to focus your efforts and provide a numerical benchmark for projecting your cash flow in the near future

1. Employees want more control over their retirement investments. Small companies may want to check with plan recordkeepers about offering self-directed 401(k) accounts.

2. Put cash flow before profits. It might seem counterintuitive, but if you aren’t organizing your cash flow, you’ll run into problems that a profitable quarter might not be able to fix

2. SDBAs allow participants to invest in stocks, bonds and exchange-traded funds, with fewer restrictions, and include lower-cost investments.

3. Secure credit ahead of time. Most small business owners should secure as much credit as possible. This is the best way to be prepared for the unexpected

3. Consider discussing your 401(k) plan menu with a third-party fiduciary investment adviser who can help maximize your plans’ options.

4. Consider using a payroll service. Having the professionals take care of collecting payroll taxes saves them an enormous amount of time, helps streamline their cash flow

4. There are risks. Individual investors tend to overestimate their degree of investment knowledge. Self-directed plans can increase the potential for principal loss.

5. SDBA 401(k)s don’t materially add costs to employers but can increase annual costs for participants.

5. Schedule your payments. Don’t go delinquent but do divide your payments into categories such as “must pay,” “important to pay” and “flexible payment terms.” This can help keep sufficient cash on hand.

American workers are participating in the stock market at historic rates, with the majority of their money invested through their employeroffered 401(k) account. You could guess the inevitable. More employees want increased investment flexibility in how they invest their retirement accounts.

Small businesses are usually founded by entrepreneurs who have a unique vision and a passion that drives them to work late hours, take chances and believe in what they’re doing. But, just as Thomas Edison once said that genius is 1 percent inspiration and 99 percent perspiration, successfully running a small business requires rolling up your sleeves and putting in significant time on more mundane, day-today matters.

Small companies have been quick to respond to employee demands. More of them are offering the selfdirected brokerage account (SDBA), which is sometimes referred to as the “brokerage window option.”

You can be driven, impassioned and have a great idea to fill a niche or serve customers in new ways, but if you don’t attend to the details of the business, you can create for yourself a heap of problems.

Why SBDAs?

Small companies need to check with their current retirement plan sponsor and their current recordkeeper to see about adding the self-directed account to their default 401(k) menu.

Here, we’ll look at one of the most important of these business details: managing cash flow. Especially for early startups, knowing how much cash is coming in and going out, and accurately forecasting sales and expenses, is key to maintaining your company’s health.

The SDBA allows 401(k) participants to establish a personal brokerage account within their employer’s defined contribution retirement plan account.

No matter where you are in your business, keep these things top of mind:

1. Know when you will break even

Every small business owner keeps at the front of their mind the question:

SDBAs also provide retirement plan participants with more investment options, including securities outside of their company retirement plan’s core mutual fund lineup. They also allow participants to invest in stocks, bonds and exchange-traded funds, with fewer restrictions, and it includes lower-cost investment options.

“When do I start to turn a profit?”

Rather than wonder, set a realistic goal for when you want to break even. This will help you to focus your efforts and provide a numerical benchmark for projecting your cash flow in the near future.

SDBAs also allow retirement plan investors to choose specific stock market sectors. Think gold, oil and real estate investment options or specific stocks, like Google, Microsoft and Apple.

2. Put cash-flow management before profits

What are the benefits?

Self-directed brokerage accounts have been available for many years within plans directed at professional service firms, such as doctors, law firms, consultants, accountants and Fortune 500 companies.

This might seem counterintuitive, since profits are how you survive. However, if you aren’t organizing your cash flow, you’ll run into problems that a profitable quarter might not be able to fix. Keep things organized and well managed so you can be ready for whatever success comes your way.

3. Secure credit ahead of time

Small companies are now seeing increased demand for these plans from their participants. They want access to a more diverse set of investment options.

The SDBA account in the company retirement plan is at the top of the list. Employees want to be able to target their investments in ways that fit their values, such as in environmental, social and governance (ESG) investment options, faith-based investments and investments that involve clean energy companies.

Retirement plan participants struggle to find investments that reflect their values and beliefs. Access to an SDBA in their retirement plan solves the problem.

Too often, small business owners wait until they need it to secure credit. This can cause a lot of unnecessary stress, or worse. Talk to experienced business owners in your area and industry ahead of time to know how much revenue you’ll need up front. Take a realistic look at the situation and plan. You might have sufficient cash reserves or a rich uncle who is only a call away, but most small business owners should secure as much credit as possible. This is the best way to be prepared for the unexpected.

They’re a bit harder to find, but even participants seeking to invest in the boom of artificial intelligence companies popping up nowadays can find what they are looking for in exchange-traded funds and individual stocks.

Alone or with an adviser

A final benefit of the SDBA 401(k) brokerage account option: It is a great tool for a 401(k) participant with an existing investment adviser relationship. He or she can provide investment adviser access to the SDBA account.

Or a SDBA 401(k) account can help establish a new investment-adviser relationship, providing an open door to investment advice for small company retirement plan participants.

A third-party fiduciary investment adviser analyzes the company 401(k) retirement plan menu as part of the plan participant’s financial planning strategy. The investment adviser can help make the most of the company retirement plan options.

Many small company retirement plan participants would welcome the opportunity to have a relationship with someone who can provide 401(k) investment advice to help establish a disciplined investment management strategy for their retirement account.

Individual options come with risk

There are risks involved in providing the SDBA option in a small company 401(k) menu. The first is emotional. The second is financial.

Individual investors tend to overestimate their degree of investment knowledge and their tolerance for stock market risk. The SDBA 401(k) brokerage account option increases the potential for 401(k) principal loss.

The 401(k) plan sponsors might consider placing certain guardrails around SDBA investment options to mitigate some of those risks. Plan sponsors can place limits on the investments available through the SDBA.

The SDBA 401(k) can increase annual costs for a retirement plan participant. Annual account maintenance fees may apply. Trading costs apply to buy and sell securities, whether done online or through an automated telephone system.

But the SDBA option does not add more cost to the small business retirement plan sponsor.

Always check your plan’s fee disclosure documents and with your company’s retirement plan provider and recordkeeper to make sure you understand all costs associated with an SDBA account.

Duties as fiduciary

A final concern for the small business retirement plan sponsor: As a fiduciary, the sponsor selects investment options in their retirement plan menu.

The rules and regulations are clear, explained to me many times by my legal profession clients and volumes of Department of Labor and ERISA articles and opinions. The company retirement plan sponsor is a fiduciary, obligated to select the provider of the brokerage window and the default menu of designated mutual funds options. The company is not, however, obligated for the underlying investments made by individual retirement plan participants.