Selling to small-business owners

Umpteen years in the investment community have taught us that there is a right way and a wrong way to sell a retirement plan to a small-business owner. Take the wrong path and you will waste everyone’s time or succeed in selling the owner a plan that doesn’t suit the company’s needs.

It all comes down to asking the right questions upfront — six questions, to be precise. Start with these and you are well on your way.

1. What is the legal structure of the business? Is it incorporated or unincorporated? Is it a limited liability corporation, an S corporation or a C corporation? If it is an S corporation, how much does the owner pay himself in W2 wages?

Many small-business owners say that they make X, when most of that is actually paid out as pass-through income not subject to Social Security or self-employment taxes. If you know the legal structure of the enterprise upfront, you can suggest the right plan to maximize the lower-wage amount.

2. How many employees are there, and how long have they worked for the business? This will give you an idea of who can be excluded, especially if there is a lot of turnover or if the owner has part-time employees who have been around for a long time. This can affect the plan. For example, the number of hours worked by an employee doesn’t affect eligibility for a simplified employee pension as long as the employee has earned $500 in any three of the prior five years.

But before presenting a plan, the adviser must inquire about the demographics of the work force. Are they minimum-wage blue-collar workers or well-paid and highly educated? A SEP individual retirement account may be the best choice for more educated, stable workers who can make their own investment decisions, but not the right choice for employees who earn the minimum wage or who don’t speak English. For them, a 401(k) may be better.

3. How much do the business owners want to put away? If the answer is $5,000 or $6,000, you may want to suggest an IRA and forget a plan. By asking for a dollar amount, you can quickly narrow plan options. It also helps you learn whether the plan is really for them or for their employees. Are they losing employees because they don’t offer a plan? Are they looking to do this just to enhance their own retirement?

4. How much are the owners willing to spend on employees? This is tricky. Most owners will say “nothing” because they feel they already spend so much on health care and other benefits. If that is the response, ask about their total payroll. If it is $100,000, ask if they can afford to contribute 3%, or $3,000? Under a savings incentive match plan for employees, that would be the worst-case scenario, assuming that all employees would defer at least 3% of their pay and the employer had to match 3%. The actual number probably would be lower. Then ask whether it is worth spending something to keep employees happy.

5. Are the owners willing to pay plan fees? If not, they might be better off with a SEP or Simple IRA. Still, most business owners are unaware of the three-year small-business tax credit for adopting a plan, and most aren’t familiar with 401(k) plan fees and don’t realize that such plans need not be expensive.

6. Is this the owner’s only business? If not, you must describe the controlled-group rules. Many small-business owners are under the impression that they can provide a plan for one of their businesses and not cover employees at another. To get more detail on these rules, you may recommend that the owner talk with his or her tax adviser or attorney.

Cover these six questions as early in the relationship as possible and you will save yourself headaches.

Everybody — the employer, employees and you — wins when the adviser understands the business owner’s true needs, desires and circumstances.

John Diehl is a senior vice president, and Karen Hofmann is a retirement and wealth consultant, in the investment and retirement distributors division of The Hartford (Conn.) Financial Services Group Inc.

Related Topics: ING Group, Retirement Watch