Examining the high cost of employee retention

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When I meet with a business owner for the first time, there are a few questions that I gravitate towards in order to get a better understanding of what it's like to own their business. One question I like to ask is "What is one of your greatest expenses in running your business?"

Having asked this question for over 25 years I'm still amazed at the number one answer I receive; hiring, training and keeping good employees.

Face it, by the time you find a good employee — one who works hard, is trustworthy, smart, and can think on their own —you may have interviewed hundreds of applicants just to fill one position. Then, just when you think you have a well-oiled machine, you receive notice that your employee is leaving along with the time and cost of your investment

As a business owner, you know the most valuable resource your company has is its employees. And in today's business environment, employees not only expect a proper salary for a job well done, they now expect to be provided with benefits not only for themselves but for their families as well.

Competitive benefit packages generally include health insurance, dental insurance, life insurance and some form of a retirement plan. I wanted to focus on retirement plans (specifically the 401(k) plan) and how this simple tool may help you not only recruit better employees but retain them as well.

So, what is a 401(k)? As defined by the IRS, it is a qualified deferred compensation plan in which an employee can elect to have the employer contribute a portion of his or her cash wages to the plan on a pretax basis. For 2014, the maximum amount an employee can contributed to a 401(k) is $17,500. Maximum contribution between employee and employer is $51,000.

The last 401(k) plan I helped a business owner establish establishing asked me a very good question, he wanted to know "what's in it for me?"

As it turns out, there are several compelling reasons for establishing a 401(k). For one thing, the 401(k) plan is a tax break for my business. Any company costs associated with operating a 401(k) plan can be deducted at tax time including any contributions my company makes to the plan.

Second, it's a great tool for attracting and retaining employees through vesting schedules (we'll discuss later).

In a recent survey published by Business News Daily, 40 percent of employees said they would leave their current employer for a similar job if it offered a 401(k) plan. The survey also concluded that most employees work harder and stay on the job longer once a 401(k) is introduced.

In addition 401(k) plans are one of the most flexible types of retirement plans available today. As the plan trustee, you can determine who's eligible to participate, whether your company will match contributions, how long before employees become vested and tie companies' goals to 401(k) incentives. In other words, the more profitable the company is the greater the employee's contribution.

Another benefit of the 401(k) is they're portable; this means you can roll your plan over should you decide to start another company.

So, you have decided to implement a 401(k) plan for the reason listed above. But how do you know once you have made a contribution to the plan on the employee's behalf, said employee will not cash out and head to the competition?

The answer is in the word used earlier "vesting." Vesting is the term used to indicate when an employee is eligible for that portion of their 401(k) plan which has been contributed by the employer. 401(k) plans offer two types of vesting, graded or cliff. With a graded vesting schedule employer contributions vest on certain anniversaries of employment. Although vesting schedules can vary amongst companies, it cannot be less than: after three years of service 20 percent vested; after four years of service 40 percent vested; after five years of service 60 percent vested; after six years of service 80 percent vested; and after seven years of service 100 percent vested

Cliff vesting is exactly what it sounds like, for a period of time the employee won't be vested at all. Then, like going over a cliff, the participant becomes vested all at once. Much like the above example, cliff vesting can vary amongst companies but cannot be less than: less than three years 0 percent vested; and at least three years or greater 100 percent vested

In addition to implementing a 401(k) plan, a business owner may wish to combine a Profit Sharing Plan along with their 401(k) in order to enhance the effectiveness and flexibility of the plan.

In profit sharing plans, there doesn't need to be a formula that ties the contributions to company profits.

For example, a firm might look at the payroll and calculate each employee's share. Companies commonly base this allocation on age and service.

Also, since the business owner is usually the one with the greatest number of years with the company and the highest salary, this strategy might benefit the owner by allowing him or her to contribute a greater amount of their taxable income to their plan.

No matter what type of plan you choose to help recruit or retain top employees, it seems obvious that the retirement plan is here to stay. Their popularity has gained traction in the past few years and there appears to be no slowing down in the near future. Regardless of the type retirement plan that you elect to implement, make sure you check with your financial advisor or CPA to ensure you understand any and all tax ramifications these plans may offer not only to you, but your company as well.

Kevin W. La Mont, is the director of advance planning and investments for RB Capital Management LLC.